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Thursday, March 3, 2011

Here Comes the Housing Crash: 30-Year Mortgage In Jeopardy

Bipartisan support for winding down Freddie Mac and Fannie Mae threatens to end the 30-year-mortgage as the staple of residential housing financing, imperiling long-term residential real estate values.

The reason values are headed down -- long-term and probably for a long time -- is simple.  A shorter amortization period means that monthly payments on any mortgage will be higher.  Purchaser affordability is measured in terms of the ability to make a certain monthly payment; that payment will increase and hence diminish the affordability by this yardstick.  But there's another catch: if Freddie and Fannie are wound down and eventually cease to exist, there will be far less demand for the securitized bundles of mortgages, for which investor demand helped drive down mortgage interest rates during the last decade to all-time lows.  This means that interest rates on mortgages will rise from their current levels.  Even worse, this increase will occur independent of any other factors that could cause a spike in interest rates.

The long-term prognosis for the value of residential real estate (which is down anywhere between 30 and 60 percent from its all-time high in 2005-06, depending on location) simply cannot be positive under any circumstances, if the 30-year-mortgage should become a rarity.

Eric Dixon is a New York lawyer and strategic analyst.  Mr. Dixon formerly was a corporate transactional and mergers/acquisitions lawyer, and now concentrates his practice on advising businesses and individuals on strategic issues and legal issues relating to litigation, investigations, litigation stress counseling and assertiveness training.  Mr. Dixon formerly advised a real estate venture capital fund to discontinue its purchases in 2004 based upon the assessment that realizable rental income under a rent-stabilization regime in New Jersey would not support then-prevailing prices, which were at least 25 percent higher than current values.  Mr. Dixon is available for further comment or consultation at

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