4 steps to a first mortgage (© Dana Hoff/Getty Images)

© Dana Hoff/Getty Images

After more than 40 years of subsidizing and boosting homeownership, the federal government is talking about backing away. The Obama administration wants to eliminate federal guarantees for home loans for all but creditworthy buyers "with modest incomes" who otherwise could not get a mortgage from a private lender, according to a report that the administration gave to Congress in February (PDF).

Change like that could make buying a mortgage more expensive. Americans' favorite home loan, the 30-year, fixed-rate mortgage,  would lose ground against other mortgage types.

There's even talk that the popular 30-year loan could become extinct, though that's unlikely.

"There would definitely be fewer 30-year mortgages, but they would not disappear," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. He wrote the books "Taking Economics Seriously" and "False Profits: Recovering from the Bubble Economy."

It's all talk, at this point, about how to shrink, change or eliminate Fannie Mae and Freddie Mac, the two huge, government-run corporations that have kept costs low for middle-class homeowners by guaranteeing home loans.

Massive defaults by homeowners, along with management and accounting scandals at Fannie and Freddie, are costing taxpayers hundreds of billions of dollars. Even political rivals agree it's time for a new approach.

The debate among regulators, economists, politicians, consumer advocates and lobbyists could continue for years before Congress passes a plan, experts say. After that, any changes would be phased in slowly over many more years.

Meanwhile, homeowners may wonder how this change could affect mortgages today and in the long term.

What's happening to 30-year mortgages?
Today, 80% of all mortgages are 30-year, fixed-rate, "conventional" loans, Freddie Mac says. "Conventional" means Fannie and Freddie can guarantee them, as long as they're below a maximum amount, so they're cheaper. By spreading lower payments over decades, conventional loans are more expensive in the long run, but they've allowed many people to buy a home.

At the tail end of the housing boom in 2008, the conventional loan's market share dropped as low as 67%. But at least 80% to 90% of all mortgages since 1990 have been conventional, Freddie Mac says.

But if the government eliminates the guarantee for conventional mortgages, buyers might look at other loan types.

"Without the guarantee, I think long-term, fixed-rate mortgages will still exist, but they'll be higher priced, and there'd be less of them," says Michael Lea, director of The Corky McMillin Center for Real Estate at San Diego State University. "You wouldn't see 90%, but you'd see maybe 30%."

Mortgages haven't always been cheap and easy. Look at the 1920s.

"It was a prosperous period, but if you wanted a mortgage loan, you put 40% down and got an interest-only loan for 10 years. And then you refinanced it," says mortgage expert Jack Guttentag, author of "Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls" and of the Mortgage Professor educational website for consumers.

In most other countries — where governments don't subsidize mortgages or where they do it differently than we do here — the 30-year mortgage is a rare bird. In Denmark, the exception, it comprises about half of all home loans.

"You don't need 30-year mortgages to have high rates of homeownership," Baker says. In the U.S., homeownership is 66.5%, down from a high of 69.2% in 2004, the Census Bureau says. But other countries do as well or better with different financing systems and different loan types, and many suffered less during the housing crash.

Lea cites these 2008 homeownership rates, for example:

  • Ireland: 74.5%
  • Australia and the United Kingdom: 70%
  • Canada: 68.4%
  • Japan: 61%

Emerging markets often have even higher rates of homeownership because they don't have well-developed rental markets, Lea says.