The villain of the housing bubble

Not what I expected. [Link]

To me, the unsung villain of the mortgage crisis is the 30-year fixed rate self-amortizing mortgage with no prepayment penalty.  This hothouse creature is beloved of liberals, who like any product that gives the consumer the power to shaft banks whenever it is to their advantage.  And it is beloved of conservatives because it smacks of sober citizens taking on modest, stable obligations they can meet.
But this product is about as stable as a nitroglycerine shot with a TNT chaser.  The 30 year fixed rate mortgage was ultimately at the heart of the Savings and Loan crisis.  Yes, yes, deregulation set the stage for the ultimate denouement--but the Savings and Loans were deregulated in such a haphazard fashion in part because they were being slowly driven into bankruptcy by their huge collection of low-interest, long-term real estate loans, in an environment where Paul Volcker had briefly driven short-term interest rates up to 20%.  While fraud and abuse were certainly rampant, the enormous scope of the problem was not due to S&L officers suddenly becoming more thievish, or regulators more tolerant of thievery, but because everyone in the industry was flopping as wildly a a beached sturgeon in an attempt to keep their banks solvent atop large portfolios of low-interest loans.  Meanwhile, whenever interest rates dropped, people would refinance, meaning that even the high-interest loans they did make didn't help much.

The roots.

Until the Great Depression, the mortgage was a very, very different product.  There was no amortization, and down-payments were often massive--half or more of a home's value.  They lasted perhaps 3 or 5 years, and were rolled over if borrowers could not meet the balloon payment.  The default crisis of the 1930s resulted from the inability to roll those loans, and so the government stepped in, causing the fifteen year self-amortizing loan to proliferate.  This process was especially accelerated by the VA loans that were offered to returning veterans.  Eventually, the payment terms stretched out to allow more and more people to buy homes.

What will come of it?

As of this writing, are we rethinking any of it?  Will the new head of the CFPA crack down on mortgages that offer prepayment options?  Will lawmakers finally break up Fannie and Freddie and cut off the flow of cheap capital they glean from the implicit government guarantee?  Will it get the FHA out of the business of propping up the conventional loan market?
Of course not. There is no constituency for such a thing except for a few crazy libertarians.