It has to do with the absolute size of the mortgage. Fixed rates go as high as $770k borrowed. You have to be well-off to carry a $770k mortgage, and the value of this subsidy to that type of borrower is unneeded.
There's no cap to the amount of cash borrowed on a fixed-rate mortgage. Bay Area jumbo loans regularly top $2.5M, and during the 2020-2021 period, they had sub-3% fixed interest rates. The big difference between jumbo & conforming loans is that jumbo loans cannot be packaged off and securitized by Fannie & Freddie, and so they are largely kept on the originating financial institution's books.
The reason fixed mortgage rates have been below inflation recently is because the financial industry (bond buyers and mortgage underwriters, at least) have largely bought the Fed's "transitory" narrative. A 3% mortgage remains profitable if inflation runs at 8% for a year and then returns to 2%; it becomes very unprofitable if inflation stays at 8%. The reason mortgage rates have climbed so much in the last couple months is because the "transitory" narrative has basically collapsed, and the bond markets are now starting to price an extended period of high inflation into the rates they charge.
It’s not that the interest is higher now! It’s that it’s fixed for 30 years no matter what the interest rate environment is! Plus it can be paid off early and refinanced when it suits the borrower!
I don’t know how more clearly I can state why this is a glaring subsidy for the rich. I’m sure in a free market these would just appear by themselves /s
My point is that fixed-rate jumbo loans are not a taxpayer subsidy, they're a banking subsidy. The bank is left holding the bag for existing jumbo loans when interest rates move against them.
There is some historical validity to the point that fixed-rate mortgages existed because of taxpayer subsidies. The creation of the FHA during the New Deal, and Fannie-Mae shortly after that, basically jumpstarted the practice. But there's a difference between jumpstarting the a market and continued subsidy of it. The existence of jumbo loans is an indication that even without taxpayer subsidies, fixed-rate mortgages still exist, presumably because the expectation of price stability means that private institutions don't think that the risk of interest rate variability is that great (jumbo mortgage borrowers usually pay about 0.5% more, so that's the implied risk premium). This can change during times of high price variability - my parents mortgage was 13.5% back in 1978, because expected inflation was about that. But that also indicates that interest rate risk is primarily absorbed by the private markets, and taxpayer subsidies play a relatively small part in it.
A mortgage with a fixed interest rate and no prepayment penalty is no subsidized since the borrower pays for the option to prepay the mortgage with a higher interest rates than they would be able to get if they were not able to prepay the loan. The market prices in the value of the call option.
The point being made here is that we actually do have the counterfactual available to us. Jumbo mortgages are not underwritten by the government, and they're exclusively private transactions between lender and borrower where the lender keeps the mortgage on the books and assumes all risk of default, interest rate changes, inflation, etc. And we know the market premium for this risk, because we can compare the difference in rates between a jumbo and conforming loan. It's about a half a percent.
I believe it's possible to get a fixed rate "jumbo" loan for even more than that, but since they're "non-conforming" they can't be sold to fanny/freddy, and so the banks take on the full risk of these loans. For conforming loans, the limit in most areas is $647k [1], which has risen substantially in recent years (along with broader housing cost inflation). Not adjusting for HCOL areas would effectively be blocking lower income people from moving into these (arguably) "higher-mobility" areas.
