When you publish in The Wall Street Journal, you have to expect a few readers to come out swinging. Some disagree on principle; others on tone. And then there are those who lecture you like you just flunked Econ 101.
Meet Jay Wright, Adjunct Professor of Finance at Georgetown University.
Jay Wright writes:
Mr. Brenner:
I read with interest your article in today’s Wall Street Journal entitled “The Case Against 30-year Mortgages.”
I expected the article to describe how banks were foolish to make loans at fixed interest rates which borrowers can choose to pay down, refinance, or pay off at will. How banks are exposed to substantial interest rate risk by being long duration and therefore can get whipsawed as the entire S&L industry did in the 1970s and early 1980s. How subsidizing these loans creates more systemic risk in the banking and financial sector if inflation returns to 1970’s levels as gold is warning us may happen.
So I have to admit significant surprise when the article was about why 30-year mortgages are allegedly bad for borrowers (the “scam of the century” to use your understated phrase).
You say that the “30-year mortgage locked families into a lifetime of interest payments that cost the borrower far more than the original price.” That is not true: a borrower is not “locked in” but in fact can amortize its loan on any schedule it wishes from one month to 360 months. As most borrowers’ incomes will rise over time due to COLAs and merit based increases to their salary, the burden of a fixed rate 30 year mortgage decreases quickly over time, allowing a borrower to accelerate payments if the borrower chooses. Or, if the borrower has a low interest rate 30-year mortgage (e.g. 3% locked in during Covid), they can invest surplus funds at 4% or more and reap an arbitrage. If the borrower collects an inheritance or large bonus, it can pay the mortgage off in full immediately or, at their option, wait to pay it off.
You fail to point out that if housing inflation is even 2% per year, the asset the borrower will have at the end of 30 years will have a nominal value of 181% of the original cost. To use your $400,000 house with a 6% mortgage example, the house will be worth over $720,000 in year 30, more than the $690,000 paid over the 30 years.
A low down payment is a feature, not a bug of the 30 year mortgage. It allows younger people to afford a decent house when their income is at its lowest point in their careers. Given 2% COLAs and 2% merit (or step) increases (common for teachers, other unionized employees, lawyers and accountants at firms and many other professions) per year, within 7 years, the mortgage payment as a % of income will have fallen by about 25%, within 12 years by about 1/3.
Securitization, which you lament, has brought useful liquidity to the mortgage market and generally put downward pressure on loan prices.
While it is true that negative amortization loans and liars loans from the 2002-2007 period were terrible, saying that those things besmirch the fixed rate, 20% down 30-year mortgage is like saying that bad tasting lima beans should make one avoid all vegetables.
Your argument that housing prices are now too high relative to income compared to the 1970s is a good one. However, the cause is not the 30-year fixed rate mortgage. I would argue that inflation, which has seen the dollar drop from 1/35 of an ounce of gold in 1971 to 1/4000th (a more than 99% reduction in value), excessive land use regulations including oppressive zoning and rent-control, high minimum wage laws in many states which drive up the price of labor for house construction, the larger houses that are constructed today v. the 1970s (average size is up sharply), urbanization which causes more people to want to live in the same small area (thereby driving up land prices) and other factors are what are really responsible. An average (larger) home is about 100 ounces of gold today and was a bit over 700 ounces in 1971 – showing that inflation and larger sizes are probably the biggest culprits.
Your argument that the APR hides the cost of a mortgage is just false. What hides the cost of the mortgage is financial illiteracy in much of our population or an unwillingness to read the documents which are presented to them. With a computer and either AI or Excel, anybody can take an APR, a mortgage amount, and a time to maturity and calculate an amortization table – it is not hard.
Your argument that debt financing causes prices to be slightly higher than if the demand for houses was lower due to lack of financing is certainly true but again is a feature, not a bug, of mortgage financing. I for one prefer a nation of home owners rather than a nation where only a small percentage own their homes and only rich people and institutions can obtain financing. Debt financing allows people to smooth their consumption over their lifetime even if their current incomes do not match their needs – for education, cars, and homes. Milton Friedman, no socialist he, thought this was normal reasonable behavior.
I am truly hoping that you wrote your article either because you lost a bet or because you were really writing it tongue in cheek (or maybe the WSJ published it as a prank). Because the 30 year, fixed rate mortgage has done very good things for the middle class in America and is actually a very, very good deal for borrowers when you factor in the optionality and flexibility it provides the homeowner. Should a borrower pay the minimum each month and take 30 years to pay it off? Of course not, just as a borrower should not pay just the minimum on their credit card. Rather, borrowers should pay it down as quickly as possible unless they have alternative uses for their cash with higher after-tax returns. My parents paid their mortgage off in 22 years, thus enabling them to have a mortgage free residence in their late middle age and retirement. I would encourage anyone else to follow their example.
–Professor Jay Wright
My Reply
Dear Professor Wright,
Thank you for taking the time to read my article and for sharing such a detailed and thoughtful critique. I genuinely appreciate your perspective, and I can assure you, I didn’t lose a bet before writing it.
You’re correct that from a classical finance standpoint, the 30-year fixed-rate mortgage is a remarkably flexible and often advantageous product. Optionality, prepayment rights, and potential appreciation do benefit the informed borrower, as you point out. In theory, these features make the instrument efficient and consumer-friendly. My argument, however, was less about the financial mechanics of the product and more about the informational and behavioral distortions created by the regulatory framework that defines how we perceive it.
In the 1960s, Madison Avenue discovered how to sell happiness. Don Draper (in reference to the hit AMC show) and his colleagues didn’t sell products; they sold feelings. A cigarette wasn’t tobacco; it was confidence. A car wasn’t transportation; it was freedom. And soon, the mortgage wasn’t debt, it was destiny.
The 30-year mortgage became the financial instrument that could buy happiness. And when the industry needed a way to make loans feel affordable, it turned to the same psychological toolkit that built the modern consumer economy. Congress obliged by passing the Truth in Lending Act, codifying a single, soothing number: the APR.
Selling a $400,000 house for $800,000 is hard. Selling a $400,000 house at 6% APR? Even my 8-year-old son would buy it. APR wasn’t designed to protect borrowers; it was designed to sell them.
In other words, my target wasn’t the mortgage: it was APR.
The Annual Percentage Rate, as codified by the Truth in Lending Act of 1968, was intended to simplify comparison shopping for consumers. But as Todd Zywicki and others in the field of behavioral law and economics have shown, simplification often backfires. When a complex product is reduced to a single number, consumers tend to “anchor” on that number; they treat it as the total measure of cost, even when it hides temporal realities like compounding, opportunity cost, and duration risk. The resulting illusion of comparability encourages consumers to overemphasize rate and underappreciate term.
This is where my argument departs from the textbook model of rational choice. In practice, most borrowers don’t prepay early, arbitrage their interest rates, or perform inflation-adjusted lifetime cost calculations in Excel. They behave predictably irrationally and the system is designed to let them do so under the comforting fiction that APR equals transparency.
Zywicki’s research has consistently demonstrated that disclosure-based regulation often fails because it assumes a level of financial literacy and rational decision-making that doesn’t exist in the real world. APR, like the nutrition label of finance, looks objective but hides the real composition of the product. It’s formally correct but functionally misleading.
So while I agree that the 30-year mortgage can be a valuable instrument for many households, the larger point remains: as long as APR remains the dominant language of “truth in lending,” the marketplace will continue to misprice time, underestimate cost, and misinform consumers.
I deeply value your insights, particularly your reference to duration risk and the S&L crisis, and I suspect we’d find significant common ground on how monetary policy and regulatory design together distort consumer and institutional incentives. My critique wasn’t meant as an indictment of lending itself, but as a call to rethink the flawed measurement system that governs it.
Thank you again for writing and for engaging so thoughtfully. I’d welcome further discussion: perhaps even over coffee the next time I’m in Washington.
Sincerely,
–Patrick
A Postscript
After I sent that reply, Professor Wright graciously agreed to meet for coffee during my next trip to Washington. By the end of the exchange, we found common ground: both of us want to make homeownership more achievable for the next generation.
But I also offered some friendly advice:
I might only suggest softening the tone a bit next time; setting aside some of the tongue-in-cheek commentary would make your argument feel more conversational and open to dialogue, which is exactly the spirit I was hoping to encourage with my piece.
I’ll be in Washington at the end of October. I’ll let you know how it goes.
Reflection
Professor Wright’s letter is a case study in how experts defend the status quo. He’s right about the math, but the math was never my point. APR isn’t just a formula; it’s a frame. It turned debt into a dream and cost into comfort.
The professors of the 1970s built the models. The Mad Men of the 1960s sold the emotion. Congress codified the illusion. And somewhere in between, the American family bought the product: believing they were buying happiness.
Compounding Interest: Reader Replies, Part I
Compounding Interest: Reader Replies, Part II
Compounding Interest: Reader Replies, Part III