Borrowers – No Mortgage Payment Shock. Let's start with the obvious. Between 2005 and 2007 – the peak years of the housing boom – borrowers who took out different types of adjustable-rate mortgages (ARMs) saw their principal and interest (P&I) payments soar by as much as 165 percent a few years later. What's more, many borrowers with option pay ARMs also saw their home equity erode, which exacerbated the collapse in home values. (Option pay ARMs let borrowers make minimal mortgage payments and add any unpaid interest to the balance of their loan, i.e. negative amortization.)

By contrast, borrowers who took out long-term fixed-rate loans had predictable and stable P&I payments that insulated them from mortgage-driven payment shock. Given the uncertainty of income brought on by the recession, this stability was a home-saving feature for many.

What's more, at the start of this year, prime adjustable-rate and subprime mortgages accounted for 21 percent of the nation's outstanding home loans but accounted for 47 percent of all foreclosures started over the first half of the year, according to the MBA's delinquency survey. By contrast, prime fixed-rate mortgages accounted for 64 percent of the nation's outstanding mortgages and 38 percent of foreclosures started.

The reason for the disparity is not a mystery and has been well reported in the press. In the wake of the subprime market implosion, many ARM borrowers were unable to refinance their mortgages and avoid punishing interest-rate resets as private investors pulled their capital out of the market and lenders tightened underwriting standards and borrower documentation requirements. Borrowers with fixed-rate mortgages were under no such pressure to refinance.

(It's worth noting at this point that as of December, 31, 2009, 91 percent of Freddie Mac's portfolio was composed of conforming, conventional fixed-rate mortgages, and this delinquency rate, which is historically high, is due to the collateral damage from the broader downturn – rising unemployment, declining incomes, and falling home prices – that has adversely affected all types of mortgages.)

Now look at this. (To see HPI vs. Fixed Rate Mortgage for all 50 states, click here [XLS].) The states where home prices fell the most – Nevada (- 52 percent), California (- 42 percent), and Florida (- 40 percent) – were also the states where relatively few borrowers had prime fixed-rate, FHA or VA long-term fixed-rate mortgages. Only 51 percent of the loans in Nevada, 52 percent in California and 54 percent in Florida were long-term fixed-rate mortgages.

But home prices are down less than five percent in states where prime, FHA or VA long-term fixed-rate mortgages are predominant. In fact, home prices have slipped two percent or less in the states with the highest percentages of these mortgages – South Dakota (85 percent), North Dakota (84 percent), and Texas (70 percent).

The bottom line: when private capital for home loans disappeared in the wake of the Great Depression in the 1930s, Congress stepped in and enabled FHA to create a viable long-term fixed-rate mortgage product. This brought private capital back into mortgage financing and reinvigorated the housing market. Since then the fixed-rate mortgage has evolved into its current 30-year, fixed-rate freely prepayable form that is the dominant choice among America's homeowners.