[HN Gopher] Mortgages are a manufactured product
___________________________________________________________________
Mortgages are a manufactured product
Author : smitop
Score : 109 points
Date : 2022-01-14 17:47 UTC (5 hours ago)
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| crooked-v wrote:
| The worst part of this whole system is the complete opacity about
| what company will actually service the mortgage after you finish
| signing. As it turns out, some companies provide a much better
| and more modern servicing experience than others (for example:
| Chase versus anything Cenlar).
| SavantIdiot wrote:
| Other than a crappier website, what difference does the
| servicer make?
| nmhancoc wrote:
| How your servicer handles property taxes and escrow can have
| a material effect on a household's cash flows. Often time
| this is a very negative effect.
| drdec wrote:
| A servicer's records are probably your best defense against a
| robosigned foreclosure.
| vishnugupta wrote:
| Ironically it doesn't mention the elephant in the room. US Fed is
| now funding T2.6$ worth of mortgages [1]. US Fed began purchasing
| RMBS assets (essentially mortgages) in order to support the
| housing market as one of its responses to 2008 crisis [2]. It was
| meant to be a stop-gap measure, but it hasn't ended.
|
| BTW this is a good overview of different parties involved in the
| mortgage supply-chain https://imgur.com/NYg7G4t
|
| [1] https://fred.stlouisfed.org/series/WSHOMCB
|
| [2] https://www.newyorkfed.org/markets/mbs_faq.html
| csense wrote:
| Thanks for mentioning this.
|
| I somehow didn't quite realize MBS purchases had resumed with
| the Fed's COVID response, for some reason I assumed they were
| only buying Treasuries.
|
| Even though I've been trying to keep up with the Fed's
| activities, somehow I missed the part about current-decade MBS
| purchases (and it's a big part).
| [deleted]
| cavisne wrote:
| Wait till you find out the Fed buys corporate bond ETF's
| nowdays too...
| c7DJTLrn wrote:
| Seems like if the economy were a bridge then it would be held
| together with blue tack and bubblegum at this point.
| aeternum wrote:
| So what is better?
|
| Mortgages seem to have some pretty nice features. They help
| encourage people to invest some of their income into an asset
| that generally appreciates rather than spend it all. It aligns
| incentives around upkeep and investment in the neighborhood and
| community. They offset some of the negatives of inflation.
| betterunix2 wrote:
| I am skeptical of the claim that real estate generally
| appreciates over time, at least in real terms (inflation-
| adjusted). Yes that has been the trend for a long time and
| especially in popular areas, but there is no reason to think
| the trend will continue.
| tshaddox wrote:
| The problem is that people need houses to live in now. I
| can't suddenly not need a house to live in simply because I
| feel very strongly that the trend of real estate appreciation
| won't continue forever.
| adam_arthur wrote:
| Current residential home prices in the US are far above their
| 100 year inflation adjusted trend. A few standard deviations
| above IIRC, and far above where they were in real terms at
| peak of the 2000s housing bubble. That's not adjusted for
| interest rates though, which explains some of the deviation.
|
| So homes have appreciated strongly in real terms in the last
| decade, but it's likely they will revert to the mean from
| here (whether it be quick or more drawn out).
|
| However you're correct that historically homes mostly follow
| inflation, and aren't appreciating in real terms. It's only
| in the modern era where that trend has changed, probably due
| to more investor involvement and Fed trying to stimulate
| growth aggressively.
|
| But it's important to note, even if a home appreciates only
| at the rate of inflation, usually the buyer only puts 20%
| down, so from their perspective they are earning 5x the rate
| of inflation in equity.
|
| Pretty lucky to those that lived in 10% interest rate times
| that were able to buy all sorts of property cheap and
| refinance at low rates later.
| Ericson2314 wrote:
| Land value tax and appatments. The vast majority of people will
| rent, the rent will be stable, and it will mostly not go to do-
| nothing lanloards.
|
| Mass ownership of appreciating assets is a very unstable
| situation, and also unclear what it even _means_. It is better
| to increase wealth through public goods.
| Ericson2314 wrote:
| Some counterintuitive things:
|
| - the floor rent is too damn high, but the land rent is two
| damn _low_
|
| - Ownership is very hard to price, but the existance of the
| instutition of ownership is a choice! By raising the land
| rent the price of ownership shrivels up, and that clamps down
| on the risks from this volatile and ill-defined problem.
|
| - Rent is just better, what is bad is rent paid to owners,
| integrating the flow into the stock. Rent that cycles right
| back around as citizen divdend or gov services stays as a
| flow and is good. (And what ever evil inclinations states
| might have, profits are not one of them in the fiat era.
| (States == federal government in this case. State, local, and
| invididual departments could still be money grubbers.))
| fuzzer37 wrote:
| > the rent will be stable, and it will mostly not go to do-
| nothing lanloards.
|
| I see you've never rented before.
| Ericson2314 wrote:
| I am renting right now with a shitty do-nothing landlord,
| and in a dispute over maintainence --- the boiler is
| leaking and _smoking up_ my apartment. I am under no such
| illusions.
|
| Landlords maintain power through the restriction of supply.
| They don't need to actively do it, the single-family-home
| complex does it for them.
|
| Land value tax (+ land use regulation reform) demolishes
| that. Appartment management, divorced from land
| speculation, will become the boring low-margin business it
| deserves to be.
| notch656a wrote:
| Land would appreciate significantly less if housing and
| zoning regulations were eliminated. While there is value in
| being near a city core, land isn't a strongly constrained
| resource. Meeting the onerous requirements to build a home
| near this city core continually grandfathers in present-day
| land owners with buildings from the early 1900s while
| requiring entirely different standards for the next
| generation.
|
| We have intentionally sabotaged the ability for our youth to
| afford houses under guise of safety while simultaneously
| grandfathering in our own shitty run down structures that
| were built under much looser requirements. The result is land
| with a shitty old structure can be worth almost as much as a
| new one, under this restrained and captured supply.
| tagami wrote:
| A bit off OP's topic, but in California ADUs (Accessory
| Dwelling Units) are now legal in all residential zoning
| districts. This effectively opens up the urban core for
| homeowners that wish to develop out their property.
|
| A smart first time owner will take advantage of this and
| effectively create an additional 1 or 2 living units
| (Primary residence+JADU+ADU) that can cover the new
| mortgage.
| Ericson2314 wrote:
| There was just a Chronicle article on this
| https://www.sfchronicle.com/bayarea/article/San-
| Francisco-AD...
|
| Honestly, I agree with one of the quoted people that ADUs
| are just a political hack to get a half-measure by the
| NIMBYs.
|
| Even if we converted all the garages it would an
| extremely inefficient way to construct more housing.
| There was talk of trying to do financing for poor people
| to do the conversions, but insofar that that works I
| think it is likely to push up construction prices because
| ADUs are so inefficient.
|
| (Conversely, the externality of decreased parking _is_
| quite good. I don 't want to neglact that.)
|
| If we really care about housing and equity for the poor,
| we should allow poor homeowners to trade in for a new
| condo if the entire block agrees, and then redevelop it
| at a massive scale. Far more housing, still equity for
| them, and once you bootstrap the process no one even need
| be displaced out of the neighborhood. Win-win
| HarryHirsch wrote:
| _also unclear what it even means_
|
| It's very clear what it means - inflation. Consider a farmer
| in Zimbabwe who buys a used truck for 10000 Zimbabwe dollars
| to bring his produce to market. A few years later, he sells
| his truck for a million Zimbabwe dollars. He is a
| millionaire! But he still is a farmer and needs a truck to
| move his produce. Another used truck would set him back 5
| million Zimbabwe dollars.
|
| It can't go on like that. At some point the chunk of money
| that shelter takes out of the monthly paycheck can't grow
| further.
| notch656a wrote:
| The biggest driver, arguably, of elevated home prices in
| the past 2 years has been [real ] interest rates that are
| effectively negative against inflation. The result is
| buying of property under fixed rate loan to short the USD.
| Ericson2314 wrote:
| That's not true. Most homes are still being bought to
| live in. The supply of SFH in decent places is just
| always too puny to meet housing needs.
|
| Cashing out comes with the hassle to move, and is less
| attractive during pandemic. Rich people that want to
| decamp boost up demand in the select few popular remote
| places. That was the 2020 story.
|
| Recently I am less sure exactly what's going, but yeah,
| single family homes are the worst!
| notch656a wrote:
| People have always wanted to buy homes to live in. I'm
| talking about the large increase in prices in the last 2
| years. [negative real] Interest rates are definitely a
| big reason for the asset appreciation.
| Ericson2314 wrote:
| Even if that is the case, SFH for being stupid not
| interest rates for being low is the proper scapegoat.
|
| The rest of the inflation is due to pandemic-related
| supply side dysfunction, and fossil fuels which are even
| more subject to random things like OPEC whims.
|
| Raising rates to bring down SFH prices and not reforming
| the SFH system would be colossally stupid.
| briffle wrote:
| In my area, homes have doubled in the past 4 years since I
| bought my house. its great, seeing the neighbors sell their
| home for what seems like crazy money, except, while I could
| do that, I would then need to buy a home. Only way it makes
| sense, is to sell and move somewhere much less costly, but
| right now, even remote places are crazy expensive.
| drdec wrote:
| It depends on if you are trading up or down.
|
| If you are trading up, the house you are buying is more
| expensive than the house you are selling. In this case
| you want a down market. Yes, you get somewhat less for
| your existing house, but you more than make up for it in
| what you save on the new house.
|
| If you are trading down, the opposite is true. A hot
| market has increased the value of the house you are
| selling more than the house you are buying.
| Ericson2314 wrote:
| Sorry I mean it is unclear what the price of ownership
| being correct means.
|
| Yes I absolutely agree, the greater extent "homeownership
| is a middle class right", the more housing price rising
| just is an across-the-board inflation. To the extent that
| the poor / non-whites are not involved, it is stealing from
| them.
|
| This is why fixed asset ownership is just a rotten scheme,
| inflation or theft, nothing good comes from it.
|
| "store of value" is highly overrated. Public goods and
| infrastructure are what materially derisks the future. Not
| some bidding rat race.
| LatteLazy wrote:
| I don't think you're wrong. But there is another side to this
| argument.
|
| Owning makes you responsible for things beyond your control. If
| the factory in your town closes, you're underwater no matter
| how smart you were about picking it or diligent you were about
| maintaining the house.
|
| Similarly you can't really do what you want with it. You better
| keep it cream and beige coloured! And that's all you can buy.
| No one builds small homes or castles. Just identical units.
| Everyone must have a lawn, it must be one of three shades of
| green and cut correctly etc.
|
| It also forces you to care about things you don't really care
| about: you have no problem with minorities living next door,
| but what if it effects your house price? The same for
| infrastructure your town needs. You know we need a free medical
| clinic but what if poor people hang around when you're showing
| the place?
|
| It has the same effect on services: tax rates MUST be lowered
| because you can see them before buying. Internet speed is
| irrelevant because no one knows how bad it is until they move
| in. So no one has workable internet. Americans schools are
| famously underfunded for this reason too.
|
| It gives you a big incentive to veto all future housing
| development too. That's given us a very big housing shortages
| in many places.
|
| The ownership model also makes people much less mobile,
| limiting their income and productivity, not to mention
| cementing inequality and effecting nation gdp etc.
| jjav wrote:
| > Similarly you can't really do what you want with it. You
| better keep it cream and beige coloured! And that's all you
| can buy. No one builds small homes or castles. Just identical
| units. Everyone must have a lawn, it must be one of three
| shades of green and cut correctly etc.
|
| Don't ever buy in a HOA area! That is the nightmare you
| describe.
|
| No HOA in our neighborhood, so while all the houses were the
| same shade of beige with the same lawn when the developer
| built the area, over the years as people have repainted and
| redone yards it has become wonderfully colorful with each
| house having unique character.
| LatteLazy wrote:
| It honestly baffles me that America has them. The US (I'm a
| Brit) is meant to be about individualism, personal rights,
| property rights etc. But these are all the bad bits of
| communism (except for actually killing people).
|
| The only logical reason for this I can see is people being
| terrified they'll lose 50k because their neighbours paint
| their house black and let the lawn turn to scrub.
| betaby wrote:
| I never understood that kind of US/Western point of view. I
| will give a trivial example: my grandparents purchased their
| house in year 19xx and both died in the same house in 20xxs.
| How's the price of house even mattered all their life? There
| were living there, it's not something external. Today, I
| specifically asked my parents if they knew how much their house
| cost. Nope, they didn't know. It's an irrelevant information
| for them. Cost it 10k or 10m won't change a thing - they live
| in it, it's not something external. So house-asset (why it's
| asset?) is something more US-specific I think. Also it ... bad?
| jsight wrote:
| A good financial planner will emphasize this point. Rents go
| up, but your mortgage doesn't. So you buy a house and
| eventually forget about the relatively small mortgage
| payments that have effectively become smaller due to
| inflation.
|
| The modern world of people moving and upgrading every 5-10
| years has really changed this dynamic for the negative.
| crooked-v wrote:
| Of course, part of that 'upgrading' is that homes in a lot
| of urban areas have become impractically expensive for
| anyone who wants enough space for a family... but you still
| have to buy in ASAP if you don't want to be left behind by
| further market inflation. So cue 'starter home' nonsense.
| WJW wrote:
| There is/was a fairly straightforward explanation for the
| fiscal stimulation of home ownership and in the 60s
| government was not very coy about describing it: home
| ownership ties people into their respective communities
| by giving them a very tangible piece of "skin in the
| game". When you own a very expensive (relative to your
| total net worth) piece of real estate, that gives you a
| real incentive to take care of your local community. This
| in turn improves the stability of the society as a whole,
| since the large group of homeowners is not in favor of
| any real upheaval which might threaten the status quo.
| vertr wrote:
| mym1990 wrote:
| I think there are pros and cons to population movement, its
| not all negative. There is now more supply and demand which
| creates a more robust market full of choices. Obviously a
| big negative is the massive price increases that either
| completely price groups out or burden other groups in large
| debt, but I'll leave my points at that.
| 1MachineElf wrote:
| Here's one US-based example. Anyone in the US who is middle-
| class likely will have to sell their home or put it into a
| financial trust by the time they become very old in order to
| qualify for certain Medicaid benefits, which is the only
| affordable way to receive elderly care unless you're a
| millionaire. So from that perspective, thinking of the home
| as an asset can be important.
| PaulDavisThe1st wrote:
| According to the American Council on Aging, "In most cases,
| one's home, home furnishings, and vehicle are exempt."
| (from the asset test).
| dionidium wrote:
| Yes, from the asset test required to _qualify_ you for
| Medicaid. But if you enter into a nursing facility, for
| example, then they 'll place a lien on the property and
| collect if the house is sold while you're alive or from
| your estate when you die (assuming there's no living
| spouse).
|
| You really want to have a plan for your primary home
| _before_ this becomes an issue. The asset test is only
| one concern.
| [deleted]
| toomuchtodo wrote:
| Medicaid in 49 states and DC has a 5 year look back period
| (California is 30 months/2.5 years) on
| transactions/disbursements with regards to intentional
| impoverishment. Something to consider when estate planning.
|
| https://www.medicaidplanningassistance.org/medicaid-look-
| bac...
| dragonwriter wrote:
| > Medicaid in 49 states and DC has a 5 year look back
| period (California is 30 months/2.5 years)
|
| California is also phasing out the asset test, which will
| eliminate the need for a look-back period entirely (asset
| limit moving from $2k/$3k for individual/couple to
| $130k/$195k this July, planned for total elimination by
| July 2024.)
| [deleted]
| swamp40 wrote:
| >> certain Medicaid benefits
|
| Assisted Living and Nursing Homes. Medicare makes you burn
| thru your assets before they start paying.
|
| You get charged $5K/month until you are broke. Then
| Medicare pays the place 1/3 that price for the same care.
|
| Largest wealth confiscation scheme ever seen. Inheritance?
| No, sorry.
| dragonwriter wrote:
| > Anyone in the US who is middle-class likely will have to
| sell their home or put it into a financial trust by the
| time they become very old in order to qualify for Medicaid,
|
| In most states, your home is exempt (at least to certain
| far above median value, equity limit) from the Medicaid
| asset test, so, no, you probably won't.
| dionidium wrote:
| You should. While it's true that your primary residence
| won't be counted as an asset in order to qualify you for
| Medicaid, they can and will place a lien on the property
| if you ever enter into a nursing facility (and maybe in
| some other situations). This allows them to capture the
| proceeds if the house is sold while you're living or (in
| some states?) from your estate when you die.
|
| Older families should strongly consider placing their
| home into some kind of trust or transferring ownership to
| a descendant before this becomes an issue.
| dragonwriter wrote:
| "Will want to because of potential downstream
| inconveniences of" and "will have to in order to qualify
| for" are...very different things.
| dionidium wrote:
| That's true, but I don't think most people would put,
| "the state sold the house my mom has lived in since 1972
| and kept the proceeds" in the "downstream inconveniences"
| bucket. It's a pretty big deal! The whole point of
| getting approved for Medicaid is that you won't have to
| go broke paying for your healthcare (at which point you'd
| qualify for Medicaid, anyway).
| adam_arthur wrote:
| Home equity loans are an obvious one. Or cash out refis.
|
| If you have 1m equity, you could for example take out 500k at
| 3% interest and buy a dividend stock paying 6% and
| effectively double your yield on that equity (plus added risk
| from the debt, though).
|
| Or use the equity to buy a rental property.
|
| But most people aren't too finance savvy so you're right that
| it may not affect them in practice.
| cortesoft wrote:
| Did they care about what they were leaving to their heirs?
| What happened to the house after they both died in that
| house? Did the kids keep it? Sell it?
|
| Even if you never use it as an asset in your life, it is
| still an asset.
| phamilton wrote:
| Even if I never move I can borrow against my house/asset.
| Sure, this can be abused. Don't blow it all on a vacation or
| a house remodel. But if an opportunity comes along to buy an
| income producing asset then debt is a wonderful tool. I'd
| rather have access to 100k of debt than not.
| notch656a wrote:
| What if the cost of being in a position to access the 100k
| of debt is you have to pay 1k per year in additional
| property taxes, whether you use the debt or not. If
| property taxes aren't lowered to compensate for appreciated
| values, it starts to look bad for homeowners who live in
| their houses.
| xyzzyz wrote:
| > How's the price of house even mattered all their life?
| There were living there, it's not something external. Today,
| I specifically asked my parents if they knew how much their
| house cost. Nope, they didn't know. It's an irrelevant
| information for them. Cost it 10k or 10m won't change a thing
| - they live in it, it's not something external.
|
| And if it is worth $100B, would it still be irrelevant? Would
| they still live in it, instead of selling and becoming mega
| rich billionaires?
| betaby wrote:
| If their house were 100B that means similar house nearby is
| also 100B and one still needs a place to live.
| woobar wrote:
| But why would they need to live nearby? Or have a similar
| house? Maybe as an empty nesters they can move to a
| smaller house and use spare change for other nice things?
| dionidium wrote:
| If I walk into a room with 2 people and I offer one of
| them a million dollars to move to Cleveland, then one of
| them has something tangible and valuable that the other
| one doesn't. Older homeowners in markets that have seen a
| lot of appreciation are presented with this offer every
| morning when they wake up. Whether they take it or not is
| immaterial. It's a real offer that really exists.
| ErikVandeWater wrote:
| Presumably you inherit it and that is part of their plan to
| impart wealth to the next generation.
| dragonwriter wrote:
| > How's the price of house even mattered all their life?
|
| Depends on the way the financial sector works where they
| live; in the US, if they ever applied for credit for anything
| while owning the house, it, and their debt:asset ratio,
| probably would have played a role in the terms they were
| offered, and that may have been largely transparent to them,
| because a lot of the information flow supporting that
| decision doesn't go through the people applying.
| timr wrote:
| Your grandparents are the exceptional case (in the US,
| anyway). The vast majority of homeowners here change homes
| multiple times in their life (IIRC, once a decade or so).
|
| One of the big advantages of a system like the US (unlike,
| say, Japan, where homes are a _depreciating_ asset) is that
| it increases mobility. If your home is worth less than the
| day you moved in, you 're kind of stuck there -- every move
| represents a capital outlay that is just going to evaporate
| over time. In the US system, a home is a little like a fixed-
| income asset. Even if it only appreciates at the rate of
| inflation, you can treat it as a stable store of wealth.
|
| Even if you purchase one home in your entire life, it's still
| a positive in this system. As others have pointed out
| already, you can _borrow_ against that wealth, or, in the
| case of your grandparents, pass it down to heirs.
| Accumulating wealth is better than not accumulating wealth.
| pharmakom wrote:
| increases mobility for home owners whilst everyone else is
| locked out of a rising market. I'm not convinced this is a
| good trade off.
| dionidium wrote:
| This has a lot more to do with zoning and urban planning
| that it does with the mortgage as a financial product.
|
| On the majority of lots in most cities it's very
| difficult (or illegal) to build new housing. That's a
| regulatory constraint that has nothing to do with how the
| house is financed.
| dnadler wrote:
| Perhaps it's a US phenomenon.
|
| In the US (and probably most places) a house is the most
| expensive asset that a person will own throughout their life.
|
| It is reasonable to ask if a person's life would be better if
| they were able to extract some of the value from the house in
| exchange for other things. For example, I can borrow against
| the value of my home and afford to go on more vacations, or a
| nicer car. It could fund my retirement, even.
|
| Another way of looking at it is as a component of an overall
| portfolio. Does it make sense for me to have 80% of my net
| worth in real estate when I can get a 30 year loan at 2% or
| 3% and diversify? HELOCs are another commonly used
| instrument.
|
| I suppose some may argue that a few of the things I've
| mentioned are "irresponsible", but the truth is that it
| varies from person to person. When used intelligently, debt
| like this can be a win for both parties.
| beepbooptheory wrote:
| Housing is, unfortunately, not a human right in itself
| apparently. So we got care about it.
| DwnVoteHoneyPot wrote:
| The author actually address this a bit in the 2nd and 3rd
| paragraph. The US has added a layer of complexity on top of
| the plain vanilla mortgage. For the rest of world, mortgages
| are a way to pay for the house over time. However, in the US,
| they are into derivatives of the house price (pool them
| together, sell off the risk (rate of change of house price)),
| hence the title of the article: Mortgages are a manufactured
| product.
|
| Edit: now that I think about it. The first level is just
| buying house with cash immediately. The mortgage is the next
| level of complexity, adding time dimension. The article is
| about the 3rd level complexity above that (securitization of
| the 2nd level)! Turtles all the way down.
| rufus_foreman wrote:
| Next two turtles are CDO-squared and CDO-cubed.
| cortesoft wrote:
| Sure, but as a home buyer, what happened to your mortgage
| after you purchase your home only really matters to you as
| far as who the servicer is... you don't care or even know
| who owns the other parts.
|
| US home owners use mortgages for the same purpose as people
| in other countries... to be able to pay off their home over
| time. How is it any different as a home owner in the US
| verse the rest of the world?
| DwnVoteHoneyPot wrote:
| From the home owner perspective, the derivatives are nice
| because the borrower are able to get a lower mortgage
| interest rate, or a longer mortgage, or qualify for a
| mortgage when they could not before. The risk of non-
| payment is spread out, allowing less compensation for the
| risk.
| ziml77 wrote:
| I live in the US and I've always found the idea of a house as
| something that is supposed to appreciate in value to be odd.
| Sure, it's great for you if it does, but I really don't think
| it should be an expectation. The only issue I can see when it
| comes to the price is if you want to move out after just a
| few years but the value has fallen. Hard to buy a new place
| when you're still on the line to pay the mortgage for your
| old place even after selling it.
| mym1990 wrote:
| I think 2 things here: people today seem much more likely to
| relocate due to work and other preferences...in 2018 the
| median duration of holding a personal property is 13 years,
| hardly a lifetime. But lets say that someone buys a house and
| owns it for a lifetime...eventually that will be passed down
| to the kids or whomever, and they may want to liquidate in
| order to move somewhere else. Although in 2008 and also today
| much of what was/is happening in complete speculation, which
| upends the market for many people.
| vngzs wrote:
| Nit: "personal property" traditionally means _any property
| except for real estate_. Using it to mean "real estate" is
| confusing.
| flacnut wrote:
| In the US, you are taxed for the value of your house each
| year. As it goes up in value, so does your property taxes.
| It's hard not to be aware of its value :)
| drdec wrote:
| In practice the market value of a house and the assessed
| value of a house (used to determine real estate taxes) are
| not as tightly correlated as one might assume.
| PopAlongKid wrote:
| That varies widely from one location to another. In
| California for example, your statement is mostly inaccurate
| due to the effect of Prop. 13, which severely limits annual
| increases in assessed value for current owners.
| betterunix2 wrote:
| People sometimes take out a home equity loan, which is kind
| of like going in reverse with mortgage payments -- you are
| going _more_ in debt, using the equity in you built up with
| previous mortgage payments. If the value of your home
| increases you have access to a bigger line of credit.
|
| A common use for such a loan is to pay for renovations, which
| can further increase the value of a property. Another typical
| use is "home grown leverage" i.e. using a home equity loan to
| pay for some investment, which is commonly done with rental
| properties (often to make the down payment on another
| mortgage; the hope being that you can collect enough in rent
| to have money left over after making monthly loan payments).
| For a truly US-only use-case, people sometimes wind up having
| to use a home equity loan to cover medical bills after a
| major emergency or accident, though I think this was more
| common before the Affordable Care Act and will probably
| become even less common with surprise billing being mostly
| eliminated.
| matwood wrote:
| > How's the price of house even mattered all their life?
|
| Assuming the standard US fixed 30 year mortgage, it mattered
| quite a bit. Their final payment was on relative terms, much
| less than their first payment. This effect over time made
| your grand parents wealthier by having one of the most
| expensive parts of living (housing) somewhat sheltered from
| inflation (taxes and upkeep not withstanding).
|
| I live in a popular location, and the house next door just
| rented for 2.5x what I pay on my 10 year old mortgage. I like
| where I live and don't plan on selling, but the price I
| locked in years ago has absolutely mattered to my life.
| ryanSrich wrote:
| In the US, you likely can't afford the house you want. So you
| buy the house you can afford. Ideally, and this has been the
| case since 2014, the value of the house increases. So, now
| you say, "wow, looks like I can sell this house and get a
| better one". And let's say you do that. But the new house you
| just bought only has 3 bedrooms, and not 4. And maybe you
| have 2 kids now and need 4. So you hope and pray your new-ish
| house has gone up in value, and most likely it has, by a lot.
| So you sell that and buy a new one. You do this every 5-10
| years. Once you hit retirement age, you sell the house and
| move into a long term care facility (aka "an old folks
| home"). These aren't cheap though. Affordable ones are
| $5k/month, most are north of $10k. So what do you do? Well,
| you have the money from the sale of your house and hopefully
| some retirement funds. That's why it's kind of important that
| your house value goes up. It's how you'll survive when you're
| older.
| fartcannon wrote:
| In Canada, the price for the detached home that you want
| increases faster than the townhouse you could afford, so
| the plan of buying a starter home to help buy the home of
| your dreams is not really sensible anymore. It requires
| your other wealth/income to increase to compensate for the
| different appreciation rates of the house vs townhouse, or
| for you to move further and further from your current
| location, which will probably negatively affect your income
| or at minimum, your quality of life.
| marcosdumay wrote:
| > the value of the house increases. So, now you say, "wow,
| looks like I can sell this house and get a better one".
|
| If the price of your house increases, the price of the
| better one increases even more. You can switch it if you
| saved or if you life improved. The price increase doesn't
| help, it hinders that change.
| ryanSrich wrote:
| Not in my experience (3 houses so far, early 30s).
|
| The way I've seen markets move is that certain price
| bands are more susceptible to fluctuations than others.
| For example, over the course of a 4 year period you might
| see the entry point for the market go from $400k to
| $500k, while the $500-$600k band sees a 30% increase, the
| $700-$800 band sees a 20% increase, and the $900-$1m sees
| a 10% increase.
|
| So while the entire market is moving up, certain bands
| become more affordable if you can capitalize on a higher
| percentage band.
| secabeen wrote:
| The other element is leverage. If you put 20% down (which
| is higher than average), you are levered 5:1. If all
| houses double in value, your equity goes up 5x. (Example:
| $100k down on a $500k house; price doubles to $1mil, your
| equity is now $600k; you can now easily afford 20% down
| on the higher price house, despite the fact that it is
| now $2,000k from $1,000k when you started the process.)
| DwnVoteHoneyPot wrote:
| I don't think the author is implying something is wrong with
| mortgages. I think article is just a concise, informative
| explanation of how the mortgage industry works.
| 300bps wrote:
| Mortgage brokers make crazy money in the U.S. Generally around 2%
| of the loan amount so they're making $6,000 on a $300,000 loan.
|
| At the particular mortgage broker that I have inside knowledge
| of, their worst loan officers are closing 5 loans per month and
| their best are closing 30 or more which gives them an annual
| salary of between $400,000 to over $2 million.
| cynusx wrote:
| There's a lot to add to this article in my opinion:
|
| Many lenders refinance loans because lenders also need to finance
| their activities and refinancing through securitization is a
| profitable way to do so, that goes for student loans, business
| loans, private loans, car loans, ...
|
| Mortgages are no exception, what is different about the US
| compared to Europe is that the capital market to buy packages of
| loans is more developed because unlike the EU, the US is a
| unified financial and legal system under federal governance.
|
| What happens in a mortgage is not that much different than a car
| loan, you use some cash and borrowed money to pay for the car and
| the lender expects you to repay that money (and interest) in
| fixed installments. Should you fail to pay the loan then the car
| is repossessed. The lender will want to make sure that your
| monthly salary is enough to cover the payments and that the car
| is valuable enough to recover the principle of the loan should
| something happen.
|
| Incidentally, this is why banks don't like to give entrepreneurs
| mortgages because entrepreneurs don't have stable income
| (usually).
|
| The moment you borrow that money, it becomes a liability for you
| but it becomes an asset for the bank/originator; after all you
| are going to pay the originator cash for 25 years.
|
| Now in the US, your originator can sell this asset onwards to a
| loan aggregator (Fannie Mae; Freddie Mac) to realize profits
| today rather than hold the mortgage forever but obviously the
| loan aggregator has some standards it wants you to adhere too.
| (note: the EU doesn't have these types of loan aggregators due to
| the lack of synchronization between their national financial
| markets)
|
| In theory the originator can make more profit by holding the
| mortgage, but since his money is locked up for 30 years in the
| mortgage; many of them don't have enough cash on hand to just
| lend the money and wait 30 years for it to come back so it can be
| lended out again.
|
| The loan aggregators on the other hand buy mortgages from all
| originators and can put them together into a package that is safe
| and diversified enough so that the repayment performance is
| predictable enough (ignoring pre-2007 when rating agencies
| succumbed to customers' pressure to rate pretty much anything as
| safe and caused the huge financial meltdown when borrowers
| started to predictably default) and sell it onward to pension and
| sovereign wealth funds.
|
| These aggregators, or GSEs as patio11 calls them, are private
| companies but by now they are government owned because they all
| collapsed in the financial crisis and since they underwrite
| pretty much every mortgage in the US, they had to be saved as
| otherwise the mortgage originators would also become illiquid and
| then you can only buy a house in cash (which would have pretty
| much destroyed the entire housing market in 2008).
|
| The 60 basispoints though, is the fee for packaging the loans.
| It's not an insurance like patio11 says.
|
| Operational work like support, collections, negotiations about
| late payment and administrative work ("Servicing") is outsourced
| is just because no loan aggregator wants to deal with that and a
| pension fund DEFINITELY doesn't want to deal with that and like
| any outsourced service that is well-understood, they prefer to
| pay as little as possible for this part. This creates natural
| market pressure for consolidation.
| PopAlongKid wrote:
| >educate them on the most complicated and high-stakes financial
| decision they'll have to make in their lives,
|
| I disagree with this hyperbole (part of the overall tone of the
| article). I think taking on full-time college tuition at age 19,
| or having kids, are both far more complicated and consequential
| financial decisions.
|
| Taking out a mortgage to purchase, let alone re-finance, an
| owner-occupied residence is something a lot of people do, perhaps
| more often than they buy a new mattress. If you have the minimum
| down payment and good income & credit report, it's not a big
| deal, and since there are a lot of legal protections all around
| for owner-occupied properties, it's straight-forward and low risk
| to the one taking out the mortgage.
| ILMostro7 wrote:
| Indeed. Although, most of the time when someone ends up in one
| of those other 2 scenarios, long-term finances are not their
| primary objective ;)
| vkk8 wrote:
| I wonder why fixed interest rates are so prevalent in some
| countries (like, apparently, the US) while in other countries the
| standard is to tie the interest rate to a reference rate (like
| EURIBOR in the Eurozone)?
| AndrewDucker wrote:
| Here in the UK, as far as I can tell, your lender can't sell on
| your mortgage. It's a contract between you and them. I wonder how
| many countries do allow that.
| Denvercoder9 wrote:
| They might not be allowed to sell the servicing rights, but
| they almost certainly can sell the risk and returns.
| emilecantin wrote:
| Yeah, as a Canadian all of this seems pretty alien to me. To
| get my mortgage, I went to a specific bank, signed a contract
| with their logo at the top, the amount I owe / pay shows up in
| my online at that bank, and I send money every month to that
| same bank. If a different entity came up and told me to pay
| them instead, I's assume it's a scam. I'm surprised scammers in
| the US haven't tried that yet.
| jjav wrote:
| In the US you can go directly to a bank to get a mortgage,
| but I'm not sure why one would want to since you can't
| comparison shop that way.
|
| Better to go to a broker who shops your loan among dozens of
| lenders to find the best terms. You typically end up with
| some entity you've never heard of (not a known bank), who
| will hold the loan for a month or two and then sell it off to
| someone else.
| marvin wrote:
| Also, as a Norwegian, risks related to refinancing in the
| case of a falling interest rate don't exist. Mortgages are
| floating-rate by default. If you enter a fixed interest rate
| contract, you are on the hook for the entire interest
| difference of the duration of the fixed rate contract if you
| terminate the contract.
|
| 10 year fixed rate contract, loan of 1 million and the rate
| falls from 3% to 2% on the second day of the contract -- if
| you terminate the contract now, you owe the bank 1% of the
| sum of whatever your loan balance would have been during each
| of the next 10 years.
|
| To be fair, you get the opposite deal if the interest rate
| rises.
| namdnay wrote:
| Even if you can't sell the mortgage itself, I'm sure you can
| sell on the "economics" of the mortgage - just like you can
| invest in gold without actually having a vault at home
| betterunix2 wrote:
| They can use the mortgage as collateral for their own loans,
| and I am not really sure how that is any different...
| NoboruWataya wrote:
| It is generally possible under English law to assign _rights_
| under a contract, just not liabilities. It 's also possible for
| the mortgage contract itself to contain a provision permitting
| transfer by the bank. Mortgage-backed securities (which
| generally involve the selling of mortgages to an SPV) are
| certainly a thing in the UK.
|
| For retail mortgages there are presumably regulatory
| considerations as well, eg, the mortgage probably has to
| continue to be serviced by a regulated entity. It's not
| uncommon for the original lender to sell the rights to the
| mortgage but continue to service it.
| friendlydog wrote:
| If government banned long term debt would the real estate market
| disappear, or would home and auto prices eventually level out at
| a much smaller amount reducing overall inflation, or would
| ownership just be for the wealthy and the rest would live in
| pottersville?
| vkk8 wrote:
| This would transfer the real estate from the people to huge
| rental companies that can buy real estate without 30 year
| loans. Probably it would also lower the prices a lot, though.
| jjav wrote:
| I'd speculate that in a world where a few huge real estate
| conglomerates own all the housing, lowering prices will not
| be what they will be doing.
| nybble41 wrote:
| If you only allow short-term debt (say, five years max) then to
| finance a modern house--even if you could buy it "at cost"--you
| would need to take out a series of "balloon" mortgages. Every
| five years you apply for a new loan and use it to pay off the
| old one. However, this is risky for the borrower since it
| assumes interest rates won't increase too much (vs. a 30-year
| fixed mortgage which you can refinance at any time if the rate
| improve) and that you will be approved for a new mortgage when
| it's time to pay off the current one.
|
| Or you can save up $1000/mo. for 15+ years so you can pay for
| the house without taking out a loan... while also paying rent
| on top of that.
| inglor_cz wrote:
| I guess home values would go down, but investment
| (improvements, remodeling etc.) would go down as well, so the
| old houses would be pretty shabby when sold. Newly built homes
| would be either substandard (what the Chinese derogatorily call
| "tofu quality", where walls aren't really that solid), or
| available to the wealthy only.
|
| It is surprisingly expensive to build a (brick and mortar)
| house to 2021 security, energy-saving and quality standards, at
| least in Central Europe. We have a lot of cheaper housing from
| the 1960s-1980s, both block of flats and detached houses, but
| no way would such buildings in their original form be approved
| today.
| CalRobert wrote:
| Interestingly, I had a modern house built in eastern Europe
| (Latvia), and shipped to western Europe, very affordably. I
| had the foundation, roof and windows done locally but the
| frame, with insulation, was under 40k, for a ~140 sqm house.
| sbierwagen wrote:
| For the curious: in 2019 the average house in the US was
| 213 square meters:
| https://www.rocketmortgage.com/learn/average-square-
| footage-...
| inglor_cz wrote:
| A wooden house can be very affordable, but also tricky. The
| wood should be well dried. There was a wave of interest in
| wooden houses in 2015-6 AFAIK, which resulted in vendors
| shipping not-yet-very-dry wooden constructions to their
| customers.
| woggy wrote:
| I wish we had 30 year fixed-rate mortgages in Aus
| post_break wrote:
| What do you have?
| softveda wrote:
| 2 or 3 years fixed interest terms are common and 1-5 years
| fixed terms are available. FI loans cannot be closed early
| without incurring some penalties (economic costs). But the
| most popular loans are what are called Variable Rate Loan
| over 25-30 years. The interest rate can vary through the term
| of the loan based on the interest rate movement by Reserve
| Bank of Australia. These loans can be fully paid anytime.
| Split loans are common too where a portion is fixed and the
| other portion is variable. Another unique feature in
| Australia for Variable rate loans is a so called offset
| account. This is a normal bank account attached to the loan
| and any money here offsets the loan balance. So people can
| save any extra money over the minimum repayment in an offset
| account to reduce interest payment (as it is calculated on
| the difference of loan - offset). The money from offset
| account though can be withdrawn anytime providing tremendous
| flexibility.
| thomascgalvin wrote:
| Spiders, mostly.
| a-priori wrote:
| I don't know about Australia, but in Canada mortgages are
| amortized over (usually) 30 years at first issuance, but they
| are on (usually) 5 year terms.
|
| This means you'll renew your mortgage roughly five times
| before it is repaid, at the prevailing rates at that time.
| There's no such thing here as a mortgage with fixed interest
| rate over 30 years like, as I understand it, there is in the
| US.
| depingus wrote:
| >This means you'll renew your mortgage roughly five times
| before it is repaid, at the prevailing rates at that time.
|
| This sounds a lot like ARMs aka balloon mortgages. Mortgage
| brokers ramming these everyone's throats played a big role
| in the 2008 melt down.
| a-priori wrote:
| I don't know enough about what a "balloon mortgage" is to
| comment on that, other than to say that the 2008 mortgage
| crisis was not as severe in Canada as it was in the
| United States.
|
| So, to the extent that mortgage terms were a factor in
| the crisis, and I don't know whether it was, I wouldn't
| say that this kind of mortgage was disproportionately
| worse.
| shry4ns wrote:
| This is more of a tangential comment, but I absolutely love
| patio11's blog. As someone who is generally interested in fintech
| and financial services but does not have the time to read deeply
| into it, this blog is a treasure mine.
| dtnewman wrote:
| This is generally a pretty interesting article, but I wish he'd
| expand into the other risks inherent to pools of mortgages:
|
| 1) Default risk - Obviously if I invest in pools of mortgages,
| and a lot of people stop paying their loans, I am exposed to
| risk. In many cases I'm insulated, because if someone defaults, I
| now own the home and can sell it to recoup my losses. But there's
| costs associated with foreclosing and in some cases, the value of
| the house goes down by enough that I can't recoup my money
| anyways (see 2008). We slice and dice mortgage pools to reflect
| this, so that the junk bonds are at the bottom and pay more and
| the AAA are at the top and don't lose anything until the lower
| tranches lose everything.
|
| 2) Interest rates rising - he discusses this in the article. If
| interest rates go up from 5 to 10% then any notes I held on a 5%
| loan are worth less.
|
| 3) Interest rates falling - this is called "pre-payment" risk and
| is what makes mortgages so interesting (and much harder to value
| than corporate bonds and most other loans). See point 2 for why
| rates rising hurts the owners of mortgage notes. You might think
| that rates falling would therefore help them, but it doesn't
| directly correlate. If rates fall enough, many people will
| refinance their loans. You have the right to pay off your
| mortgage at any time and another bank will be happy to step in
| and give you a new loan. So if rates fall from 4% to 2%, you can
| bet that most people will refinance. If I'm an investor holding a
| pool of 4% loans, then most of those loans will get paid off and
| now I'm stuck being in a market where I can only buy pools of 2%
| loans. Corporate bonds generally don't work this way. Auto loans
| technically do, but given the size and durations of the loans,
| it's usually not worth the hassle to refinance in the way it is
| for a house. This pre-payment risk makes the modeling of mortgage
| investment much more complicated, but also more interesting than
| many other financial securities.
| poulsbohemian wrote:
| >2) Interest rates rising - he discusses this in the article.
| If interest rates go up from 5 to 10% then any notes I held on
| a 5% loan are worth less.
|
| Maybe you meant this and just wrote it differently, but I'd
| argue it isn't that it is worth less so much as its liquidity
| has declined. You felt good enough about that 5% at the time
| you bought out the mortgage, but now it isn't as good a return
| as you would get if rates were at 10%, thus it may be difficult
| for you to sell that mortgage off to someone else given their
| opportunity cost.
|
| On the other hand, rates (at least in the US) are unlikely to
| jump even a full 1%,let alone 5%, in such a timeline that you
| couldn't retrench if you believed you were better off to
| liquidate and move on to higher yielding assets.
| SilasX wrote:
| That's not what lower liquidity looks like. The bonds sell
| just fine, you just have to lower the price to sell it, such
| that the effective yield matches the market rate.
|
| Lower liquidity would show up as wider bid/ask spreads, which
| doesn't happen in that case.
| nostrademons wrote:
| I also wish there was more about inflation risk.
|
| After being debt-averse my whole life, I finally got a mortgage
| in 2020 when the prevailing interest rate dropped below the
| expected inflation rate. Because that meant real rates were
| negative, and sure, I'd love to get paid for taking out debt.
| At least so far, it's been a great trade, with me paying 2.75%
| on my mortgage and my home's value up about 35%.
|
| Out of morbid curiosity, I'd like to know who I'm screwing
| over. Somebody out there is getting a 2.75% cash flow in a 7%
| inflation environment. Is it my mom's pension fund? The Saudi
| sovereign wealth fund? Wells Fargo? The Federal Reserve, and
| hence everybody who pays for goods with dollars?
| WJW wrote:
| Probably just future generations of taxpayers and/or the
| people you will eventually sell your house to?
| vishnugupta wrote:
| > because if someone defaults, I now own the home and can sell
| it to recoup my losses.
|
| From what I know that's a rare scenario. Stressed asset (i.e.,
| mortgage contract) holder typically sells off that asset to
| someone else at a discount. The buyers are those someone who
| specialise in holding semi-toxic assets and know how to make
| money out of it.
|
| Lenders typically don't want to deal with the underlying
| assets. It's time consuming and not their speciality. Lenders
| just want to recoup whatever money they can fast and be done
| with it.
| [deleted]
| AussieWog93 wrote:
| I'm slightly confused by 2 and 3, as I own cap notes and have
| friends with mortgages (in Australia).
|
| Are mortgage rates and cap note returns in the US not tied to
| the federal interest rate?
|
| Here, pretty much every note traded publicly will yield x%
| above RBA (reserve bank) interest rates, and most mortgages
| will be "variable rate" - ie they'll automatically adjust to be
| some function dependent on the RBA rate.
| chadash wrote:
| In the US, the standard mortgage is 30 year fixed. i.e. you
| pay the same rate for 30 years. Adjustable rate mortgages
| exist, but are less typical.
| jbay808 wrote:
| That's pretty unique to the US, I think. Canada has no
| comparable product and the difference between "fixed" and
| "variable rate" mortgages here is that fixed mortgages are
| fixed for five years.
| rufus_foreman wrote:
| Adjustable rate mortgages (ARMs) weren't even available
| in the US until 1982, Congress didn't allow them. They're
| still around, the type you describe is a 5/1 ARM. Fixed
| rate for 5 years, adjusts every year after that. 3, 5, 7,
| and 10 year ARMs are common. A 5/1 loan rate is about 1%
| lower than a 30 year fixed now. It doesn't make much
| sense to me to take the risk with rates as low as they
| are now.
| beebmam wrote:
| Those used to be much more common in the US. The 2008
| housing crisis changed everything, and variable rate
| mortgages are extraordinarily rare now.
| jjav wrote:
| Main factor is that interest rates are so low (and have
| been for years now). With very low interest rates, it
| would be foolish to get an adjustable rate mortgage since
| it only has room to go up. Much better to lock in the
| very low rate for life. Thus, approximate nobody takes
| variable rate loans anymore.
|
| When I first bought my house interest rates were over 7%,
| so getting discount on the interest in exchange of the
| risk of an adjustable rate mortgage made some sense.
| dragonwriter wrote:
| > Those used to be much more common in the US
|
| Only briefly; the 30 year fixed has been a norm for a
| very long time, and the expansion of ARMs and more exotic
| creative financing instruments in the bubble leading up
| to the 2008 finance crises was itself a short-term
| aberration; there was also a brief run up in popularity
| when interest rates spiked in the 1980s (to avoid locking
| in sky-high rates.)
| inglor_cz wrote:
| Interestingly, I never saw a fixed rate mortgage for 30
| years in my country. The top fixation period is usually
| 10 years, anything higher than that is unusual.
|
| A typical value is 5 years.
| namdnay wrote:
| Not unique, standard in several European countries I've
| lived in too
| glitchc wrote:
| That doesn't sound right. The rate is fixed till the
| renewable period, typically 5 or fewer years.
| dragonwriter wrote:
| > That doesn't sound right.
|
| It is.
|
| > The rate is fixed till the renewable period, typically
| 5 or fewer years.
|
| Lenders and mortgage brokers will often heavily push
| loans like that, ARMs with a short initial fixed period,
| using the (usually slightly) lower initial rate and the
| prospect of refi before the float as a hook, but full-
| term fixed-rate mortgages are still more popular.
| glitchc wrote:
| Assertion requires evidence. This graph disagrees with
| you:
|
| https://fred.stlouisfed.org/series/MORTGAGE30US
| ILMostro7 wrote:
| That's the mortgage interest rate, not the percentage of
| 30-year fixed rate mortgages vs. ARM.
|
| Categories > Money, Banking, & Finance > Interest Rates >
| Mortgage Rates
|
| Unless you're not arguing against the last part of the
| parent comment...
| dragonwriter wrote:
| > This graph disagrees with you:
|
| No, it doesn't. That's a chart of the _average annual
| interest rate of 30 year mortgages_ , not the _share of
| mortgages that are 30 year mortgages_.
| secabeen wrote:
| Not in America. Here's a graph of the market share of
| 30-year fully fixed rate mortgages between 1996 and 2010:
| https://academic.oup.com/view-
| large/figure/114328487/hhu060f...
| nhoughto wrote:
| Surprising, that seems very inefficient. As a bank offering
| a mortgage I have to set an interest rate for entire
| period? Naturally I'm going to be conservative to ensure
| profit.. which hurts the consumer. Variable or short term
| fixed rates seems much more logical.
| basch wrote:
| What percentages of conforming mortgages are sold off by
| the originators that wrote them, before the first payment
| is even due? If it is conforming, or close, there is
| almost no risk for the initial underwriter? I could be
| way off base, but that's mostly what the article is
| about, that the people offering loans arent the ones
| holding the risk.
| mhog_hn wrote:
| Regarding risk for the initial underwriter, there are two
| main elements I think:
|
| - fallout risk
| https://www.investopedia.com/terms/f/fallout-risk.asp
|
| - pipeline risk: https://www.investopedia.com/terms/m/mor
| tgage_pipeline.asp
|
| For the fallout risk an originator can typically model
| the impact on the value of a mortgage with a conservative
| low digit basispoint estimate (following past fallout
| patterns that have been observed for example), for the
| pipeline risk the originator may do some more exotic
| price modelling by deriving implied interest rate
| volatilities from market prices (of interest rate
| derivatives).
|
| Both risks are relatively speaking minimal given their
| short horizons and the (current) low volatility of
| interest rates.
|
| I am impressed with the quality of the website linked to
| by the author of this thread, great read!
| basch wrote:
| The website is of patio11 on hn
|
| https://news.ycombinator.com/user?id=patio11
| freewilly1040 wrote:
| It's a trade, the consumer exchanges certainty about
| costs for a higher fixed rate than they'd get otherwise.
|
| If the consumer doesn't like that they can get a lower
| cost variable rate mortgage just as easily.
| nostrademons wrote:
| That's the point of securitization, which is the point of
| the article. The banks _aren 't_ holding the mortgage.
| They immediately sell it off to some other financial
| institution who wants to buy what basically amounts to a
| homeowner bond that pays the prevailing interest rate.
| (There are some differences mentioned elsewhere in this
| thread, notably that the homeowner has an option to pre-
| pay, there's collateral that the mortgage holder can
| foreclose on, risk profiles are different for homeowners
| than corporations, etc.)
|
| The bank doesn't care what interest rates are going to be
| next year, because they sell the mortgage _now_ and
| collect the cash for it. The buyer cares, but the buyer
| is probably a hedge, pension, or sovereign wealth fund
| that in theory at least should be able to estimate &
| offset interest rate risk.
|
| I wish the article went into more detail about exactly
| who the losers are in this system. I suspect that it's
| essentially a policy by the U.S. government to increase
| social stability (in the form of homeownership, stable
| residence, investment in communities) at the expense of
| holders of U.S. dollars and dollar-denominated assets
| (i.e. most of the rest of the world). In other words,
| it's transferring wealth from non-citizens in exchange
| for keeping citizens happy, which is a pretty typical
| government play. It also looks like the system is on the
| verge of collapsing, in the sense that it pumps up house
| prices and encourages artificially low interest rates and
| high inflation, and hence an increasing number of
| American renters are being caught on the wrong side of
| the equation.
| nhoughto wrote:
| Interesting insights, my brain always goes to how to
| reduce inefficiency but there are many more things at
| play.
| basch wrote:
| >who the losers are in this system.
|
| People who dont qualify. People who misuse it. As is the
| case with much debt, there is debt given to people who
| consume it, spend it, lose it and owe it; and there is
| debt given to people who invest it, accrue with it, and
| profit from it. Many people may stumble through the
| process and benefit from it, while the purchasing power
| of others who cant get it is diluted.
| secabeen wrote:
| Patrick also links a good newsletter at the end that goes
| into the "who are the losers" question a bit:
| https://byrnehobart.medium.com/the-30-year-mortgage-is-
| an-in...
| rufus_foreman wrote:
| Many banks don't care, they are going to turn around and
| sell the loan. Some banks don't even make money off of
| the loan itself, they break even or even lose money
| originating the loan and make money servicing the loan -
| collecting the payments.
| notch656a wrote:
| Which is why .gov holds like 50% of residential
| mortgages. Any losses can be eaten by tax-paying renters
| [by virtue of government purse] to subsidize failures of
| homeowners/lenders. Home owners can watch their asset
| [privately] appreciate while failures in the mortgage
| system get socialized onto landless class as well.
| nostrademons wrote:
| Government technically isn't holding the mortgages -
| Fannie/Freddie/etc. buy the mortgage, repackage them into
| securities, and then _sell the securities_. The flow
| analogy in the article is really good - mortgages flow
| through a lot of intermediaries and get traded on
| markets. (The exception is the Fed 's purchase of RMBS,
| which actually is a quasi-government agency _holding_
| mortgage assets. It 's more like 25%, though; the Fed
| holds about $2.6T in RMBS, while the total RMBS market is
| about $10.3T.)
|
| The socialization-of-losses aspect comes through interest
| rates. When wealth isn't held but is traded on markets,
| there's an incentive to hold interest rates artificially
| low, because that makes asset prices artificially high.
| High asset prices benefits all asset holders, so you can
| make people happier than they otherwise would be simply
| by keeping rates low.
| [deleted]
| samstave wrote:
| During prior to the 2008 crisis, one of the shady practices
| was that all mortgage brokers, realtors and banks were
| pushing adjustable rates on everyone which was a huge
| reason so many people lost their homes.
| soperj wrote:
| Didn't interest rate plummet during that crisis?
| flacnut wrote:
| In America, the majority of loans (especially after 2008) are
| fixed interest rate for the life of the loan. So even if the
| FED/RBA raises the benchmark rate, the mortgage rate and the
| note associated with it will not change.
| cortesoft wrote:
| Many people have variable rate mortgages, but the standard
| mortgage that most people try to get is a "30 year fixed",
| where the interest rate is locked for the entire 30 year
| term.
|
| You pay a higher rate for a fixed than a variable, but you
| get a lot more certainty.
| JimTheMan wrote:
| In Australia the amount you can overpay a fixed mortgage
| before you incur fees is relatively low. (Ie if you pay
| beyond an additional $20,000 per annum you start incurring
| fees.) Is it the same in the states?
|
| Do people just pay the principal and interest for 30 years?
| denimnerd42 wrote:
| No generally there is no pre-payment fee. Although I'm
| not going to say it doesn't exist. I've only heard about
| it on the internet. The avg length of stay in a house is
| like 4-5-6 years anyway at which point you request a
| payoff amount and the buyers money is sent to pay off the
| note. You can also pay any additional principal amount
| you'd like and pay it off in full at any time. You can
| also refinance it at any time if the rate drops.
| cortesoft wrote:
| No, in general there is no prepayment penalty. In fact,
| it is relatively rare for a 30 year mortgage to last the
| entire 30 years. Normally it is paid off early, either
| because the person sells the home and moves somewhere
| else, meaning they pay off their old mortgage with the
| proceeds from the sale and get a new mortgage for the new
| house.
|
| Or, you "refinance" your loan for a better interest rate
| after you have paid down the loan some. For example, I
| bought a house in 2018 and refinanced in 2020. Since my
| home price has gone up in those two years, and I had also
| paid some of the mortgage off, my rate was much better
| since my loan-to-value ratio was lower (basically the
| percentage of the market value of the home you are
| borrowing... the lower that is, the less risk the lender
| is taking, since they can sell the house to get back more
| than the cost of the loan, therefore it has a lower
| interest rate) I was able to save a large amount on my
| payment (went from paying $4700 a month to $3600),
| although it did extend the term of my loan for an extra
| two years. However, I doubt I'll be in the house that
| long anyway.
| namdnay wrote:
| > Do people just pay the principal and interest for 30
| years?
|
| If interest rates go down, you refinance. If interest
| rates go up, you hold onto that cheap debt as long as you
| can. It's a pretty unique product in that one party (the
| consumer) gets complete flexibility whereas the other
| (the bank) doesn't
| dragonwriter wrote:
| > In Australia the amount you can overpay a fixed
| mortgage before you incur fees is relatively low. (Ie if
| you pay beyond an additional $20,000 per annum you start
| incurring fees.) Is it the same in the states?
|
| In several rounds of house buying and/or refinancing,
| I've never even seen an offer in the US that didn't
| expressly note the absence of an early payment penalty.
| nostrademons wrote:
| Except for certain very restricted circumstances,
| prepayment penalties have been illegal since 2014:
|
| https://www.nolo.com/legal-encyclopedia/when-are-
| prepayment-...
| betterunix2 wrote:
| Is the prepayment risk really much different from a callable
| commercial bond? Call protection is not universal in commercial
| or even agency bonds.
| lotsofpulp wrote:
| Does the prepayment risk even matter for most mortgages in
| the US since they are sold to the government sponsored
| enterprises?
|
| https://en.wikipedia.org/wiki/Government-
| sponsored_enterpris...
|
| As I understand, the goal of those entities is to simply
| lower the costs and increase access to loans to the US
| public.
| patrickthebold wrote:
| The Gses bundle up the mortgages and sell mortgage backed
| securities to investors. The prepayment risk flows through
| to those investors. As an extreme example, some securities
| they separately sell the principle payments and the
| interest payments. So if you bought the interest payments
| on a bunch of mortgages you stop getting paid as people
| prepay.
|
| The folks who bought the principle payments are very happy
| to get paid early.
| chadash wrote:
| Yes. Fannie and Freddie sell those loans to investors, they
| don't hold them. They just insure them against defaults.
| But prepayments are still investors' problems as far as I'm
| aware.
| dtnewman wrote:
| No, not very different. But as I understand it, most
| commercial bonds are not callable, whereas most mortgages are
| pre-payable with no penalty.
| [deleted]
| yrral wrote:
| For 3) it's a bit more complex than what you described.
|
| Mortgages are generally securitized. High level, a pool of
| unrelated mortgages (think different parts of the US, different
| types of borrowers, different credit ratings) are packaged up
| together and then split into different tranches. Say you have
| tranches AAA-B. These different tranches are sold to different
| parties with different risk appetites.
|
| Each tranche has a set interest rate, and AAA will have the
| lowest, and B the highest. Say like 2.5% for AAA and 7.2% for
| B. AAA is the most "senior" and B the most "junior".
|
| When borrowers pay back their monthly payments, first the
| interest gets distributed to AAA->B, then all the excess goes
| back paying the principal of AAA. Once AAA is fully paid back
| (say 5 years later for a 30 year loan), the AAA bondholders no
| longer care about the mortgage, and the excess gets paid
| towards AA principal (then A, BBB etc). This keeps going on
| until every tranche gets fully paid back.
|
| By structuring it this way it's "almost impossible" for the
| more senior bondholders to realize a loss.
|
| Obviously there is more risk for B bondholders (given they are
| being paid 7.2% interest). So in this case, losses in mortgages
| are borne by B principal holders until they get exhausted.
|
| Zooming back into the pre-payment risk, it's entirely possible
| that prepayments/refinances will allow the more junior
| tranchess to avoid as much principal loss as expected while
| picking up that juicy yield. (note when the yield for more
| junior bonds are 7.2%, anyone buying these already planned for
| some amount of realized losses)
|
| This pic from wikipedia illustrates some of the concepts
| https://en.wikipedia.org/wiki/Tranche#/media/File:Risk&Retur...
| deweywsu wrote:
| It has always annoyed me that the financial services industry
| attempts to referred to mortgages, loans and other financial
| instruments as "products". By definition, they are services. The
| many papers you get when signing a mortgage is about the closest
| thing you could refer to as a "product". I think they do this to
| attempt to create a sense of finality and inflexibility in what
| they are selling. "It's a product" makes it seem like a fixed
| thing that cannot be changed, when in fact, it definitely can be.
| philomath_mn wrote:
| I work at a structured credit manager. I'm not sure how much
| the semantics matter, but from our perspective, a mortgage (or
| other loan) is an asset that we can buy with a certain yield
| and risk profile. This an abstraction to be sure, but the way
| we use mortgages makes them more of a product.
|
| (we don't do much in the RMBS area specifically)
| namdnay wrote:
| It's a service for you the consumer, but those loans are
| packaged and sold as investment products
| Hamuko wrote:
| The Big Short (great movie) had a good scene on the
| productization of mortgages.
|
| https://www.youtube.com/watch?v=xbiDrzTd8fE
| supernovae wrote:
| 2008 calls, if you didn't know this already I guess this is a
| good re-hash.
| AndrewGaspar wrote:
| A non-trivial percentage of Hacker News was 8 years old in
| 2008. :)
| SilasX wrote:
| I'm confused about this part:
|
| >A mortgage has a quirky little subcomponent called a Mortgage
| Servicing Right (MSR). Every month, it needs to collect money
| from the borrower and send that money... somewhere. This implies,
| minimally, a mailbox where you can send checks, someone to open
| the mail, and a phone number with a CS representative who can
| answer questions like "What is my current balance?" and "Did you
| get the last check I sent you?"
|
| I thought mortgage payments were mostly done electronically now?
| cortesoft wrote:
| Sure, but that still means someone has to operate the website,
| and they still need to operate customer service when it doesn't
| work.
| vulpes wrote:
| I don't think there are any Mortgage Collectors that do not
| allow you to send a physical check that needs to be processed.
| Of course they'll encourage you to set up AutoPay, bank
| transfers, etc, since it makes their job easier with no benefit
| to you (same can be said about "paperless").
| ls612 wrote:
| Paperless and autopay online is absolutely a benefit to me, I
| have all of my records in a folder in my email and never
| forget a payment or make it late.
| consultutah wrote:
| Is Stripe going to revolutionize the financing of residential
| homes? :)
| GordonS wrote:
| Any ideas on what forms other hoke financing products might
| take?
| bradleyjg wrote:
| > Private capital buys all the other risks.
|
| What about the Fed? It is not private capital.
| mym1990 wrote:
| The Fed operates as both a public and private entity, while the
| Board of Governors is a governmental agency, the the Federal
| Reserve Banks are set up like private corporations. Whether
| that makes the actual capital private, I am not sure, but I
| think it is a noteworthy fact.
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