[HN Gopher] Requiem for a bank loan
___________________________________________________________________
Requiem for a bank loan
Author : Ozzie_osman
Score : 83 points
Date : 2023-06-16 16:49 UTC (6 hours ago)
(HTM) web link (www.bitsaboutmoney.com)
(TXT) w3m dump (www.bitsaboutmoney.com)
| BSEdlMMldESB wrote:
| I'm interested "the metaphysics" of credit emission
|
| too bad this is not publicly permitted, I fear this stuff only
| gets discussed in private (occulted) societies and 'back rooms'
| (or private lounges) with lots of wooden furniture (I imagine)
|
| when somebody emits a credit for somebody else, they've set a
| requirement for the future, this has consequences that ain't so
| simple; and what's worse, that are all taboo to discuss with
| 'randos' (outsiders of any sort)
| Biologist123 wrote:
| There's some interesting ideas here of the type I'm interested
| in. Can you eleborate a little further?
| ryandrake wrote:
| > So I had a brief negotiation with First Republic, where I asked
| for (and got) a $100,000 credit line "for cash management
| purposes." My recollection is that this took less than two hours
| total, inclusive of time to write the loan application.
|
| Fascinating look at a world that I just kind of assumed was only
| for the ultra-wealthy. Who knew one could simply stroll into a
| bank, and two hours later and a couple of signatures and
| handshakes, simply walk out with a $100K _unsecured_ line of
| credit! Mind blown. I always just assumed that you had to show
| $millions in net worth or be some kind of Investment Banking
| super-partner to the bank in order to get such generous
| treatment. Or at least secure the credit with _something_. Wow.
| hcknwscommenter wrote:
| Unfortunately, your intuition is largely correct. The First
| Republic product was unique, and basically a marketing tool (as
| the article does explain). Typical unsecured rates for loans to
| individuals are floating, calculated as (libor/sofor) + some
| market rate, or maybe just prime+. The market rate can be quite
| high.
| nocoiner wrote:
| Depending on prevailing circumstances (basically how long has
| it been since there's been a financial crisis, or how frothy
| are the markets currently?), it can be a pretty common product.
| Like Patrick wrote, smaller lenders and private bank divisions
| of the big banks (used to?) love to give these to people with
| highly probable future income and wealth generation potential
| (doctors, lawyers, etc.)
|
| Though, am I wrong, or wouldn't it be pretty straightforward
| for someone with what I assume would be average comp for an HN
| reader to take out several credit cards and get a similar
| amount of unsecured credit? Obviously a different loan product
| (higher interest rate, non-amortizing) but isn't that a fairly
| accessible path to six figures of unsecured debt?
| lief79 wrote:
| He already had 100k in other accounts, and not just retirement
| savings. He was a safe bet.
| cypherpunks01 wrote:
| This is a great rule of thumb: "a 1% increase in prevailing
| interest rates decreases the value of the loan by approximately
| 1% per year of duration".
|
| Especially good to keep in mind for borrowers who are trying to
| negotiate payoff amounts for fixed term loans. A 5% interest rate
| increase means you can potentially negotiate a loan payoff for
| significantly less than you owe for loans that have multiple
| years remaining. Has anyone been successful at this for consumer
| loans recently?
| nradov wrote:
| I'm pretty sure that consumer lenders will never negotiate with
| borrowers to allow paying off a loan in good standing for less
| than the balance. Usually they're only willing to negotiate if
| you're already in default, and your credit rating will take a
| hit either way. In many cases the loan will have already been
| securitized and sold to an outside investor so the servicer
| that you deal with might not even have the contractual
| authority to negotiate with you.
| bombcar wrote:
| This is correct. The _only_ time you will get a chance to do
| this with a non-commercial loan (like a massive loan on a
| factory, etc) is if you got a loan that was so short term
| that the bank didn 't bother selling it, and kept it in
| house.
|
| Then there is a _slight_ chance that you can convince the
| bank to give you a bonus for refinancing with them.
| wewtyflakes wrote:
| That is a neat idea; a calculator to plug in the numbers and
| get back a hypothetical payoff number. It would be also neat if
| we could track which lenders are willing to take the deal; it
| may lead to people preferentially using them in the future.
| hospitalJail wrote:
| I dont totally understand this.
|
| Do you mean that you could refinance it to defeat the rule of
| thumb?
| sokoloff wrote:
| Suppose I owe you a million dollars for 30-years at a fixed
| rate of 5%. If the prevailing rates are 5% or less (and you
| think I'll remain solvent), there's no real reason for you to
| take less than face value if I agree to pay it off now.
|
| Suppose then prevailing rates go up to 10%. Now you have
| incentive to take less than a million dollars if I pay it off
| now. You could take the million bucks and lend it back out at
| 10% now, but you're stuck with 5% with me.
|
| The question is "how much incentive/how much less would you
| rationally take?"
| jagged-chisel wrote:
| But the bank is in the position to "create money" to loan
| at 10% while also making that 5% on you. I don't think it's
| realistic to expect the bank to be interested in taking
| your (lower) payoff specifically to loan it at a higher
| rate.
| stocknoob wrote:
| Banks have a reserve ratio. The money lent suboptimally
| to you at 5% has an opportunity cost.
| sokoloff wrote:
| They still have reserve requirements, meaning the total
| money they can lend out isn't infinite and therefore the
| money they lent to me they might wish to have back and
| lend it out to someone else at the higher rate.
| shawabawa3 wrote:
| By that logic you would expect banks to create infinite
| money and drive interest rates down to 0.00001%. the fact
| that doesn't happen should hint that you've misunderstood
| how banks work
| pwatsonwailes wrote:
| Depends how many people come back willing to sell their
| loans, and what that does to the liquidity position of
| the bank, and their current intentions regarding
| investment and the capital requirements to execute that.
| beezle wrote:
| Big assumption that the "bank" owns the loan, in particular
| the original lender. If it has been pooled nobody is going
| to answer the phone.
| SilasX wrote:
| The idea came up before on HN[1], where the upshot is, banks
| don't do this, because if they sell the loan at all, they sell
| a bunch at once, and there are game-theoretic reasons not to
| encourage this kind of deal. But Denmark gives you the right to
| buy your mortgage back under that formula, meaning you benefit
| from interest rates going both up _and_ down.[2]
|
| [1] https://news.ycombinator.com/item?id=31189814
|
| [2] https://news.ycombinator.com/item?id=32813598
| lend000 wrote:
| Someone clever enough to try this might also just invest their
| cash in treasuries and cut out the middleman's fees, unless you
| think you know better than the bank that interest rates will be
| coming down soon and the opportunity will evaporate (banks are
| not great at predicting market conditions as showcased recently
| by SVB and company but I wouldn't do it personally without some
| edge).
|
| Edit: Although if the bank was mismanaged into a bad liquidity
| situation, they might want to offer an even better price than
| the difference between treasuries would provide as incentive.
| loeg wrote:
| Yeah, I've thought there should be a cash-out mortgage
| refinancing product for monetizing the difference between my
| 2.5% mortgage and prevailing rates north of 5%. Unfortunately,
| I don't think there is.
| HWR_14 wrote:
| Interesting. So you are thinking you would get a lump sum
| payment, and then the mortgage would change to a 5% rate?
| [deleted]
| beezle wrote:
| Better: a 100 bp increase in prevailing interest rates...
|
| edit to add:
|
| Also, in the context of loans/notes/bonds, duration refers to
| sensitivity of the price of the instrument to a small change in
| interest rates.
|
| Knowing the duration of the instrument is all you need, it is
| very odd to say 'by approximately 1% per year of duration' If
| the duration is 4 yrs, a 100bp increase in rates will result in
| a 4% decline in the price of the bond.
| gigel82 wrote:
| I got a chuckle out of that... I'd be very interested in
| hearing if this was ever done in the history of consumer loans
| (from a reputable financial institution). Don't get me wrong,
| I've got a 4% mortgage so would totally go for some of that
| "reduced loan payoff" stuff, but it's not realistic.
| dmoy wrote:
| Likely not for mortgages at least, since those get packaged
| and securitized like immediately
| cwillu wrote:
| Actual title is "Requiem for a bank loan", we don't need to
| repeat the domain name.
| Biologist123 wrote:
| > The fundamental purpose of bank loans is to enable measured
| private risk-taking by leveraging a small amount of bank equity
| (from risk-taking investors) with a larger amount of risk-adverse
| deposits. Sometimes the risks are opening a restaurant or buying
| an apartment building in an up-and-coming neighborhood; here the
| risk was a crash project to build charitable medical
| infrastructure during a crisis.
|
| This is central to the author's defence of the social importance
| of banks. And if only it were true, banks really don't finance
| small businesses in a meaningful way anymore. At least not in the
| UK.
___________________________________________________________________
(page generated 2023-06-16 23:00 UTC)