7 ms·

Financial industry makes money off transactions and commissions. The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll

by VLM 8y ago

Financial industry makes money off transactions and commissions. The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll make a mortgage transaction every 20 years on average, but if you try to live in a giant commune like a 90s era sitcom, it'll financially collapse every 2 years and ya gotta live somewhere so you'll be entering into new transactions the bank can middleman every two years rather than every twenty years. They probably will make less money off each transaction, maybe lose some of the time, but if you increase transaction volume by 10, as long as their profit drops less than 90% its a net gain for them on average. Also interest is profit to the financial institution, they'll make far more money off ten two year mortgages than one twenty year mortgage. With a side dish of the bank eating all the equity in interest in fees meaning the participants will be much poorer after twenty years meaning the bank can extract ever more middleman profits off the victims. The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage.

ovi256 8y ago
The average ownership duration seems to be in the 10 to 12 year in the US, shorter for apartments, but yeah, your point still stands. https://eliresidential.com/blog/2018/6/12/what-is-the-average-length-of-home-ownership https://eliresidential.com/blog/2018/6/12/what-is-the-averag... http://nahbclassic.org/generic.aspx?genericContentID=194717 http://nahbclassic.org/generic.aspx?genericContentID=194717
clairity 8y ago
I’m not sure i can be that cynical, but you’re right that lenders prefer higher monetary velocity (in the form of transaction volume here), all other things being equal.
- fbonetti 8y ago
  They don't. I don't know where your getting this idea from. The tiny origination fee that lenders charge is nothing to compared the amount of interest earned over the life of the loan. A lender would much rather have steady income over 30 years than constantly having to seek out new deals.
  - clairity 8y ago
    that’s a false dichotomy. if you love strawberries, would you sit on the one you have or go out and try to get as many as possible?
    - mcv 8y ago
      The humorous visual of someone preferring to sit down on a strawberry is the only redeeming value of that analogy.
mcv 8y ago
> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. It seems really backwards to consider this the nightmare scenario. This is exactly what everybody wants: for people to take a mortgage once and pay it off eventually. A business that considers healthy finances a nightmare scenario is a predatory business that needs to die.
- sbierwagen 8y ago
  I mean, plenty of businesses have incentives maligned with society. Gas stations want you to burn more gasoline, not less. Hospitals want you to visit more often, and spend more each visit. Liquor stores want you to drink more alcohol. Etc etc. Are hospitals predatory?
  - mannanj 8y ago
    Yes. The people there aren't, but the institutions by design are.
  - mcv 8y ago
    Hospitals don't want you to visit more often. At least not in any healthy society. Hospitals that do prefer ill people over healthy people are indeed predatory and dangerous for a society to have, because it operates on very harmful incentives. I guess this is the clearest case ever of why regulation is important. Good regulation provides businesses with incentives that help rather than harm society.
    - coldtea 8y ago
      >Hospitals don't want you to visit more often. At least not in any healthy society "Healthy" society is a weasel word here though: a qualifier that turns this into a "no true scotsman". In this one, and most real societies, hospitals do want people to visit more often. Their incentives are geared towards that. And not just "visit more often" -- hospitals (well, hospital execs, doctors, etc) want (and do) all kinds of things detrimental to society: - to charge more for healthcare - to add hidden charges - to perform unneeded operations and treatments to make profit (even if the patient not only doesn't need them, but can be in danger from them) - to prescribe drugs that the drug companies wine and dine them to promote, whether they're needed or not And whole more besides. E.g. https://www.scientificamerican.com/article/unnecessary-tests-and-treatment-explain-why-health-care-costs-so-much/ https://www.scientificamerican.com/article/unnecessary-tests... https://eu.usatoday.com/story/news/nation/2013/06/18/unnecessary-surgery-usa-today-investigation/2435009/ https://eu.usatoday.com/story/news/nation/2013/06/18/unneces... http://discovermagazine.com/2018/apr/doctors-wined-and-dined http://discovermagazine.com/2018/apr/doctors-wined-and-dined https://theconversation.com/whos-paying-for-lunch-heres-exactly-how-drug-companies-wine-and-dine-our-doctors-78395 https://theconversation.com/whos-paying-for-lunch-heres-exac...
have_faith 8y ago
> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. This is very interesting and produces an odd incentive structure. The only upside I can think of is mortgage terms might be favourable to the buyer as the lenders just want a higher mortgage turnover which can't happen if people are stuck in mortgages for too long.
empath75 8y ago
They booked a nearly risk free profit on that mortgage that was paid off early.
iambateman 8y ago
Maybe, but at 4% interest, isn’t it financially optimal for me as a consumer to continue borrowing? Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market? It seems like a win win, at least for people who have access to 4% interest.
- ghaff 8y ago
  Maybe. You owe the 4% no matter what. There’s some risk associated with putting money in the market instead, even over a long period. Historically youd be ok but you are taking on some risk for the potential gains.
- benmmurphy 8y ago
  for individuals it is attractive because you don't pay income tax on the imputed rent.
- mattferderer 8y ago
  I really like that advice that you save those extra payments in a high yield savings account at around 2-2.5% instead. You're still losing a little but you will be ready for emergency home fixes & getting sacked with random specials from your city which are usually at a higher interest rate. Of course if you have tons of cash, then for sure throw it in some ETFs in the market.
- cornstalks 8y ago
  > Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market? My favorite rebuttal to that argument is this Q&A: https://money.stackexchange.com/questions/89245/should-i-buy-my-house-in-cash-or-with-a-mortgage-and-invest-the-rest-of-my-mone https://money.stackexchange.com/questions/89245/should-i-buy... To quote the top answer: > Ask them if you already owned the house, would they be advising you to take out a mortgage in order to invest elsewhere. If not, ask them to explain the difference between taking out a mortgage on the day you buy the house and taking the same mortgage out the day afterwards. If I owned a house (with no mortgage), I wouldn’t take out a mortgage on it just to invest those funds in the market. Some people might, but that’s too much risk for me.
chosenbreed37 8y ago
> The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll make a mortgage transaction every 20 years on average,... People take out long term mortgages but it is quite common to re-mortgage on the same property to get a better deal...and usually people go with a different lender in those cases
- JoshTriplett 8y ago
  > it is quite common to re-mortgage on the same property to get a better deal Or to "extract" equity as money to spend. There's a huge amount of advertising out there trying to convince people they should take out a home equity loan and spend the resulting money.
nickysielicki 8y ago
> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. This is only true provided that the mortgage rate for this person is below or at the federal funds rate, right? Given how low it is, even in the nightmare scenario they're making good money.
- mipmap04 8y ago
  Depends on the institution and their relationship to the borrower. For instance, if you are a servicer who bought the MSRs to a loan portfolio and a large cut of those borrowers pay off early, you may not make back your investment on the MSR purchase (this is unlikely though as rarely will that many people pay off early as to not payback the investment if you've conducted appropriate due diligence of the portfolio). Though for the originating institution you're generally correct.
TravelTechGuy 8y ago
> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. I think the nightmare scenario for financial institutions is people buying houses for cash. No mortgage, no down-payments, no middlemen. The west coast right now is seeing an increase of such transactions. Add to that the slew of services trying to get around realtors, and the future may be bleak for such financial institutions. One can only hope...
- eli_gottlieb 8y ago
  Let's set a more ambitious goal. The real nightmare scenario for these institutions should be: people buy houses like refrigerators, as durable goods, with financing being only for the very worst-off.
  - lostapathy 8y ago
    Where do you live that people don’t routinely finance appliances for 2-3 years on consumer credit? I don’t, but all the appliances sellers here advertise it so people must do it.
    - droithomme 8y ago
      That is interesting, I wonder how many people do buy appliances on credit. I recently replaced a refrigerator, which was over 40 years old and which I'd done multiple overhauls myself on over the years. Appliance store had lots of refrigerators in the $3,000-$16,000 range. With lots of features and compartments, multiple icemakers, LED zoned glow lighting, exotic hinges, internet connectivity, etc. I got a good fridge for $500 for cash. No icemaker and a single fridge and freezer door so it had the highest energy efficiency rating, higher than all the high tech fridges there with exotic energy saving features. And plenty of room inside because it wasn't taken up by compartments and drawers and icemakers. So... if most people are financing as you speculate, maybe it is because they are going for these $5000 refrigerators that don't work as well as the $500 refrigerators. Also I just know that all the internet, digital stuff, and touchscreens on the $5000+ fridges is going to break down in a few years and cost a fortune to repair. No thanks!
Spooky23 8y ago
Most US banks sell the loans immediately and are basically middlemen. They don’t care.
- czbond 8y ago
  Agree here. Most of the money made on a mortgage with the lowest risk are the origination fees (say ~$10k in US) and then the individual mortgages are sold off to sit in tranches where they are risked by credit level and p
eli_gottlieb 8y ago
>The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. Well, that's a bit of encouragement to overpay my upcoming mortgage.

by VLM 8y ago

ovi256 8y ago

The average ownership duration seems to be in the 10 to 12 year in the US, shorter for apartments, but yeah, your point still stands. https://eliresidential.com/blog/2018/6/12/what-is-the-average-length-of-home-ownership https://eliresidential.com/blog/2018/6/12/what-is-the-averag... http://nahbclassic.org/generic.aspx?genericContentID=194717 http://nahbclassic.org/generic.aspx?genericContentID=194717

clairity 8y ago

I’m not sure i can be that cynical, but you’re right that lenders prefer higher monetary velocity (in the form of transaction volume here), all other things being equal.

fbonetti 8y ago
They don't. I don't know where your getting this idea from. The tiny origination fee that lenders charge is nothing to compared the amount of interest earned over the life of the loan. A lender would much rather have steady income over 30 years than constantly having to seek out new deals.
- clairity 8y ago
  that’s a false dichotomy. if you love strawberries, would you sit on the one you have or go out and try to get as many as possible?
  - mcv 8y ago
    The humorous visual of someone preferring to sit down on a strawberry is the only redeeming value of that analogy.

mcv 8y ago

> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. It seems really backwards to consider this the nightmare scenario. This is exactly what everybody wants: for people to take a mortgage once and pay it off eventually. A business that considers healthy finances a nightmare scenario is a predatory business that needs to die.

sbierwagen 8y ago
I mean, plenty of businesses have incentives maligned with society. Gas stations want you to burn more gasoline, not less. Hospitals want you to visit more often, and spend more each visit. Liquor stores want you to drink more alcohol. Etc etc. Are hospitals predatory?
- mannanj 8y ago
  Yes. The people there aren't, but the institutions by design are.
- mcv 8y ago
  Hospitals don't want you to visit more often. At least not in any healthy society. Hospitals that do prefer ill people over healthy people are indeed predatory and dangerous for a society to have, because it operates on very harmful incentives. I guess this is the clearest case ever of why regulation is important. Good regulation provides businesses with incentives that help rather than harm society.
  - coldtea 8y ago
    >Hospitals don't want you to visit more often. At least not in any healthy society "Healthy" society is a weasel word here though: a qualifier that turns this into a "no true scotsman". In this one, and most real societies, hospitals do want people to visit more often. Their incentives are geared towards that. And not just "visit more often" -- hospitals (well, hospital execs, doctors, etc) want (and do) all kinds of things detrimental to society: - to charge more for healthcare - to add hidden charges - to perform unneeded operations and treatments to make profit (even if the patient not only doesn't need them, but can be in danger from them) - to prescribe drugs that the drug companies wine and dine them to promote, whether they're needed or not And whole more besides. E.g. https://www.scientificamerican.com/article/unnecessary-tests-and-treatment-explain-why-health-care-costs-so-much/ https://www.scientificamerican.com/article/unnecessary-tests... https://eu.usatoday.com/story/news/nation/2013/06/18/unnecessary-surgery-usa-today-investigation/2435009/ https://eu.usatoday.com/story/news/nation/2013/06/18/unneces... http://discovermagazine.com/2018/apr/doctors-wined-and-dined http://discovermagazine.com/2018/apr/doctors-wined-and-dined https://theconversation.com/whos-paying-for-lunch-heres-exactly-how-drug-companies-wine-and-dine-our-doctors-78395 https://theconversation.com/whos-paying-for-lunch-heres-exac...

have_faith 8y ago

> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. This is very interesting and produces an odd incentive structure. The only upside I can think of is mortgage terms might be favourable to the buyer as the lenders just want a higher mortgage turnover which can't happen if people are stuck in mortgages for too long.

empath75 8y ago

They booked a nearly risk free profit on that mortgage that was paid off early.

iambateman 8y ago

Maybe, but at 4% interest, isn’t it financially optimal for me as a consumer to continue borrowing? Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market? It seems like a win win, at least for people who have access to 4% interest.

ghaff 8y ago
Maybe. You owe the 4% no matter what. There’s some risk associated with putting money in the market instead, even over a long period. Historically youd be ok but you are taking on some risk for the potential gains.
benmmurphy 8y ago
for individuals it is attractive because you don't pay income tax on the imputed rent.
mattferderer 8y ago
I really like that advice that you save those extra payments in a high yield savings account at around 2-2.5% instead. You're still losing a little but you will be ready for emergency home fixes & getting sacked with random specials from your city which are usually at a higher interest rate. Of course if you have tons of cash, then for sure throw it in some ETFs in the market.
cornstalks 8y ago
> Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market? My favorite rebuttal to that argument is this Q&A: https://money.stackexchange.com/questions/89245/should-i-buy-my-house-in-cash-or-with-a-mortgage-and-invest-the-rest-of-my-mone https://money.stackexchange.com/questions/89245/should-i-buy... To quote the top answer: > Ask them if you already owned the house, would they be advising you to take out a mortgage in order to invest elsewhere. If not, ask them to explain the difference between taking out a mortgage on the day you buy the house and taking the same mortgage out the day afterwards. If I owned a house (with no mortgage), I wouldn’t take out a mortgage on it just to invest those funds in the market. Some people might, but that’s too much risk for me.

chosenbreed37 8y ago

> The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll make a mortgage transaction every 20 years on average,... People take out long term mortgages but it is quite common to re-mortgage on the same property to get a better deal...and usually people go with a different lender in those cases

JoshTriplett 8y ago
> it is quite common to re-mortgage on the same property to get a better deal Or to "extract" equity as money to spend. There's a huge amount of advertising out there trying to convince people they should take out a home equity loan and spend the resulting money.

nickysielicki 8y ago

> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. This is only true provided that the mortgage rate for this person is below or at the federal funds rate, right? Given how low it is, even in the nightmare scenario they're making good money.

mipmap04 8y ago
Depends on the institution and their relationship to the borrower. For instance, if you are a servicer who bought the MSRs to a loan portfolio and a large cut of those borrowers pay off early, you may not make back your investment on the MSR purchase (this is unlikely though as rarely will that many people pay off early as to not payback the investment if you've conducted appropriate due diligence of the portfolio). Though for the originating institution you're generally correct.

TravelTechGuy 8y ago

> The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. I think the nightmare scenario for financial institutions is people buying houses for cash. No mortgage, no down-payments, no middlemen. The west coast right now is seeing an increase of such transactions. Add to that the slew of services trying to get around realtors, and the future may be bleak for such financial institutions. One can only hope...

eli_gottlieb 8y ago
Let's set a more ambitious goal. The real nightmare scenario for these institutions should be: people buy houses like refrigerators, as durable goods, with financing being only for the very worst-off.
- lostapathy 8y ago
  Where do you live that people don’t routinely finance appliances for 2-3 years on consumer credit? I don’t, but all the appliances sellers here advertise it so people must do it.
  - droithomme 8y ago
    That is interesting, I wonder how many people do buy appliances on credit. I recently replaced a refrigerator, which was over 40 years old and which I'd done multiple overhauls myself on over the years. Appliance store had lots of refrigerators in the $3,000-$16,000 range. With lots of features and compartments, multiple icemakers, LED zoned glow lighting, exotic hinges, internet connectivity, etc. I got a good fridge for $500 for cash. No icemaker and a single fridge and freezer door so it had the highest energy efficiency rating, higher than all the high tech fridges there with exotic energy saving features. And plenty of room inside because it wasn't taken up by compartments and drawers and icemakers. So... if most people are financing as you speculate, maybe it is because they are going for these $5000 refrigerators that don't work as well as the $500 refrigerators. Also I just know that all the internet, digital stuff, and touchscreens on the $5000+ fridges is going to break down in a few years and cost a fortune to repair. No thanks!

Spooky23 8y ago

Most US banks sell the loans immediately and are basically middlemen. They don’t care.

czbond 8y ago
Agree here. Most of the money made on a mortgage with the lowest risk are the origination fees (say ~$10k in US) and then the individual mortgages are sold off to sit in tranches where they are risked by credit level and p

eli_gottlieb 8y ago

>The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage. Well, that's a bit of encouragement to overpay my upcoming mortgage.