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Wealthy mortgage borrowers face cold shoulder from lenders

81 points by aazaa 7y ago

onetimemanytime 7y ago
They'll lend you, just at higher rates. This is banks doing what they do, taking the umbrella now that it's raining.
- em500 7y ago
  > taking the umbrella now that it's raining Always found this a very strange metaphore. Banks seem to always face criticism for 1) when they don't lend to people who need it most and 2) when they do lend to people who are likely to default. It seems fairly obvious that there is a very large overlap between those groups.
  - gindely 7y ago
    Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? I mean banks aren't charities and maybe they're not/shouldn't be obliged to do this, but it's not like everyone is being hypocritical - we're allowed to expect institutions to do things that are in the public interest rather than their own private interest (freedom of opinion and all that).
    - aguyfromnb 7y ago
      >Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). >we're allowed to expect institutions to do things that are in the public interest This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it?
      - TeMPOraL 7y ago
        > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). No. But then again, being a businessman isn't seen as unqualified virtue in many places in the world. You'll also note that "selling things to the people who need it most for the lowest price" is literally the justification given for why free and competitive markets are good. It's the goal societies want to achieve. In this, competitive pressure is a hack to force the businesses to reduce prices.
        aguyfromnb 7y ago
        >is literally the justification given for why free and competitive markets are good. If you think "price that minimizes default" and "lowest economic price" are equivalent, you need to brush up on your Econ 101.
      - bryanrasmussen 7y ago
        >Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). I think a business that sells something for a small markup but makes it up in volume does something like this. So I guess the answer would be - yes - probably most businesses actually do this.
        aguyfromnb 7y ago
        >I think a business that sells something for a small markup but makes it up in volume does something like this. Define a "small markup".
      - gindely 7y ago
        > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). Yes > This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it? I wasn't responding to the article.
    - imtringued 7y ago
      There are risk pools for lending because every business has a different cut off point below which a borrower is considered too risky and therefore gets rejected. Imagine you are a bank employee at Bank A with very low default rates and consequently low interest rates (say 2.5%) and a homeless man has an appointment with you because he wants a small loan of $5000 to find an apartment and a job. He has no assets or income and is only able to pay after getting his job so he will miss his first few payments. Therefore you decide to simply not give him a loan because it is incredibly obvious that he is going to default. What are his options now? He can go to a Bank B that accepts more risky borrowers with a still acceptable but slightly higher interest rate of 5%. What happens is that all the reliable lenders go to Bank A because they get a great deal there and have no trouble getting a loan. They don't even bother with Bank B. Since Bank B fails to attract reliable lenders the only borrowers at Bank B are those who couldn't get a loan at Bank A. Bank B now has two choices. Either keep the risk profile or tighten it and only allow reliable lenders. If they keep it then they will notice a much higher than usual default rate. Bank B is losing money from all the defaulting loans and that money has to come from the borrowers of Bank B that didn't default. Now imagine that there is a Bank C. What if it's risk profile is so lenient that it accepts anyone with no questions asked. Literally everyone who comes to you is defaulting. You're throwing money into a black hole with no chance of getting it back. You have to crank up the interest rate to absurd levels to cover the defaults. You know what the problem is? It's not that Bank C is evil and exploiting the poor. Those people should have never gotten a loan at all. The act of giving them a loan is exploitation itself, not the interest rate or whatever conditions that Bank C needs to stay in business. It's as simple as that. Those individuals do not need a loan, they need support from the government in a way that doesn't require the money to be paid back. e.g. free housing, unemployment benefits or even straight up UBI. Don't criticize Banks for not lending to those who need it most. For some reason people don't understand that Banks are businesses that have to at least cover their costs. They think a Bank is a charity that should take on responsibilities that really only belong to the government.
      - gindely 7y ago
        But now you have just portrayed situations in which banks provide affordable loans to people who don't need them, and unaffordable loans to people who need them. But this is what was criticised in the first place so we know it happens. So I'm not sure what the point of your first four paragraphs were. Your final paragraph is exactly what my earlier comment rejects. The general public has every right to criticise banks for acting in the banks' private interest. Banks are not charities, it is true. But they are groups of moral agents acting in a community, and the community has every right to hold the moral agents to whatever standards the community wishes to. The bank has the legal right to pursue its own private interests, so long as it acts legally, and has the legal right to not act as a charity. But that is not an argument against the view that the bank should act in conformance with community expectations, and if necessary the law should be changed to ensure that they do. The fact that banks make ridiculous profits - they're not just covering costs - is also relevant. If your business is making billion dollar profits, you're vulnerable to the claim that you should give greater weight to public opinion, and the notion that you're only acting to cover costs is a red herring.
  - godzillabrennus 7y ago
    Payday lenders fill this gap. Everyone hates them as well. Everyone hates student loans and they fill a different gap. Basically, people hate people who lend money.
    - ForHackernews 7y ago
      There's a reason usury was historically a serious sin.
      - throw_m239339 7y ago
        It was in fact punishable by death in Christian countries. In theory it's also still a sin in Islam. That's why most of the first bankers… were not Christians or Muslims if I can put it that way.
      - spicymaki 7y ago
        Yes and usury is why we have an economic crisis every ten years. The magnitude of the crisis seems to be increasing each time.
        lotsofpulp 7y ago
        Is this specific Mar 2020 onward economic crisis being caused by usury?
    - TeMPOraL 7y ago
      > Payday lenders fill this gap. Everyone hates them as well. That's because they offer a very dangerous financial tool, and at the same time they work hard to put this tool in hands of people who can't handle it safely. In this way, they make money off destroying people. > Everyone hates student loans and they fill a different gap. The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education.
      - smcl 7y ago
        > The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education. If the loan is meant to pay for tuition then perhaps that's true. My loan was something like £1600/yr which covered about 5 months of rent, but the government paid for my tuition.
  - cowsandmilk 7y ago
    My experience has been this idea has largely been a myth pushed in conjunction with the community reinvestment act and the financial crisis, When. Looking at numbers, most of the subprime mortgages were originated by institutions not subject to the CRA and we had decades of banks complying with the CRA without giving out subprime loans. The financial crisis was largely a system repackaging loans they knew were bad and then claiming falsely they were good using voodoo math. And the CRA didn’t force them to do that.
  - TheOtherHobbes 7y ago
    That's not why banks face criticism. They face criticism because they don't lend as a service, they lend as a scam operation. In the UK there are credit card companies that specialise in borrowers with poor credit. They offer cards with a rate of up to 100% and a contract which gives them first call on any assets, including the borrower's house. Is it hard to understand that this is entirely conscious and predatory? They could lend at lower rates and minimise the risk of default, but they make more money by pushing high-risk borrowers into default and selling off their property. It's a similar story with bank loans for small businesses. Banks will often call in a loan and bankrupt a small company at the first sign of any trouble, including a wider recession that the company may be perfectly able to handle. There's a huge gap between prudent and sensible lending and aggressively destructive profiteering, and banks are often on the wrong side of that line.
  - wegs 7y ago
    The central friction is there are two conflicting views of banking: 1) Lending, insurance, and investment as a social service. People need homes. Businesses sometimes need to weather crises without bankruptcy. Startups need funding. People need educations. 2) Lending as a private investment. You want interest rate to reflect risk. Evolving monetary theory means federal interest rates are set to reflect #1. The underlying view is that financial system is a bunch of bits used for accounting designed to keep businesses productive, people working, and the economy running, much as you might have in a video game. You make and destroy money as needed to support what needs to happen to make that work, much as a game developer might engineering money sources and sinks into an MMORPG. It's just bits on a computer. Historical practice and the structure of banks is set around #2. This is a really sound theory if your currency is either backed by gold, or even is fiat currency, but running on the same principles. Defaults aren't a problem with #1, unless they encourage bad behavior. If a bunch of poor people buy homes, and later default on mortgages, it's really not a big deal; bits on a computer appear and disappear. If 50% of those people come out owning homes, you're still ahead if 100% were still renting. But in #2, it's a financial crisis. Conversely, if a bunch of poor people can't buy homes and have to rent, it's a crisis in #1. It's not a problem in #2. I'm not sure the mixture model works well -- indeed, I think that's the source of our problems. I think if we killed the banking sector, and folded all of this into the fed, it'd work great (that's what China does). I think if we had the gold standard again, that'd work pretty well too. But when you mix the two, things get a bit ugly.
    - pishpash 7y ago
      There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy. But such lending may require too much capital, too large a risk pool, or too long a time horizon for an individual private bank to take on. Instead a public or policy bank steps in. It's good to have banks of different sizes serving different niches, as long as they assess risk prudently and price rationally. What you don't want is politicians micromanaging in domains in which they have no expertise, especially when they are driven by short-term, personal political objectives.
      - 7y ago
  - PopeDotNinja 7y ago
    When banks lend to people who will default, it's usually because they issued a secured loan. You can repossess a car quite easily. I couldn't keep up with my car payments in 2009, and my car got repossessed. They got (most of) their money back. Since I had been paying a high interest rate, maybe they even made money. When I ran a service business & wanted to borrow money for growth, even though I was profitable, there was no risk formula I fit into that would allow the bank to determine the likelihood my business would pay them back, so they wouldn't lend to me (unless I used personal assets as collateral).
  - rapind 7y ago
    I don't care if banks make foolish or intelligent lending decisions... I just don't want my tax dollars bailing them out when they screw it up. If I am bailing them out, then I should be entitled to an opinion on how they run their business... heck I should be a shareholder!
eikenberry 7y ago
Jumbo loans were people wanting more than they could afford and the bank hedging that they could actually afford it. Ends up that they can't.
- abofh 7y ago
  I don't think those words mean what you think they mean.
- dbish 7y ago
  Jumbo loans are just loans over a certain number, nothing to do with how much you can afford to pay for a house. I put 20% down (and could have put down more, but the bank rates were pretty good so the better move was to keep investing the extra money) and still got what was considered a jumbo loan because even with 20% down I had to borrow > 750k.
jbb67 7y ago
I two years I imagine the same lenders will be complaining that they drove away all their most profitable, low risk customers because of a short term risk issue.
justaguyhere 7y ago
Why exactly should we care about wealthy borrowers at this point, when millions of people are losing their jobs/health insurance...? So what if they get told no - it is not like they are living in a 500 sq ft apartment anyway
- im3w1l 7y ago
  Even if you don't feel bad for them, it's still an interesting and maybe surprising story.
- mimikatz 7y ago
  You should have empathy for everyone. You should have empathy for the pain poor people experience and the pain the rich people experience. Someone's income doesn't make them more or less human.
  - gizmo 7y ago
    Nobody is arguing that rich people don't bleed or don't feel pain. The point here is that for rich people a rent strike is a nuisance, but for renters the alternative to a rent strike is homelessness, or not being able to afford their medicine, or something equally catastrophic. That's why you don't see rent strikes everywhere, you see them where renters have their backs against the wall.
  - justaguyhere 7y ago
    Not sure what this has got to do with empathy. If rich people don't get favorable mortgage, it is at max an annoyance to them. They are not going to be homeless or going to ask for food stamps. If a normal family with one home and one mortgage is not able to refinance or not able to pay their mortgage for a few months, their bank will go after them and they will end up on the street. Sure we can talk about it and feel sorry for their inconvenience, but our time is better spent looking into much bigger problems of much bigger percentage of our population.
    - jfim 7y ago
      Keep in mind that in high cost of living areas, such as the Bay area, all housing is essentially jumbo mortgages. If jumbo loans are not available or hard to obtain, this means that people who do lose their jobs face an illiquid market and don't have the option to sell their house to avoid default, and thus end up on the street.
nsfyn55 7y ago
Wealthy Borrower: "Why can't I refi lower?" Lender: "No, because your loan isn't secured by the government" Wealthy Borrower: "I am just using logic here, you're telling me a riskier borrower with lower credit than me can refi?" Lender: "If their loan is secured by the government, yes" Wealthy Borrower: "I don't understand" Lender: "Well at least we agree on something" Are you really using logic? Seems like a dubious claim to me. Capitalism is a harsh mistress Mr.1%. Don't like it move to Denmark.
- jericho_jones 7y ago
  But government backing is risk mitigation...
- SilasX 7y ago
  But the lender dismissed the borrower (in the story) as "you're trying to use logic", which is at least as big a confusion (and inability reflect on the root of the disconnect).
  - nsfyn55 7y ago
    The borrower is sort of using logic, but because of his extreme level of entitlement he fails to understand his premises are flawed. Low rates are a function of your total risk not your perceived status as a responsible borrower. The lender is using logic(the refi equation was almost certainly devised and reviewed by a qualified actuary)
    - SilasX 7y ago
      I know, I was only objecting to his attempt to resolve the confusion by saying "you're using logic". That's not the problem, and the lender should realize it and say something more productive. In case it wasn't clear, the original commenter was referencing this part: >>“I told the guy at the bank, ‘I’m trying to use logic here,’” Adler said in an interview. “And he said, ‘That’s your problem.’”
      - 7y ago
supahfly_remix 7y ago
I'm not sure what qualifies as wealthy, but most houses in the SF Bay Area bought in the past few years are probably financed with jumbo mortgages. E.g, 20% down on a $1MM house leaves $800k to be financed, which is greater than the $765k criteria stated in the article.
- alexhutcheson 7y ago
  The median sales price for a house in the US is $327,000[1]. People buying houses for $1 million are wealthy by any standard. [1] https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS
  - gdubs 7y ago
    They’re not wealthy by the standard of the Bay Area, which is the point of the comment you’re replying to. Wealth is relative. Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population, where anyone making over something like $40k a year would be in the top 1%. Just to underscore the point, Palo Alto declares not too long ago that anyone making under $100k a year is considered “low income”.
    - BoiledCabbage 7y ago
      > Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population Any middle class American is wealthy by the world's standard. The quality of life provided by middle class America is the life of the 1%. To not see this is to not understand how most of the world lives, and the challenges people face from being less lucky.
      - gdubs 7y ago
        This is exactly my point though. If you look at averages, a jumbo home owner in the US is considered wealthy — but only if you ignore their local market. Like in the Bay Area where you could earn $100k a year and still be considered “low income”. These people may be huge earners compared to the average American. It doesn’t mean they’re living the lavish lifestyles of the rich and famous. A lot of them are living paycheck-to-paycheck. Markets are relative. Similarly, the average American making over $40k a year will not consider themselves the 1%, but to the average citizen of the world they are.
sys_64738 7y ago
The bigger the mortgage then the larger their emergency fund. Right?
- joezydeco 7y ago
  Underwriters like to see six months of reserves on hand, but they don’t monitor that after the closing.
  - mgkimsal 7y ago
    was close to building a house earlier this year (early March) and was talking to two lenders about construction loan. being self-employed was an extra small bump for underwriting, and I asked about loss of income because the covid19 stuff was just starting to become big news. Both indicated that their underwriters would likely check up after closing - 30 or 60 days after - to check on income at that point, to see if there were problems, and that this was somewhat normal for them with self-employed folks, but wasn't anything related to c19 (which... I suspect some changes may occur to underwriting and loan processes in the aftermath of c19). They indicated this was just something that happens to 'a moderate portion of self-employed borrowers post-closing'. I'm not sure what they could actually do to you if they found your income had gone down or away post-closing. I was going to ask in our next call, but ... we're probably putting that whole project on the shelf for now.
    - lotsofpulp 7y ago
      In certain commercial mortgages, you have to maintain a certain debt service coverage ratio (DSCR), which is operating income divided by debt service. If not maintained above a certain ratio, the lender has the right to come and take over your bank accounts and you have to submit to them to get reimbursed for expenses. Never heard of it in a residential loan though.
    - double0jimb0 7y ago
      Self employed and re-if’d 6 months ago. The 4 brokers I worked with all said they never checked again after closing. So maybe that has changed, but I doubt it) (Also, unless you have your savings with the mortgage lender, I don’t think the bank can legally check your balances without a some sort of soft credit pull)
SilasX 7y ago
Relevant points: >Stanley Middleman, chief executive officer of Freedom Mortgage Corp., one of the nation’s biggest home-lending companies[:] >“Whether the assets are good or not good is irrelevant because there’s no liquidity to buy them,”... >Wealthier buyers are proving to be just as likely to stop paying their mortgages. Approximately 5.5% of jumbo loans -- 131,000 borrowers -- have asked to postpone payments due to a loss of income, compared with 6% of all loans, according to Black Knight Inc.
- neltnerb 7y ago
  I think the bigger point is that the jumbo loans aren't backed by Fannie and Freddie so if the risk of default is similar then it does make sense to prefer to lend to people who need conforming (under the jumbo limit) loans. Of course, if you consider "wealthier buyers" they may have quite a few properties, and are more likely to have the resources legally to "go bankrupt" without it impacting them personally. See our POTUS for an obvious example. So they may be more likely to default by choice because it won't ruin their lives and increase the relative risk of lending to them.
  - bradleyjg 7y ago
    > I think the bigger point is that the jumbo loans aren't backed by Fannie and Freddie so if the risk of default is similar then it does make sense to prefer to lend to people who need conforming (under the jumbo limit) loans. In the case of conforming mortgages the banks aren’t lending at all. They are filing out paperwork and skimming off the top.
    - tempsy 7y ago
      This is what the Fed has done for both recessions. It’s a bailout.
- tempsy 7y ago
  This has nothing to do with actual credit risk. It has to do with the Fed’s decision as part of the stimulus package to buy mortgage backed securities backed by conventional loans but not jumbo loans. So banks have an out to sell bad conventional loans off their balance sheet to the Fed but have to take all the credit risk for jumbo loans even though those borrowers are more credit worthy and wealthier than your typical borrower. It’s creating a distortion in the mortgage market.
1-6 7y ago
To read the article, just put a period (.) at the end of the domain. Eg. domain.com/article --> domain.com./article
- lisper 7y ago
  I normally frown on people who whine about paywalls. Publishers have to make a living, and you are not entitled to access their content for free. But I gotta say, that is a devilishly clever hack.
  - throwlaplace 7y ago
    bloomberg's media business is a giant content marketing play for the terminals themselves (that's why so many of the stories have deep links or whatever to their software)
- przemub 7y ago
  Do you know why does it work?
  - johnbatch 7y ago
    looks like the JavaScript doesn't run because of CORS Cross-Origin Request Blocked: The Same Origin Policy disallows reading the remote resource at https://www.bloomberg.com/markets/modules/datastrip.json?ver…&theme=blens&tickers=3902314Z:US,TREE:US,WFC:US,TFC:US,GS:US https://www.bloomberg.com/markets/modules/datastrip.json?ver.... (Reason: CORS header ‘Access-Control-Allow-Origin’ missing).
    - SilasX 7y ago
      So it only works for sites that depend on (client-side) JS to block the content?
  - criddell 7y ago
    It didn't work for me. Instead it said I'm in private mode and said I should subscribe to keep reading. I'm using Firefox FWIW.
aantix 7y ago
Where’s the best place to shop for a mortgage? Bankrate, Rocket Mortgage all claim to have the lowest rates but there’s direct smaller lenders that definitely have them beat.
- Spooky23 7y ago
  Usually local credit unions and small banks. Sometimes rates are marginally higher but the underwriting process is better and transaction costs are usually lower. When I bought my first house, it was a 90% LTV loan that was .1% higher, but didn’t require escrow or PMI.
- gnopgnip 7y ago
  You want to check through different sources, direct to consumer, through a mortgage broker, and through a bank you have an existing relationship with. It is worth shopping around with the direct to consumer lending, there might be a $10k difference in closing costs for the same rate between the best and worst of 5 lenders. With a broker they will compare 10+ sources typically. For instance Quicken/Rocket will have different rates going direct or going through a broker. If you have a lot of money invested with Chase/BOA they could give you a better rate than you would get elsewhere. The same can be true of a credit union, or you could get a discount even if you do not have a substantial amount of money invested with your bank.
- alasdair_ 7y ago
  Shop around and play lenders against each other. I've found they absolutely WILL negotiate, even if they claim otherwise. I ended up using Better for my last refinance FWIW.
raziel2p 7y ago
> Before the pandemic, lenders were falling over each other to welcome jumbo borrowers, who generated fat profits even though they were the least likely to default. Even though? Implying loans that default are normally the most profitable? Am I misreading this?
- eli_gottlieb 7y ago
  Normally, doesn't the interest rate track the likelihood of default?
- ascagnel_ 7y ago
  From reading the article, this may be because the banks choose to service the loans directly, or because the loans have priced-in higher risk (as they lack a government guarantee).
- magicsmoke 7y ago
  Loans that are likely to default have higher interest rates. However, jumbo loans also have high interest rates due to the size of the principal. Although they're supposed to be less likely to default, being held by high-income individuals, if they do default then you lose more principal than a regular loan. For a bank in good times, you get to charge high interest rates normally reserved for risky borrowers on safe borrowers. More profit with less risk, what's not to like? In bad times though, when those previously safe borrowers start defaulting, even if only a few of them default they do so on larger chunks of money. Instead of losing your money with many small cuts now you could end up losing money in chunks.
  - t0mas88 7y ago
    But in a well working market, why wouldn't bank X provide a lower rate than bank Y if the loan is less risk and very profitable? And then bank Z sees a potential profit and undercuts bank X. Repeat until you get a rate that reflects the risk? So the real question is: What is wrong in the high-end US mortgage market? Are banks breaking anti-trust laws and setting price floors?
ww520 7y ago
That’s good. That means the banks are rational and exercising caution to avoid risks.
- tempsy 7y ago
  Nope this isn’t a good phenomenon. Once again this is a result of Fed intervention. The Fed is buying mortgage backed securities as part of the stimulus package that exclude jumbo loans, so banks are being effectively saved from bad conventional loans on their books because they can sell it to the government but can’t sell jumbo loans that are usually taken by more credit worthy and wealthier borrowers. This is creating a distortion in the mortgage market that isn’t rational.
gist 7y ago
Typical non rigorous find a few examples and write a story article. Not saying not true either just that getting a few people to say something is not a trend or show what is happening in most places (possibly). That said we just did a refi which closed today. (My own single data point anecdote). It does make sense that the risk is greater for the mortgage companies now than in typical times in the sense that traditional borrowers who were secure and non risky in a regular economy could potentially be out of work and have a greater chance of default with the security not being worth that much.

81 points by aazaa 7y ago

onetimemanytime 7y ago

They'll lend you, just at higher rates. This is banks doing what they do, taking the umbrella now that it's raining.

em500 7y ago
> taking the umbrella now that it's raining Always found this a very strange metaphore. Banks seem to always face criticism for 1) when they don't lend to people who need it most and 2) when they do lend to people who are likely to default. It seems fairly obvious that there is a very large overlap between those groups.
- gindely 7y ago
  Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? I mean banks aren't charities and maybe they're not/shouldn't be obliged to do this, but it's not like everyone is being hypocritical - we're allowed to expect institutions to do things that are in the public interest rather than their own private interest (freedom of opinion and all that).
  - aguyfromnb 7y ago
    >Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). >we're allowed to expect institutions to do things that are in the public interest This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it?
    - TeMPOraL 7y ago
      > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). No. But then again, being a businessman isn't seen as unqualified virtue in many places in the world. You'll also note that "selling things to the people who need it most for the lowest price" is literally the justification given for why free and competitive markets are good. It's the goal societies want to achieve. In this, competitive pressure is a hack to force the businesses to reduce prices.
      - aguyfromnb 7y ago
        >is literally the justification given for why free and competitive markets are good. If you think "price that minimizes default" and "lowest economic price" are equivalent, you need to brush up on your Econ 101.
    - bryanrasmussen 7y ago
      >Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). I think a business that sells something for a small markup but makes it up in volume does something like this. So I guess the answer would be - yes - probably most businesses actually do this.
      - aguyfromnb 7y ago
        >I think a business that sells something for a small markup but makes it up in volume does something like this. Define a "small markup".
    - gindely 7y ago
      > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). Yes > This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it? I wasn't responding to the article.
  - imtringued 7y ago
    There are risk pools for lending because every business has a different cut off point below which a borrower is considered too risky and therefore gets rejected. Imagine you are a bank employee at Bank A with very low default rates and consequently low interest rates (say 2.5%) and a homeless man has an appointment with you because he wants a small loan of $5000 to find an apartment and a job. He has no assets or income and is only able to pay after getting his job so he will miss his first few payments. Therefore you decide to simply not give him a loan because it is incredibly obvious that he is going to default. What are his options now? He can go to a Bank B that accepts more risky borrowers with a still acceptable but slightly higher interest rate of 5%. What happens is that all the reliable lenders go to Bank A because they get a great deal there and have no trouble getting a loan. They don't even bother with Bank B. Since Bank B fails to attract reliable lenders the only borrowers at Bank B are those who couldn't get a loan at Bank A. Bank B now has two choices. Either keep the risk profile or tighten it and only allow reliable lenders. If they keep it then they will notice a much higher than usual default rate. Bank B is losing money from all the defaulting loans and that money has to come from the borrowers of Bank B that didn't default. Now imagine that there is a Bank C. What if it's risk profile is so lenient that it accepts anyone with no questions asked. Literally everyone who comes to you is defaulting. You're throwing money into a black hole with no chance of getting it back. You have to crank up the interest rate to absurd levels to cover the defaults. You know what the problem is? It's not that Bank C is evil and exploiting the poor. Those people should have never gotten a loan at all. The act of giving them a loan is exploitation itself, not the interest rate or whatever conditions that Bank C needs to stay in business. It's as simple as that. Those individuals do not need a loan, they need support from the government in a way that doesn't require the money to be paid back. e.g. free housing, unemployment benefits or even straight up UBI. Don't criticize Banks for not lending to those who need it most. For some reason people don't understand that Banks are businesses that have to at least cover their costs. They think a Bank is a charity that should take on responsibilities that really only belong to the government.
    - gindely 7y ago
      But now you have just portrayed situations in which banks provide affordable loans to people who don't need them, and unaffordable loans to people who need them. But this is what was criticised in the first place so we know it happens. So I'm not sure what the point of your first four paragraphs were. Your final paragraph is exactly what my earlier comment rejects. The general public has every right to criticise banks for acting in the banks' private interest. Banks are not charities, it is true. But they are groups of moral agents acting in a community, and the community has every right to hold the moral agents to whatever standards the community wishes to. The bank has the legal right to pursue its own private interests, so long as it acts legally, and has the legal right to not act as a charity. But that is not an argument against the view that the bank should act in conformance with community expectations, and if necessary the law should be changed to ensure that they do. The fact that banks make ridiculous profits - they're not just covering costs - is also relevant. If your business is making billion dollar profits, you're vulnerable to the claim that you should give greater weight to public opinion, and the notion that you're only acting to cover costs is a red herring.
- godzillabrennus 7y ago
  Payday lenders fill this gap. Everyone hates them as well. Everyone hates student loans and they fill a different gap. Basically, people hate people who lend money.
  - ForHackernews 7y ago
    There's a reason usury was historically a serious sin.
    - throw_m239339 7y ago
      It was in fact punishable by death in Christian countries. In theory it's also still a sin in Islam. That's why most of the first bankers… were not Christians or Muslims if I can put it that way.
    - spicymaki 7y ago
      Yes and usury is why we have an economic crisis every ten years. The magnitude of the crisis seems to be increasing each time.
      - lotsofpulp 7y ago
        Is this specific Mar 2020 onward economic crisis being caused by usury?
  - TeMPOraL 7y ago
    > Payday lenders fill this gap. Everyone hates them as well. That's because they offer a very dangerous financial tool, and at the same time they work hard to put this tool in hands of people who can't handle it safely. In this way, they make money off destroying people. > Everyone hates student loans and they fill a different gap. The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education.
    - smcl 7y ago
      > The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education. If the loan is meant to pay for tuition then perhaps that's true. My loan was something like £1600/yr which covered about 5 months of rent, but the government paid for my tuition.
- cowsandmilk 7y ago
  My experience has been this idea has largely been a myth pushed in conjunction with the community reinvestment act and the financial crisis, When. Looking at numbers, most of the subprime mortgages were originated by institutions not subject to the CRA and we had decades of banks complying with the CRA without giving out subprime loans. The financial crisis was largely a system repackaging loans they knew were bad and then claiming falsely they were good using voodoo math. And the CRA didn’t force them to do that.
- TheOtherHobbes 7y ago
  That's not why banks face criticism. They face criticism because they don't lend as a service, they lend as a scam operation. In the UK there are credit card companies that specialise in borrowers with poor credit. They offer cards with a rate of up to 100% and a contract which gives them first call on any assets, including the borrower's house. Is it hard to understand that this is entirely conscious and predatory? They could lend at lower rates and minimise the risk of default, but they make more money by pushing high-risk borrowers into default and selling off their property. It's a similar story with bank loans for small businesses. Banks will often call in a loan and bankrupt a small company at the first sign of any trouble, including a wider recession that the company may be perfectly able to handle. There's a huge gap between prudent and sensible lending and aggressively destructive profiteering, and banks are often on the wrong side of that line.
- wegs 7y ago
  The central friction is there are two conflicting views of banking: 1) Lending, insurance, and investment as a social service. People need homes. Businesses sometimes need to weather crises without bankruptcy. Startups need funding. People need educations. 2) Lending as a private investment. You want interest rate to reflect risk. Evolving monetary theory means federal interest rates are set to reflect #1. The underlying view is that financial system is a bunch of bits used for accounting designed to keep businesses productive, people working, and the economy running, much as you might have in a video game. You make and destroy money as needed to support what needs to happen to make that work, much as a game developer might engineering money sources and sinks into an MMORPG. It's just bits on a computer. Historical practice and the structure of banks is set around #2. This is a really sound theory if your currency is either backed by gold, or even is fiat currency, but running on the same principles. Defaults aren't a problem with #1, unless they encourage bad behavior. If a bunch of poor people buy homes, and later default on mortgages, it's really not a big deal; bits on a computer appear and disappear. If 50% of those people come out owning homes, you're still ahead if 100% were still renting. But in #2, it's a financial crisis. Conversely, if a bunch of poor people can't buy homes and have to rent, it's a crisis in #1. It's not a problem in #2. I'm not sure the mixture model works well -- indeed, I think that's the source of our problems. I think if we killed the banking sector, and folded all of this into the fed, it'd work great (that's what China does). I think if we had the gold standard again, that'd work pretty well too. But when you mix the two, things get a bit ugly.
  - pishpash 7y ago
    There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy. But such lending may require too much capital, too large a risk pool, or too long a time horizon for an individual private bank to take on. Instead a public or policy bank steps in. It's good to have banks of different sizes serving different niches, as long as they assess risk prudently and price rationally. What you don't want is politicians micromanaging in domains in which they have no expertise, especially when they are driven by short-term, personal political objectives.
    - 7y ago
- PopeDotNinja 7y ago
  When banks lend to people who will default, it's usually because they issued a secured loan. You can repossess a car quite easily. I couldn't keep up with my car payments in 2009, and my car got repossessed. They got (most of) their money back. Since I had been paying a high interest rate, maybe they even made money. When I ran a service business & wanted to borrow money for growth, even though I was profitable, there was no risk formula I fit into that would allow the bank to determine the likelihood my business would pay them back, so they wouldn't lend to me (unless I used personal assets as collateral).
- rapind 7y ago
  I don't care if banks make foolish or intelligent lending decisions... I just don't want my tax dollars bailing them out when they screw it up. If I am bailing them out, then I should be entitled to an opinion on how they run their business... heck I should be a shareholder!

eikenberry 7y ago

Jumbo loans were people wanting more than they could afford and the bank hedging that they could actually afford it. Ends up that they can't.

abofh 7y ago
I don't think those words mean what you think they mean.
dbish 7y ago
Jumbo loans are just loans over a certain number, nothing to do with how much you can afford to pay for a house. I put 20% down (and could have put down more, but the bank rates were pretty good so the better move was to keep investing the extra money) and still got what was considered a jumbo loan because even with 20% down I had to borrow > 750k.

jbb67 7y ago

I two years I imagine the same lenders will be complaining that they drove away all their most profitable, low risk customers because of a short term risk issue.

justaguyhere 7y ago

Why exactly should we care about wealthy borrowers at this point, when millions of people are losing their jobs/health insurance...? So what if they get told no - it is not like they are living in a 500 sq ft apartment anyway

im3w1l 7y ago
Even if you don't feel bad for them, it's still an interesting and maybe surprising story.
mimikatz 7y ago
You should have empathy for everyone. You should have empathy for the pain poor people experience and the pain the rich people experience. Someone's income doesn't make them more or less human.
- gizmo 7y ago
  Nobody is arguing that rich people don't bleed or don't feel pain. The point here is that for rich people a rent strike is a nuisance, but for renters the alternative to a rent strike is homelessness, or not being able to afford their medicine, or something equally catastrophic. That's why you don't see rent strikes everywhere, you see them where renters have their backs against the wall.
- justaguyhere 7y ago
  Not sure what this has got to do with empathy. If rich people don't get favorable mortgage, it is at max an annoyance to them. They are not going to be homeless or going to ask for food stamps. If a normal family with one home and one mortgage is not able to refinance or not able to pay their mortgage for a few months, their bank will go after them and they will end up on the street. Sure we can talk about it and feel sorry for their inconvenience, but our time is better spent looking into much bigger problems of much bigger percentage of our population.
  - jfim 7y ago
    Keep in mind that in high cost of living areas, such as the Bay area, all housing is essentially jumbo mortgages. If jumbo loans are not available or hard to obtain, this means that people who do lose their jobs face an illiquid market and don't have the option to sell their house to avoid default, and thus end up on the street.

nsfyn55 7y ago

Wealthy Borrower: "Why can't I refi lower?" Lender: "No, because your loan isn't secured by the government" Wealthy Borrower: "I am just using logic here, you're telling me a riskier borrower with lower credit than me can refi?" Lender: "If their loan is secured by the government, yes" Wealthy Borrower: "I don't understand" Lender: "Well at least we agree on something" Are you really using logic? Seems like a dubious claim to me. Capitalism is a harsh mistress Mr.1%. Don't like it move to Denmark.

jericho_jones 7y ago
But government backing is risk mitigation...
SilasX 7y ago
But the lender dismissed the borrower (in the story) as "you're trying to use logic", which is at least as big a confusion (and inability reflect on the root of the disconnect).
- nsfyn55 7y ago
  The borrower is sort of using logic, but because of his extreme level of entitlement he fails to understand his premises are flawed. Low rates are a function of your total risk not your perceived status as a responsible borrower. The lender is using logic(the refi equation was almost certainly devised and reviewed by a qualified actuary)
  - SilasX 7y ago
    I know, I was only objecting to his attempt to resolve the confusion by saying "you're using logic". That's not the problem, and the lender should realize it and say something more productive. In case it wasn't clear, the original commenter was referencing this part: >>“I told the guy at the bank, ‘I’m trying to use logic here,’” Adler said in an interview. “And he said, ‘That’s your problem.’”
    - 7y ago

supahfly_remix 7y ago

I'm not sure what qualifies as wealthy, but most houses in the SF Bay Area bought in the past few years are probably financed with jumbo mortgages. E.g, 20% down on a $1MM house leaves $800k to be financed, which is greater than the $765k criteria stated in the article.

alexhutcheson 7y ago
The median sales price for a house in the US is $327,000[1]. People buying houses for $1 million are wealthy by any standard. [1] https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS
- gdubs 7y ago
  They’re not wealthy by the standard of the Bay Area, which is the point of the comment you’re replying to. Wealth is relative. Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population, where anyone making over something like $40k a year would be in the top 1%. Just to underscore the point, Palo Alto declares not too long ago that anyone making under $100k a year is considered “low income”.
  - BoiledCabbage 7y ago
    > Otherwise you could say that just about any American middle class family is wealthy — just look at the entire world’s population Any middle class American is wealthy by the world's standard. The quality of life provided by middle class America is the life of the 1%. To not see this is to not understand how most of the world lives, and the challenges people face from being less lucky.
    - gdubs 7y ago
      This is exactly my point though. If you look at averages, a jumbo home owner in the US is considered wealthy — but only if you ignore their local market. Like in the Bay Area where you could earn $100k a year and still be considered “low income”. These people may be huge earners compared to the average American. It doesn’t mean they’re living the lavish lifestyles of the rich and famous. A lot of them are living paycheck-to-paycheck. Markets are relative. Similarly, the average American making over $40k a year will not consider themselves the 1%, but to the average citizen of the world they are.

sys_64738 7y ago

The bigger the mortgage then the larger their emergency fund. Right?

joezydeco 7y ago
Underwriters like to see six months of reserves on hand, but they don’t monitor that after the closing.
- mgkimsal 7y ago
  was close to building a house earlier this year (early March) and was talking to two lenders about construction loan. being self-employed was an extra small bump for underwriting, and I asked about loss of income because the covid19 stuff was just starting to become big news. Both indicated that their underwriters would likely check up after closing - 30 or 60 days after - to check on income at that point, to see if there were problems, and that this was somewhat normal for them with self-employed folks, but wasn't anything related to c19 (which... I suspect some changes may occur to underwriting and loan processes in the aftermath of c19). They indicated this was just something that happens to 'a moderate portion of self-employed borrowers post-closing'. I'm not sure what they could actually do to you if they found your income had gone down or away post-closing. I was going to ask in our next call, but ... we're probably putting that whole project on the shelf for now.
  - lotsofpulp 7y ago
    In certain commercial mortgages, you have to maintain a certain debt service coverage ratio (DSCR), which is operating income divided by debt service. If not maintained above a certain ratio, the lender has the right to come and take over your bank accounts and you have to submit to them to get reimbursed for expenses. Never heard of it in a residential loan though.
  - double0jimb0 7y ago
    Self employed and re-if’d 6 months ago. The 4 brokers I worked with all said they never checked again after closing. So maybe that has changed, but I doubt it) (Also, unless you have your savings with the mortgage lender, I don’t think the bank can legally check your balances without a some sort of soft credit pull)

SilasX 7y ago

Relevant points: >Stanley Middleman, chief executive officer of Freedom Mortgage Corp., one of the nation’s biggest home-lending companies[:] >“Whether the assets are good or not good is irrelevant because there’s no liquidity to buy them,”... >Wealthier buyers are proving to be just as likely to stop paying their mortgages. Approximately 5.5% of jumbo loans -- 131,000 borrowers -- have asked to postpone payments due to a loss of income, compared with 6% of all loans, according to Black Knight Inc.

neltnerb 7y ago
I think the bigger point is that the jumbo loans aren't backed by Fannie and Freddie so if the risk of default is similar then it does make sense to prefer to lend to people who need conforming (under the jumbo limit) loans. Of course, if you consider "wealthier buyers" they may have quite a few properties, and are more likely to have the resources legally to "go bankrupt" without it impacting them personally. See our POTUS for an obvious example. So they may be more likely to default by choice because it won't ruin their lives and increase the relative risk of lending to them.
- bradleyjg 7y ago
  > I think the bigger point is that the jumbo loans aren't backed by Fannie and Freddie so if the risk of default is similar then it does make sense to prefer to lend to people who need conforming (under the jumbo limit) loans. In the case of conforming mortgages the banks aren’t lending at all. They are filing out paperwork and skimming off the top.
  - tempsy 7y ago
    This is what the Fed has done for both recessions. It’s a bailout.
tempsy 7y ago
This has nothing to do with actual credit risk. It has to do with the Fed’s decision as part of the stimulus package to buy mortgage backed securities backed by conventional loans but not jumbo loans. So banks have an out to sell bad conventional loans off their balance sheet to the Fed but have to take all the credit risk for jumbo loans even though those borrowers are more credit worthy and wealthier than your typical borrower. It’s creating a distortion in the mortgage market.

1-6 7y ago

To read the article, just put a period (.) at the end of the domain. Eg. domain.com/article --> domain.com./article

lisper 7y ago
I normally frown on people who whine about paywalls. Publishers have to make a living, and you are not entitled to access their content for free. But I gotta say, that is a devilishly clever hack.
- throwlaplace 7y ago
  bloomberg's media business is a giant content marketing play for the terminals themselves (that's why so many of the stories have deep links or whatever to their software)
przemub 7y ago
Do you know why does it work?
- johnbatch 7y ago
  looks like the JavaScript doesn't run because of CORS Cross-Origin Request Blocked: The Same Origin Policy disallows reading the remote resource at https://www.bloomberg.com/markets/modules/datastrip.json?ver…&theme=blens&tickers=3902314Z:US,TREE:US,WFC:US,TFC:US,GS:US https://www.bloomberg.com/markets/modules/datastrip.json?ver.... (Reason: CORS header ‘Access-Control-Allow-Origin’ missing).
  - SilasX 7y ago
    So it only works for sites that depend on (client-side) JS to block the content?
- criddell 7y ago
  It didn't work for me. Instead it said I'm in private mode and said I should subscribe to keep reading. I'm using Firefox FWIW.

aantix 7y ago

Where’s the best place to shop for a mortgage? Bankrate, Rocket Mortgage all claim to have the lowest rates but there’s direct smaller lenders that definitely have them beat.

Spooky23 7y ago
Usually local credit unions and small banks. Sometimes rates are marginally higher but the underwriting process is better and transaction costs are usually lower. When I bought my first house, it was a 90% LTV loan that was .1% higher, but didn’t require escrow or PMI.
gnopgnip 7y ago
You want to check through different sources, direct to consumer, through a mortgage broker, and through a bank you have an existing relationship with. It is worth shopping around with the direct to consumer lending, there might be a $10k difference in closing costs for the same rate between the best and worst of 5 lenders. With a broker they will compare 10+ sources typically. For instance Quicken/Rocket will have different rates going direct or going through a broker. If you have a lot of money invested with Chase/BOA they could give you a better rate than you would get elsewhere. The same can be true of a credit union, or you could get a discount even if you do not have a substantial amount of money invested with your bank.
alasdair_ 7y ago
Shop around and play lenders against each other. I've found they absolutely WILL negotiate, even if they claim otherwise. I ended up using Better for my last refinance FWIW.

raziel2p 7y ago

> Before the pandemic, lenders were falling over each other to welcome jumbo borrowers, who generated fat profits even though they were the least likely to default. Even though? Implying loans that default are normally the most profitable? Am I misreading this?

eli_gottlieb 7y ago
Normally, doesn't the interest rate track the likelihood of default?
ascagnel_ 7y ago
From reading the article, this may be because the banks choose to service the loans directly, or because the loans have priced-in higher risk (as they lack a government guarantee).
magicsmoke 7y ago
Loans that are likely to default have higher interest rates. However, jumbo loans also have high interest rates due to the size of the principal. Although they're supposed to be less likely to default, being held by high-income individuals, if they do default then you lose more principal than a regular loan. For a bank in good times, you get to charge high interest rates normally reserved for risky borrowers on safe borrowers. More profit with less risk, what's not to like? In bad times though, when those previously safe borrowers start defaulting, even if only a few of them default they do so on larger chunks of money. Instead of losing your money with many small cuts now you could end up losing money in chunks.
- t0mas88 7y ago
  But in a well working market, why wouldn't bank X provide a lower rate than bank Y if the loan is less risk and very profitable? And then bank Z sees a potential profit and undercuts bank X. Repeat until you get a rate that reflects the risk? So the real question is: What is wrong in the high-end US mortgage market? Are banks breaking anti-trust laws and setting price floors?

ww520 7y ago

That’s good. That means the banks are rational and exercising caution to avoid risks.

tempsy 7y ago
Nope this isn’t a good phenomenon. Once again this is a result of Fed intervention. The Fed is buying mortgage backed securities as part of the stimulus package that exclude jumbo loans, so banks are being effectively saved from bad conventional loans on their books because they can sell it to the government but can’t sell jumbo loans that are usually taken by more credit worthy and wealthier borrowers. This is creating a distortion in the mortgage market that isn’t rational.

gist 7y ago

Typical non rigorous find a few examples and write a story article. Not saying not true either just that getting a few people to say something is not a trend or show what is happening in most places (possibly). That said we just did a refi which closed today. (My own single data point anecdote). It does make sense that the risk is greater for the mortgage companies now than in typical times in the sense that traditional borrowers who were secure and non risky in a regular economy could potentially be out of work and have a greater chance of default with the security not being worth that much.