5 ms·

>Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more Banks would never turn away borrowers even

>Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) . This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets. Banks usually don't keep the loans. They are sold off quickly for a higher profit.

yuliyp 6y ago
Where is the profit on a 0% loan? Who would pay more than face value for a stream of payments going into the future?
- mywittyname 6y ago
  Lenders make money on the currency exchange. This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro. To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments. This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
  - wrzuteczka 6y ago
    Where is that Y coming from? The rates of say EUR and CHF diverging?
    - gen220 6y ago
      Yes. If CHF outperforms EUR, and the mortgage payments are in CHF, a bank that has most expenses in EUR is making a profit. You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
      - Chickenosaurus 6y ago
        This theory doesn't make sense to me. Banks could simply buy foreign currency to achieve the same without the additional risk of defaulting lenders.
  - poulsbohemian 6y ago
    I'm not sure if / how this is done in Europe, but do these banks presumably also package these loans for sale, where a potential buyer of the note simply wants the recurring income stream for the next 15 or 30 years? That's the basic scheme here in the US anyway.
  - zhdc1 6y ago
    I'm having trouble following (maybe it's because I'm thinking in terms of residential loans, and the commercial market works differently or something). If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee. If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
- elindbe3 6y ago
  Someone who can only lend at negative real interest rates and/or projects negative market growth.
- matwood 6y ago
  When bond rates go negative, 0% keeps people neutral.
- throw0101a 6y ago
  The (government) bonds in Netherlands are negative going out 30Y: * https://ca.investing.com/rates-bonds/netherlands-government-bonds https://ca.investing.com/rates-bonds/netherlands-government-... Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.
- ganeshkrishnan 6y ago
  The loans are packaged into a company and then traded on the stock market. Your loan repayments are the company's "profits". Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it. Depending on the class of bond, you get paid more or less (this is the CDO) The profits are from the bonds on the loan in the stock market.
saberdancer 6y ago
Does this work the same way in Europe?
- ganeshkrishnan 6y ago
  Its works the same across the world as everywhere there is fractional reserve banking. The other "Shariah Banking" is also just repackaged fractional reserve banking.
  - apta_ 6y ago
    As a Muslim, almost every "Shariah compliant" financing contract I came across is not compatible with Islamic Law (Shariah). Unfortunately, we're just taking modern parasitic and usurious financial contracts, and wrapping them under "Islamic" terms, and selling them as such. Any actual investigation of such contracts reveals that they're nothing but interest and usury in disguise. Islam seriously warns about this sort of behavior. Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing). True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt. Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.
    - kasey_junk 6y ago
      What about futures contracts?
tomatocracy 6y ago
This varies depending on the market but many banks in Europe at least do retain large parts of their loan books, in part because the securitisation market was always and still is less developed here. Banks can and do routinely turn away higher grade borrowers with no other relationship angle (ie no short or long-term profitable cross-sell) because those loans are unprofitable for them and they can only make money on riskier credits. More broadly, sub-zero base rates are a real problem for banks and may actually hurt rather than help credit creation (since banks are likely to do less of something which is less profitable). The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates. All this does contribute towards the search for yield phase of the credit cycle (CDOs were just a part of that - everyone likes to blame them but they didn't cause the credit cycle which is really a "natural" phenomenon, although they did act to obscure the amount of leverage in the system and thus the likely size of the damage when the bubble burst). Everyone across the board wants to take more risk because they can't make their numbers stack up with the less risky part of the credit spectrum. As a result over the long term some credit becomes mispriced and when there's a wave of defaults credit investors wind up losing money overall then we start the cycle again.
- tonfa 6y ago
  > The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates. It's been quite some time Switzerland have negative rates and the threshold for charging the customer are getting lower and lower, closer to 100k than to 1B (base fees have also increased as a result of negative interest rates, easier to increase the banking fees than charge negative rates :))
  - tomatocracy 6y ago
    Fair point - I was thinking about Euro deposits.
LatteLazy 6y ago
I think these days the US and UK require originating banks to keep part of the loan to avoid the whole "sub prime", "it doesn't matter if it's shit as long as you're not the one holding it" approach.
- csharptwdec19 6y ago
  At least in the US, it's not quite like that. There typically -are- penalties for certain things (i.e. if a loan goes into default or gets paid off via a refinance within X months) as well as regulatory rules and the ever-present GSEs, Fannie and Freddie. As long as the loan is 'conforming' (which the majority of loans on the up-and-up are) then Fannie or Freddie will guarantee it. Conforming loans must meet a number of criteria (Debt to income, income versus home value, etc.) to have a level of trust that the borrower will repay. Edit: And yes, if you get caught selling a non-conforming loan to Fannie/Freddie (i.e. underwriting discrepancies) you can get fined and forced to buy back the loan. In fact sometimes they will go on fishing expeditions and companies will have to prove their innocence, almost like an IRS Audit. There is also the 'servicing' aspect of a loan. Servicers basically collect payments for loans and forward them on to whomever backs the Mortgage. For Fannie/Freddie loans, what this means in case of a default is that the servicer will have to 'front' the money; this is what the housing industry was worried about at the start of COVID: before the guideline changes related to the virus, there were concerns about liquidity in that 'gap' between forbearance and (potential) forclosure.
myrandomcomment 6y ago
Depends on the size of the loan, but what you say is true for most. In my personal case I have a “jumbo” loan which is not covered by US government Freddie Mac rules so the bank has to hold the loan on its books. This is pretty common in the Bay Area due to the stupid level cost of housing. In my area the median housing price is $1.785M. From a US tax perspective it made sense for me to take out the largest loan, $1M, because of the interest tax deductions. That, charity and capital loss is pretty much the only tax deductions I have. Not complaining as I understand how lucky I am.

yuliyp 6y ago

Where is the profit on a 0% loan? Who would pay more than face value for a stream of payments going into the future?

mywittyname 6y ago
Lenders make money on the currency exchange. This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro. To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments. This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
- wrzuteczka 6y ago
  Where is that Y coming from? The rates of say EUR and CHF diverging?
  - gen220 6y ago
    Yes. If CHF outperforms EUR, and the mortgage payments are in CHF, a bank that has most expenses in EUR is making a profit. You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
    - Chickenosaurus 6y ago
      This theory doesn't make sense to me. Banks could simply buy foreign currency to achieve the same without the additional risk of defaulting lenders.
- poulsbohemian 6y ago
  I'm not sure if / how this is done in Europe, but do these banks presumably also package these loans for sale, where a potential buyer of the note simply wants the recurring income stream for the next 15 or 30 years? That's the basic scheme here in the US anyway.
- zhdc1 6y ago
  I'm having trouble following (maybe it's because I'm thinking in terms of residential loans, and the commercial market works differently or something). If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee. If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
elindbe3 6y ago
Someone who can only lend at negative real interest rates and/or projects negative market growth.
matwood 6y ago
When bond rates go negative, 0% keeps people neutral.
throw0101a 6y ago
The (government) bonds in Netherlands are negative going out 30Y: * https://ca.investing.com/rates-bonds/netherlands-government-bonds https://ca.investing.com/rates-bonds/netherlands-government-... Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.
ganeshkrishnan 6y ago
The loans are packaged into a company and then traded on the stock market. Your loan repayments are the company's "profits". Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it. Depending on the class of bond, you get paid more or less (this is the CDO) The profits are from the bonds on the loan in the stock market.

saberdancer 6y ago

Does this work the same way in Europe?

ganeshkrishnan 6y ago
Its works the same across the world as everywhere there is fractional reserve banking. The other "Shariah Banking" is also just repackaged fractional reserve banking.
- apta_ 6y ago
  As a Muslim, almost every "Shariah compliant" financing contract I came across is not compatible with Islamic Law (Shariah). Unfortunately, we're just taking modern parasitic and usurious financial contracts, and wrapping them under "Islamic" terms, and selling them as such. Any actual investigation of such contracts reveals that they're nothing but interest and usury in disguise. Islam seriously warns about this sort of behavior. Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing). True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt. Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.
  - kasey_junk 6y ago
    What about futures contracts?

tomatocracy 6y ago

This varies depending on the market but many banks in Europe at least do retain large parts of their loan books, in part because the securitisation market was always and still is less developed here. Banks can and do routinely turn away higher grade borrowers with no other relationship angle (ie no short or long-term profitable cross-sell) because those loans are unprofitable for them and they can only make money on riskier credits. More broadly, sub-zero base rates are a real problem for banks and may actually hurt rather than help credit creation (since banks are likely to do less of something which is less profitable). The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates. All this does contribute towards the search for yield phase of the credit cycle (CDOs were just a part of that - everyone likes to blame them but they didn't cause the credit cycle which is really a "natural" phenomenon, although they did act to obscure the amount of leverage in the system and thus the likely size of the damage when the bubble burst). Everyone across the board wants to take more risk because they can't make their numbers stack up with the less risky part of the credit spectrum. As a result over the long term some credit becomes mispriced and when there's a wave of defaults credit investors wind up losing money overall then we start the cycle again.

tonfa 6y ago
> The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates. It's been quite some time Switzerland have negative rates and the threshold for charging the customer are getting lower and lower, closer to 100k than to 1B (base fees have also increased as a result of negative interest rates, easier to increase the banking fees than charge negative rates :))
- tomatocracy 6y ago
  Fair point - I was thinking about Euro deposits.

LatteLazy 6y ago

I think these days the US and UK require originating banks to keep part of the loan to avoid the whole "sub prime", "it doesn't matter if it's shit as long as you're not the one holding it" approach.

csharptwdec19 6y ago
At least in the US, it's not quite like that. There typically -are- penalties for certain things (i.e. if a loan goes into default or gets paid off via a refinance within X months) as well as regulatory rules and the ever-present GSEs, Fannie and Freddie. As long as the loan is 'conforming' (which the majority of loans on the up-and-up are) then Fannie or Freddie will guarantee it. Conforming loans must meet a number of criteria (Debt to income, income versus home value, etc.) to have a level of trust that the borrower will repay. Edit: And yes, if you get caught selling a non-conforming loan to Fannie/Freddie (i.e. underwriting discrepancies) you can get fined and forced to buy back the loan. In fact sometimes they will go on fishing expeditions and companies will have to prove their innocence, almost like an IRS Audit. There is also the 'servicing' aspect of a loan. Servicers basically collect payments for loans and forward them on to whomever backs the Mortgage. For Fannie/Freddie loans, what this means in case of a default is that the servicer will have to 'front' the money; this is what the housing industry was worried about at the start of COVID: before the guideline changes related to the virus, there were concerns about liquidity in that 'gap' between forbearance and (potential) forclosure.

myrandomcomment 6y ago

Depends on the size of the loan, but what you say is true for most. In my personal case I have a “jumbo” loan which is not covered by US government Freddie Mac rules so the bank has to hold the loan on its books. This is pretty common in the Bay Area due to the stupid level cost of housing. In my area the median housing price is $1.785M. From a US tax perspective it made sense for me to take out the largest loan, $1M, because of the interest tax deductions. That, charity and capital loss is pretty much the only tax deductions I have. Not complaining as I understand how lucky I am.