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Mortgages are a manufactured product
- shry4ns 5y agoThis is more of a tangential comment, but I absolutely love patio11's blog. As someone who is generally interested in fintech and financial services but does not have the time to read deeply into it, this blog is a treasure mine.
- supernovae 5y ago2008 calls, if you didn't know this already I guess this is a good re-hash.
- AndrewGaspar 5y agoA non-trivial percentage of Hacker News was 8 years old in 2008. :)
- smegsicle 5y agohn was so young back then.. but i wonder how much of us are 8 years old now ?
- consultutah 5y agoIs Stripe going to revolutionize the financing of residential homes? :)
- GordonS 5y agoAny ideas on what forms other hoke financing products might take?
- aeternum 5y agoSo what is better? Mortgages seem to have some pretty nice features. They help encourage people to invest some of their income into an asset that generally appreciates rather than spend it all. It aligns incentives around upkeep and investment in the neighborhood and community. They offset some of the negatives of inflation.
- Ericson2314 5y agoLand value tax and appatments. The vast majority of people will rent, the rent will be stable, and it will mostly not go to do-nothing lanloards. Mass ownership of appreciating assets is a very unstable situation, and also unclear what it even means. It is better to increase wealth through public goods.
- notch656a 5y agoLand would appreciate significantly less if housing and zoning regulations were eliminated. While there is value in being near a city core, land isn't a strongly constrained resource. Meeting the onerous requirements to build a home near this city core continually grandfathers in present-day land owners with buildings from the early 1900s while requiring entirely different standards for the next generation. We have intentionally sabotaged the ability for our youth to afford houses under guise of safety while simultaneously grandfathering in our own shitty run down structures that were built under much looser requirements. The result is land with a shitty old structure can be worth almost as much as a new one, under this restrained and captured supply.
- tagami 5y agoA bit off OP's topic, but in California ADUs (Accessory Dwelling Units) are now legal in all residential zoning districts. This effectively opens up the urban core for homeowners that wish to develop out their property. A smart first time owner will take advantage of this and effectively create an additional 1 or 2 living units (Primary residence+JADU+ADU) that can cover the new mortgage.
- Ericson2314 5y agoThere was just a Chronicle article on this https://www.sfchronicle.com/bayarea/article/San-Francisco-ADUs-are-being-built-mostly-in-the-16758730.php https://www.sfchronicle.com/bayarea/article/San-Francisco-AD... Honestly, I agree with one of the quoted people that ADUs are just a political hack to get a half-measure by the NIMBYs. Even if we converted all the garages it would an extremely inefficient way to construct more housing. There was talk of trying to do financing for poor people to do the conversions, but insofar that that works I think it is likely to push up construction prices because ADUs are so inefficient. (Conversely, the externality of decreased parking is quite good. I don't want to neglact that.) If we really care about housing and equity for the poor, we should allow poor homeowners to trade in for a new condo if the entire block agrees, and then redevelop it at a massive scale. Far more housing, still equity for them, and once you bootstrap the process no one even need be displaced out of the neighborhood. Win-win
- dtnewman 5y agoThis is generally a pretty interesting article, but I wish he'd expand into the other risks inherent to pools of mortgages: 1) Default risk - Obviously if I invest in pools of mortgages, and a lot of people stop paying their loans, I am exposed to risk. In many cases I'm insulated, because if someone defaults, I now own the home and can sell it to recoup my losses. But there's costs associated with foreclosing and in some cases, the value of the house goes down by enough that I can't recoup my money anyways (see 2008). We slice and dice mortgage pools to reflect this, so that the junk bonds are at the bottom and pay more and the AAA are at the top and don't lose anything until the lower tranches lose everything. 2) Interest rates rising - he discusses this in the article. If interest rates go up from 5 to 10% then any notes I held on a 5% loan are worth less. 3) Interest rates falling - this is called "pre-payment" risk and is what makes mortgages so interesting (and much harder to value than corporate bonds and most other loans). See point 2 for why rates rising hurts the owners of mortgage notes. You might think that rates falling would therefore help them, but it doesn't directly correlate. If rates fall enough, many people will refinance their loans. You have the right to pay off your mortgage at any time and another bank will be happy to step in and give you a new loan. So if rates fall from 4% to 2%, you can bet that most people will refinance. If I'm an investor holding a pool of 4% loans, then most of those loans will get paid off and now I'm stuck being in a market where I can only buy pools of 2% loans. Corporate bonds generally don't work this way. Auto loans technically do, but given the size and durations of the loans, it's usually not worth the hassle to refinance in the way it is for a house. This pre-payment risk makes the modeling of mortgage investment much more complicated, but also more interesting than many other financial securities.
- AussieWog93 5y agoI'm slightly confused by 2 and 3, as I own cap notes and have friends with mortgages (in Australia). Are mortgage rates and cap note returns in the US not tied to the federal interest rate? Here, pretty much every note traded publicly will yield x% above RBA (reserve bank) interest rates, and most mortgages will be "variable rate" - ie they'll automatically adjust to be some function dependent on the RBA rate.
- 5y ago
- bradleyjg 5y ago> Private capital buys all the other risks. What about the Fed? It is not private capital.
- mym1990 5y agoThe Fed operates as both a public and private entity, while the Board of Governors is a governmental agency, the the Federal Reserve Banks are set up like private corporations. Whether that makes the actual capital private, I am not sure, but I think it is a noteworthy fact.
- woggy 5y agoI wish we had 30 year fixed-rate mortgages in Aus
- post_break 5y agoWhat do you have?
- thomascgalvin 5y agoSpiders, mostly.
- a-priori 5y agoI don't know about Australia, but in Canada mortgages are amortized over (usually) 30 years at first issuance, but they are on (usually) 5 year terms. This means you'll renew your mortgage roughly five times before it is repaid, at the prevailing rates at that time. There's no such thing here as a mortgage with fixed interest rate over 30 years like, as I understand it, there is in the US.
- discardedrefuse 5y ago>This means you'll renew your mortgage roughly five times before it is repaid, at the prevailing rates at that time. This sounds a lot like ARMs aka balloon mortgages. Mortgage brokers ramming these everyone's throats played a big role in the 2008 melt down.
- a-priori 5y agoI don't know enough about what a "balloon mortgage" is to comment on that, other than to say that the 2008 mortgage crisis was not as severe in Canada as it was in the United States. So, to the extent that mortgage terms were a factor in the crisis, and I don't know whether it was, I wouldn't say that this kind of mortgage was disproportionately worse.
- 5y ago
- SilasX 5y agoI'm confused about this part: >A mortgage has a quirky little subcomponent called a Mortgage Servicing Right (MSR). Every month, it needs to collect money from the borrower and send that money… somewhere. This implies, minimally, a mailbox where you can send checks, someone to open the mail, and a phone number with a CS representative who can answer questions like “What is my current balance?” and “Did you get the last check I sent you?” I thought mortgage payments were mostly done electronically now?
- cortesoft 5y agoSure, but that still means someone has to operate the website, and they still need to operate customer service when it doesn't work.
- vulpes 5y agoI don't think there are any Mortgage Collectors that do not allow you to send a physical check that needs to be processed. Of course they'll encourage you to set up AutoPay, bank transfers, etc, since it makes their job easier with no benefit to you (same can be said about "paperless").
- ls612 5y agoPaperless and autopay online is absolutely a benefit to me, I have all of my records in a folder in my email and never forget a payment or make it late.
- AndrewDucker 5y agoHere in the UK, as far as I can tell, your lender can't sell on your mortgage. It's a contract between you and them. I wonder how many countries do allow that.
- Denvercoder9 5y agoThey might not be allowed to sell the servicing rights, but they almost certainly can sell the risk and returns.
- emilecantin 5y agoYeah, as a Canadian all of this seems pretty alien to me. To get my mortgage, I went to a specific bank, signed a contract with their logo at the top, the amount I owe / pay shows up in my online at that bank, and I send money every month to that same bank. If a different entity came up and told me to pay them instead, I's assume it's a scam. I'm surprised scammers in the US haven't tried that yet.
- marvin 5y agoAlso, as a Norwegian, risks related to refinancing in the case of a falling interest rate don't exist. Mortgages are floating-rate by default. If you enter a fixed interest rate contract, you are on the hook for the entire interest difference of the duration of the fixed rate contract if you terminate the contract. 10 year fixed rate contract, loan of 1 million and the rate falls from 3% to 2% on the second day of the contract -- if you terminate the contract now, you owe the bank 1% of the sum of whatever your loan balance would have been during each of the next 10 years. To be fair, you get the opposite deal if the interest rate rises.
- jjav 5y agoIn the US you can go directly to a bank to get a mortgage, but I'm not sure why one would want to since you can't comparison shop that way. Better to go to a broker who shops your loan among dozens of lenders to find the best terms. You typically end up with some entity you've never heard of (not a known bank), who will hold the loan for a month or two and then sell it off to someone else.
- deweywsu 5y agoIt has always annoyed me that the financial services industry attempts to referred to mortgages, loans and other financial instruments as "products". By definition, they are services. The many papers you get when signing a mortgage is about the closest thing you could refer to as a "product". I think they do this to attempt to create a sense of finality and inflexibility in what they are selling. "It's a product" makes it seem like a fixed thing that cannot be changed, when in fact, it definitely can be.
- namdnay 5y agoIt’s a service for you the consumer, but those loans are packaged and sold as investment products
- Hamuko 5y agoThe Big Short (great movie) had a good scene on the productization of mortgages. https://www.youtube.com/watch?v=xbiDrzTd8fE https://www.youtube.com/watch?v=xbiDrzTd8fE
- philomath_mn 5y agoI work at a structured credit manager. I'm not sure how much the semantics matter, but from our perspective, a mortgage (or other loan) is an asset that we can buy with a certain yield and risk profile. This an abstraction to be sure, but the way we use mortgages makes them more of a product. (we don't do much in the RMBS area specifically)
- crooked-v 5y agoThe worst part of this whole system is the complete opacity about what company will actually service the mortgage after you finish signing. As it turns out, some companies provide a much better and more modern servicing experience than others (for example: Chase versus anything Cenlar).
- SavantIdiot 5y agoOther than a crappier website, what difference does the servicer make?
- vishnugupta 5y agoIronically it doesn't mention the elephant in the room. US Fed is now funding T2.6$ worth of mortgages [1]. US Fed began purchasing RMBS assets (essentially mortgages) in order to support the housing market as one of its responses to 2008 crisis [2]. It was meant to be a stop-gap measure, but it hasn't ended. BTW this is a good overview of different parties involved in the mortgage supply-chain https://imgur.com/NYg7G4t https://imgur.com/NYg7G4t [1] https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB [2] https://www.newyorkfed.org/markets/mbs_faq.html https://www.newyorkfed.org/markets/mbs_faq.html
- csense 5y agoThanks for mentioning this. I somehow didn't quite realize MBS purchases had resumed with the Fed's COVID response, for some reason I assumed they were only buying Treasuries. Even though I've been trying to keep up with the Fed's activities, somehow I missed the part about current-decade MBS purchases (and it's a big part).
- deleted 5y ago[deleted]
- cavisne 5y agoWait till you find out the Fed buys corporate bond ETF's nowdays too...
- quickthrowman 5y agoTheir reasoning was sound (liquidity mismatch), but I hope it stops there and doesn’t continue into buying equities like the Bank of Japan. More about why the Fed stepped into the corporate bond market to provide liquidity in 2020: https://www.brookings.edu/wp-content/uploads/2020/10/wp69-liang_1.pdf https://www.brookings.edu/wp-content/uploads/2020/10/wp69-li...
- pgwhalen 5y agoIt's worth pointing out that the Secondary Market Corporate Credit Facility has ended, and the Fed has sold everything it has bought [0]. But of course the precedent has been set, which may be why you chose to use the present tense. [0] https://fred.stlouisfed.org/series/H41RESPPAABNWW https://fred.stlouisfed.org/series/H41RESPPAABNWW
- 300bps 5y agoMortgage brokers make crazy money in the U.S. Generally around 2% of the loan amount so they're making $6,000 on a $300,000 loan. At the particular mortgage broker that I have inside knowledge of, their worst loan officers are closing 5 loans per month and their best are closing 30 or more which gives them an annual salary of between $400,000 to over $2 million.
- friendlydog 5y agoIf government banned long term debt would the real estate market disappear, or would home and auto prices eventually level out at a much smaller amount reducing overall inflation, or would ownership just be for the wealthy and the rest would live in pottersville?
- inglor_cz 5y agoI guess home values would go down, but investment (improvements, remodeling etc.) would go down as well, so the old houses would be pretty shabby when sold. Newly built homes would be either substandard (what the Chinese derogatorily call "tofu quality", where walls aren't really that solid), or available to the wealthy only. It is surprisingly expensive to build a (brick and mortar) house to 2021 security, energy-saving and quality standards, at least in Central Europe. We have a lot of cheaper housing from the 1960s-1980s, both block of flats and detached houses, but no way would such buildings in their original form be approved today.
- CalRobert 5y agoInterestingly, I had a modern house built in eastern Europe (Latvia), and shipped to western Europe, very affordably. I had the foundation, roof and windows done locally but the frame, with insulation, was under 40k, for a ~140 sqm house.
- sbierwagen 5y agoFor the curious: in 2019 the average house in the US was 213 square meters: https://www.rocketmortgage.com/learn/average-square-footage-of-a-house https://www.rocketmortgage.com/learn/average-square-footage-...
- inglor_cz 5y agoA wooden house can be very affordable, but also tricky. The wood should be well dried. There was a wave of interest in wooden houses in 2015-6 AFAIK, which resulted in vendors shipping not-yet-very-dry wooden constructions to their customers.
- vkk8 5y agoI wonder why fixed interest rates are so prevalent in some countries (like, apparently, the US) while in other countries the standard is to tie the interest rate to a reference rate (like EURIBOR in the Eurozone)?
- cynusx 5y agoThere's a lot to add to this article in my opinion: Many lenders refinance loans because lenders also need to finance their activities and refinancing through securitization is a profitable way to do so, that goes for student loans, business loans, private loans, car loans, ... Mortgages are no exception, what is different about the US compared to Europe is that the capital market to buy packages of loans is more developed because unlike the EU, the US is a unified financial and legal system under federal governance. What happens in a mortgage is not that much different than a car loan, you use some cash and borrowed money to pay for the car and the lender expects you to repay that money (and interest) in fixed installments. Should you fail to pay the loan then the car is repossessed. The lender will want to make sure that your monthly salary is enough to cover the payments and that the car is valuable enough to recover the principle of the loan should something happen. Incidentally, this is why banks don't like to give entrepreneurs mortgages because entrepreneurs don't have stable income (usually). The moment you borrow that money, it becomes a liability for you but it becomes an asset for the bank/originator; after all you are going to pay the originator cash for 25 years. Now in the US, your originator can sell this asset onwards to a loan aggregator (Fannie Mae; Freddie Mac) to realize profits today rather than hold the mortgage forever but obviously the loan aggregator has some standards it wants you to adhere too. (note: the EU doesn't have these types of loan aggregators due to the lack of synchronization between their national financial markets) In theory the originator can make more profit by holding the mortgage, but since his money is locked up for 30 years in the mortgage; many of them don't have enough cash on hand to just lend the money and wait 30 years for it to come back so it can be lended out again. The loan aggregators on the other hand buy mortgages from all originators and can put them together into a package that is safe and diversified enough so that the repayment performance is predictable enough (ignoring pre-2007 when rating agencies succumbed to customers' pressure to rate pretty much anything as safe and caused the huge financial meltdown when borrowers started to predictably default) and sell it onward to pension and sovereign wealth funds. These aggregators, or GSEs as patio11 calls them, are private companies but by now they are government owned because they all collapsed in the financial crisis and since they underwrite pretty much every mortgage in the US, they had to be saved as otherwise the mortgage originators would also become illiquid and then you can only buy a house in cash (which would have pretty much destroyed the entire housing market in 2008). The 60 basispoints though, is the fee for packaging the loans. It's not an insurance like patio11 says. Operational work like support, collections, negotiations about late payment and administrative work ("Servicing") is outsourced is just because no loan aggregator wants to deal with that and a pension fund DEFINITELY doesn't want to deal with that and like any outsourced service that is well-understood, they prefer to pay as little as possible for this part. This creates natural market pressure for consolidation.
- PopAlongKid 5y ago>educate them on the most complicated and high-stakes financial decision they’ll have to make in their lives, I disagree with this hyperbole (part of the overall tone of the article). I think taking on full-time college tuition at age 19, or having kids, are both far more complicated and consequential financial decisions. Taking out a mortgage to purchase, let alone re-finance, an owner-occupied residence is something a lot of people do, perhaps more often than they buy a new mattress. If you have the minimum down payment and good income & credit report, it's not a big deal, and since there are a lot of legal protections all around for owner-occupied properties, it's straight-forward and low risk to the one taking out the mortgage.
- ILMostro7 5y agoIndeed. Although, most of the time when someone ends up in one of those other 2 scenarios, long-term finances are not their primary objective ;)
- pookietactics 5y agoSlightly off topic: What should I read if this is all super interesting but Byrne Hobart is a smidge over my head?
- mooreds 5y agoIf you want to learn more about mortgages and the "behind the scenes" slicing, dicing and preparing, please check out "The Compleat Ubernerd": https://www.calculatedriskblog.com/2007/07/compleat-ubernerd.html https://www.calculatedriskblog.com/2007/07/compleat-ubernerd... It's a series of posts from a lifelong banker about all of these details, from the 2007 timeframe. Super interesting deep dive.
- UltraViolence 5y agoThe entire financial system in the U.S. is a manufactured product, if you really think about it. The USD has intrinsic value even if Americans don't lift a finger since you need US$ to purchase most goods on the commodities market. If this link is broken, the U.S. would almost immediately fall into decline. The net spending power of most Americans would drop by a third to one half of what it is today, leading to social unrest. The U.S. government wouldn't be able to fund many of its programs, such as Medicare and the DoD would need to drastically cut its budget.