7 ms·

I'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

I'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.

chadash 5y ago
In the US, the standard mortgage is 30 year fixed. i.e. you pay the same rate for 30 years. Adjustable rate mortgages exist, but are less typical.
- jbay808 5y ago
  That's pretty unique to the US, I think. Canada has no comparable product and the difference between "fixed" and "variable rate" mortgages here is that fixed mortgages are fixed for five years.
  - beebmam 5y ago
    Those used to be much more common in the US. The 2008 housing crisis changed everything, and variable rate mortgages are extraordinarily rare now.
    - inglor_cz 5y ago
      Interestingly, I never saw a fixed rate mortgage for 30 years in my country. The top fixation period is usually 10 years, anything higher than that is unusual. A typical value is 5 years.
    - jjav 5y ago
      Main factor is that interest rates are so low (and have been for years now). With very low interest rates, it would be foolish to get an adjustable rate mortgage since it only has room to go up. Much better to lock in the very low rate for life. Thus, approximate nobody takes variable rate loans anymore. When I first bought my house interest rates were over 7%, so getting discount on the interest in exchange of the risk of an adjustable rate mortgage made some sense.
    - dragonwriter 5y ago
      > Those used to be much more common in the US Only briefly; the 30 year fixed has been a norm for a very long time, and the expansion of ARMs and more exotic creative financing instruments in the bubble leading up to the 2008 finance crises was itself a short-term aberration; there was also a brief run up in popularity when interest rates spiked in the 1980s (to avoid locking in sky-high rates.)
  - namdnay 5y ago
    Not unique, standard in several European countries I’ve lived in too
  - rufus_foreman 5y ago
    Adjustable rate mortgages (ARMs) weren't even available in the US until 1982, Congress didn't allow them. They're still around, the type you describe is a 5/1 ARM. Fixed rate for 5 years, adjusts every year after that. 3, 5, 7, and 10 year ARMs are common. A 5/1 loan rate is about 1% lower than a 30 year fixed now. It doesn't make much sense to me to take the risk with rates as low as they are now.
- nhoughto 5y ago
  Surprising, that seems very inefficient. As a bank offering a mortgage I have to set an interest rate for entire period? Naturally I’m going to be conservative to ensure profit.. which hurts the consumer. Variable or short term fixed rates seems much more logical.
  - notch656a 5y ago
    Which is why .gov holds like 50% of residential mortgages. Any losses can be eaten by tax-paying renters [by virtue of government purse] to subsidize failures of homeowners/lenders. Home owners can watch their asset [privately] appreciate while failures in the mortgage system get socialized onto landless class as well.
    - nostrademons 5y ago
      Government technically isn't holding the mortgages - Fannie/Freddie/etc. buy the mortgage, repackage them into securities, and then sell the securities. The flow analogy in the article is really good - mortgages flow through a lot of intermediaries and get traded on markets. (The exception is the Fed's purchase of RMBS, which actually is a quasi-government agency holding mortgage assets. It's more like 25%, though; the Fed holds about $2.6T in RMBS, while the total RMBS market is about $10.3T.) The socialization-of-losses aspect comes through interest rates. When wealth isn't held but is traded on markets, there's an incentive to hold interest rates artificially low, because that makes asset prices artificially high. High asset prices benefits all asset holders, so you can make people happier than they otherwise would be simply by keeping rates low.
    - deleted 5y ago
      [deleted]
  - nostrademons 5y ago
    That's the point of securitization, which is the point of the article. The banks aren't holding the mortgage. They immediately sell it off to some other financial institution who wants to buy what basically amounts to a homeowner bond that pays the prevailing interest rate. (There are some differences mentioned elsewhere in this thread, notably that the homeowner has an option to pre-pay, there's collateral that the mortgage holder can foreclose on, risk profiles are different for homeowners than corporations, etc.) The bank doesn't care what interest rates are going to be next year, because they sell the mortgage now and collect the cash for it. The buyer cares, but the buyer is probably a hedge, pension, or sovereign wealth fund that in theory at least should be able to estimate & offset interest rate risk. I wish the article went into more detail about exactly who the losers are in this system. I suspect that it's essentially a policy by the U.S. government to increase social stability (in the form of homeownership, stable residence, investment in communities) at the expense of holders of U.S. dollars and dollar-denominated assets (i.e. most of the rest of the world). In other words, it's transferring wealth from non-citizens in exchange for keeping citizens happy, which is a pretty typical government play. It also looks like the system is on the verge of collapsing, in the sense that it pumps up house prices and encourages artificially low interest rates and high inflation, and hence an increasing number of American renters are being caught on the wrong side of the equation.
- samstave 5y ago
  During prior to the 2008 crisis, one of the shady practices was that all mortgage brokers, realtors and banks were pushing adjustable rates on everyone which was a huge reason so many people lost their homes.
  - soperj 5y ago
    Didn't interest rate plummet during that crisis?
    - samstave 5y ago
      I personally think they used this as one of the indicators of "sub-prime" because there were a TON of flippers in ~2004/05 (knew one guy who owned 40 houses with a group of 4 friends) All APR to keep all the payments lower... they lost them all in 08/09.
    - to11mtm 5y ago
      Eventually... But we have to remember that things moved in waves. 2006/2007 was when the foreclosures started happening. Interest rates started going up in that timeframe [0], which lines up with the idea that folks couldn't refinance their ARMs into something they could keep paying on; first due to the higher interest rate, and second because the higher interest rate cause their house values to plummet. As these defaults piled up, in late 2007 and early 2008, the banks who later folded realized that their portfolios were not really salvageable. [0] http://www.freddiemac.com/pmms/pmms30.html http://www.freddiemac.com/pmms/pmms30.html
- glitchc 5y ago
  That doesn't sound right. The rate is fixed till the renewable period, typically 5 or fewer years.
  - dragonwriter 5y ago
    > That doesn't sound right. It is. > The rate is fixed till the renewable period, typically 5 or fewer years. Lenders and mortgage brokers will often heavily push loans like that, ARMs with a short initial fixed period, using the (usually slightly) lower initial rate and the prospect of refi before the float as a hook, but full-term fixed-rate mortgages are still more popular.
    - glitchc 5y ago
      Assertion requires evidence. This graph disagrees with you: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
      - ILMostro7 5y ago
        That's the mortgage interest rate, not the percentage of 30-year fixed rate mortgages vs. ARM. Categories > Money, Banking, & Finance > Interest Rates > Mortgage Rates Unless you're not arguing against the last part of the parent comment...
      - dragonwriter 5y ago
        > This graph disagrees with you: No, it doesn't. That's a chart of the average annual interest rate of 30 year mortgages, not the share of mortgages that are 30 year mortgages. EDIT: The Mortgage Bankers Association does regular press releases of stats [0], and in them recently ARMs seem to be 3-3.5% of applications. [0] e.g., https://www.mba.org/2022-press-releases/january/mortgage-applications-increase-in-latest-mba-weekly-survey https://www.mba.org/2022-press-releases/january/mortgage-app...
      - quickthrowman 5y ago
        That is a chart of the interest rate of 30 year fixed rate mortgages in the United States. What does that have to do with the ratio of fixed rate to adjustable rate mortgages?
flacnut 5y ago
In America, the majority of loans (especially after 2008) are fixed interest rate for the life of the loan. So even if the FED/RBA raises the benchmark rate, the mortgage rate and the note associated with it will not change.
cortesoft 5y ago
Many people have variable rate mortgages, but the standard mortgage that most people try to get is a "30 year fixed", where the interest rate is locked for the entire 30 year term. You pay a higher rate for a fixed than a variable, but you get a lot more certainty.
- JimTheMan 5y ago
  In Australia the amount you can overpay a fixed mortgage before you incur fees is relatively low. (Ie if you pay beyond an additional $20,000 per annum you start incurring fees.) Is it the same in the states? Do people just pay the principal and interest for 30 years?
  - denimnerd42 5y ago
    No generally there is no pre-payment fee. Although I'm not going to say it doesn't exist. I've only heard about it on the internet. The avg length of stay in a house is like 4-5-6 years anyway at which point you request a payoff amount and the buyers money is sent to pay off the note. You can also pay any additional principal amount you'd like and pay it off in full at any time. You can also refinance it at any time if the rate drops.
  - namdnay 5y ago
    > Do people just pay the principal and interest for 30 years? If interest rates go down, you refinance. If interest rates go up, you hold onto that cheap debt as long as you can. It’s a pretty unique product in that one party (the consumer) gets complete flexibility whereas the other (the bank) doesn’t
  - dragonwriter 5y ago
    > In Australia the amount you can overpay a fixed mortgage before you incur fees is relatively low. (Ie if you pay beyond an additional $20,000 per annum you start incurring fees.) Is it the same in the states? In several rounds of house buying and/or refinancing, I’ve never even seen an offer in the US that didn't expressly note the absence of an early payment penalty.
chiph 5y ago
Point 2 is important for a bank if they hold the loan on their books. Normally, you as an individual don't worry about something being worth less unless you know you're going to sell it in the near future. You won't have a loss until you sell. Technically. But for a bank, the government requires them to maintain a certain reserve amount. This is to handle withdrawals that are greater than planned.[0] The current loan value is an asset to the bank and so counts towards the reserve ratio. If the loan value drops, then they will have to sell some assets (probably some of those same loans) in order to raise some cash. Since they're forced to do this when it's disadvantageous to them, and it's likely that other banks are also trying to unload some loans to meet their reserve requirements, they have to offer those loans at a significant discount. Meaning they get even less for them than the low value they had them for. [0] This is what killed Wachovia. There was a "silent" run on the bank over the weekend in 2008 by wealthy customers transferring out amounts above the then-FDIC insurance limit of $100k. It wiped out their reserves and the government forced a sale.

chadash 5y ago

In the US, the standard mortgage is 30 year fixed. i.e. you pay the same rate for 30 years. Adjustable rate mortgages exist, but are less typical.

jbay808 5y ago
That's pretty unique to the US, I think. Canada has no comparable product and the difference between "fixed" and "variable rate" mortgages here is that fixed mortgages are fixed for five years.
- beebmam 5y ago
  Those used to be much more common in the US. The 2008 housing crisis changed everything, and variable rate mortgages are extraordinarily rare now.
  - inglor_cz 5y ago
    Interestingly, I never saw a fixed rate mortgage for 30 years in my country. The top fixation period is usually 10 years, anything higher than that is unusual. A typical value is 5 years.
  - jjav 5y ago
    Main factor is that interest rates are so low (and have been for years now). With very low interest rates, it would be foolish to get an adjustable rate mortgage since it only has room to go up. Much better to lock in the very low rate for life. Thus, approximate nobody takes variable rate loans anymore. When I first bought my house interest rates were over 7%, so getting discount on the interest in exchange of the risk of an adjustable rate mortgage made some sense.
  - dragonwriter 5y ago
    > Those used to be much more common in the US Only briefly; the 30 year fixed has been a norm for a very long time, and the expansion of ARMs and more exotic creative financing instruments in the bubble leading up to the 2008 finance crises was itself a short-term aberration; there was also a brief run up in popularity when interest rates spiked in the 1980s (to avoid locking in sky-high rates.)
- namdnay 5y ago
  Not unique, standard in several European countries I’ve lived in too
- rufus_foreman 5y ago
  Adjustable rate mortgages (ARMs) weren't even available in the US until 1982, Congress didn't allow them. They're still around, the type you describe is a 5/1 ARM. Fixed rate for 5 years, adjusts every year after that. 3, 5, 7, and 10 year ARMs are common. A 5/1 loan rate is about 1% lower than a 30 year fixed now. It doesn't make much sense to me to take the risk with rates as low as they are now.
nhoughto 5y ago
Surprising, that seems very inefficient. As a bank offering a mortgage I have to set an interest rate for entire period? Naturally I’m going to be conservative to ensure profit.. which hurts the consumer. Variable or short term fixed rates seems much more logical.
- notch656a 5y ago
  Which is why .gov holds like 50% of residential mortgages. Any losses can be eaten by tax-paying renters [by virtue of government purse] to subsidize failures of homeowners/lenders. Home owners can watch their asset [privately] appreciate while failures in the mortgage system get socialized onto landless class as well.
  - nostrademons 5y ago
    Government technically isn't holding the mortgages - Fannie/Freddie/etc. buy the mortgage, repackage them into securities, and then sell the securities. The flow analogy in the article is really good - mortgages flow through a lot of intermediaries and get traded on markets. (The exception is the Fed's purchase of RMBS, which actually is a quasi-government agency holding mortgage assets. It's more like 25%, though; the Fed holds about $2.6T in RMBS, while the total RMBS market is about $10.3T.) The socialization-of-losses aspect comes through interest rates. When wealth isn't held but is traded on markets, there's an incentive to hold interest rates artificially low, because that makes asset prices artificially high. High asset prices benefits all asset holders, so you can make people happier than they otherwise would be simply by keeping rates low.
  - deleted 5y ago
    [deleted]
- nostrademons 5y ago
  That's the point of securitization, which is the point of the article. The banks aren't holding the mortgage. They immediately sell it off to some other financial institution who wants to buy what basically amounts to a homeowner bond that pays the prevailing interest rate. (There are some differences mentioned elsewhere in this thread, notably that the homeowner has an option to pre-pay, there's collateral that the mortgage holder can foreclose on, risk profiles are different for homeowners than corporations, etc.) The bank doesn't care what interest rates are going to be next year, because they sell the mortgage now and collect the cash for it. The buyer cares, but the buyer is probably a hedge, pension, or sovereign wealth fund that in theory at least should be able to estimate & offset interest rate risk. I wish the article went into more detail about exactly who the losers are in this system. I suspect that it's essentially a policy by the U.S. government to increase social stability (in the form of homeownership, stable residence, investment in communities) at the expense of holders of U.S. dollars and dollar-denominated assets (i.e. most of the rest of the world). In other words, it's transferring wealth from non-citizens in exchange for keeping citizens happy, which is a pretty typical government play. It also looks like the system is on the verge of collapsing, in the sense that it pumps up house prices and encourages artificially low interest rates and high inflation, and hence an increasing number of American renters are being caught on the wrong side of the equation.
samstave 5y ago
During prior to the 2008 crisis, one of the shady practices was that all mortgage brokers, realtors and banks were pushing adjustable rates on everyone which was a huge reason so many people lost their homes.
- soperj 5y ago
  Didn't interest rate plummet during that crisis?
  - samstave 5y ago
    I personally think they used this as one of the indicators of "sub-prime" because there were a TON of flippers in ~2004/05 (knew one guy who owned 40 houses with a group of 4 friends) All APR to keep all the payments lower... they lost them all in 08/09.
  - to11mtm 5y ago
    Eventually... But we have to remember that things moved in waves. 2006/2007 was when the foreclosures started happening. Interest rates started going up in that timeframe [0], which lines up with the idea that folks couldn't refinance their ARMs into something they could keep paying on; first due to the higher interest rate, and second because the higher interest rate cause their house values to plummet. As these defaults piled up, in late 2007 and early 2008, the banks who later folded realized that their portfolios were not really salvageable. [0] http://www.freddiemac.com/pmms/pmms30.html http://www.freddiemac.com/pmms/pmms30.html
glitchc 5y ago
That doesn't sound right. The rate is fixed till the renewable period, typically 5 or fewer years.
- dragonwriter 5y ago
  > That doesn't sound right. It is. > The rate is fixed till the renewable period, typically 5 or fewer years. Lenders and mortgage brokers will often heavily push loans like that, ARMs with a short initial fixed period, using the (usually slightly) lower initial rate and the prospect of refi before the float as a hook, but full-term fixed-rate mortgages are still more popular.
  - glitchc 5y ago
    Assertion requires evidence. This graph disagrees with you: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
    - ILMostro7 5y ago
      That's the mortgage interest rate, not the percentage of 30-year fixed rate mortgages vs. ARM. Categories > Money, Banking, & Finance > Interest Rates > Mortgage Rates Unless you're not arguing against the last part of the parent comment...
    - dragonwriter 5y ago
      > This graph disagrees with you: No, it doesn't. That's a chart of the average annual interest rate of 30 year mortgages, not the share of mortgages that are 30 year mortgages. EDIT: The Mortgage Bankers Association does regular press releases of stats [0], and in them recently ARMs seem to be 3-3.5% of applications. [0] e.g., https://www.mba.org/2022-press-releases/january/mortgage-applications-increase-in-latest-mba-weekly-survey https://www.mba.org/2022-press-releases/january/mortgage-app...
    - quickthrowman 5y ago
      That is a chart of the interest rate of 30 year fixed rate mortgages in the United States. What does that have to do with the ratio of fixed rate to adjustable rate mortgages?

flacnut 5y ago

In America, the majority of loans (especially after 2008) are fixed interest rate for the life of the loan. So even if the FED/RBA raises the benchmark rate, the mortgage rate and the note associated with it will not change.

cortesoft 5y ago

Many people have variable rate mortgages, but the standard mortgage that most people try to get is a "30 year fixed", where the interest rate is locked for the entire 30 year term. You pay a higher rate for a fixed than a variable, but you get a lot more certainty.

JimTheMan 5y ago
In Australia the amount you can overpay a fixed mortgage before you incur fees is relatively low. (Ie if you pay beyond an additional $20,000 per annum you start incurring fees.) Is it the same in the states? Do people just pay the principal and interest for 30 years?
- denimnerd42 5y ago
  No generally there is no pre-payment fee. Although I'm not going to say it doesn't exist. I've only heard about it on the internet. The avg length of stay in a house is like 4-5-6 years anyway at which point you request a payoff amount and the buyers money is sent to pay off the note. You can also pay any additional principal amount you'd like and pay it off in full at any time. You can also refinance it at any time if the rate drops.
- namdnay 5y ago
  > Do people just pay the principal and interest for 30 years? If interest rates go down, you refinance. If interest rates go up, you hold onto that cheap debt as long as you can. It’s a pretty unique product in that one party (the consumer) gets complete flexibility whereas the other (the bank) doesn’t
- dragonwriter 5y ago
  > In Australia the amount you can overpay a fixed mortgage before you incur fees is relatively low. (Ie if you pay beyond an additional $20,000 per annum you start incurring fees.) Is it the same in the states? In several rounds of house buying and/or refinancing, I’ve never even seen an offer in the US that didn't expressly note the absence of an early payment penalty.

chiph 5y ago

Point 2 is important for a bank if they hold the loan on their books. Normally, you as an individual don't worry about something being worth less unless you know you're going to sell it in the near future. You won't have a loss until you sell. Technically. But for a bank, the government requires them to maintain a certain reserve amount. This is to handle withdrawals that are greater than planned.[0] The current loan value is an asset to the bank and so counts towards the reserve ratio. If the loan value drops, then they will have to sell some assets (probably some of those same loans) in order to raise some cash. Since they're forced to do this when it's disadvantageous to them, and it's likely that other banks are also trying to unload some loans to meet their reserve requirements, they have to offer those loans at a significant discount. Meaning they get even less for them than the low value they had them for. [0] This is what killed Wachovia. There was a "silent" run on the bank over the weekend in 2008 by wealthy customers transferring out amounts above the then-FDIC insurance limit of $100k. It wiped out their reserves and the government forced a sale.