5 ms·

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

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.
- basch 5y ago
  >who the losers are in this system. People who dont qualify. People who misuse it. As is the case with much debt, there is debt given to people who consume it, spend it, lose it and owe it; and there is debt given to people who invest it, accrue with it, and profit from it. Many people may stumble through the process and benefit from it, while the purchasing power of others who cant get it is diluted.
  - secabeen 5y ago
    Patrick also links a good newsletter at the end that goes into the "who are the losers" question a bit: https://byrnehobart.medium.com/the-30-year-mortgage-is-an-intrinsically-toxic-product-200c901746a https://byrnehobart.medium.com/the-30-year-mortgage-is-an-in...
- nhoughto 5y ago
  Interesting insights, my brain always goes to how to reduce inefficiency but there are many more things at play.
- eldavido 5y ago
  It's interesting you think there necessarily are "losers". Interest rates are set in a competitive market. At any given point, there's a relatively fixed supply of money being put into what's on offer. For buyers like pensions, it's simple: get the highest rate they can with acceptable risk and diversification. Keep in mind that not all of a fund's assets should be invested in super-long duration loans. Anyone running a fixed income portfolio understands this is a major source of risk (interest rate risk) as long-dated bonds are one of the most rate-sensitive investments possible. You'd do better with a blend of short, medium, and long-duration debt to ensure you don't end up hosed when rates move the wrong way. Also keep in mind, many net buyers of this stuff are using it to offset long-term liabilities -- insurance loss payments, pensions, etc. Insurance companies will adjust premiums based on earnings of their investment portfolios. And finally, keep in mind that interest rates aren't just a video game. There are major "real" drivers of them, economic growth being one--the demand for credit and its supply absolutely shifts over time, and throughout the business cycle. Real economic variables like demographics, home building, population shifts, the number of retired (more savings) vs working (more wage income) people in a population, etc. cause this stuff to move around a lot. If someone gets a higher rate, it's because at the time, there was more demand for credit, it wasn't just someone "losing" or getting "ripped off" that made that trade possible.
basch 5y ago
What percentages of conforming mortgages are sold off by the originators that wrote them, before the first payment is even due? If it is conforming, or close, there is almost no risk for the initial underwriter? I could be way off base, but that's mostly what the article is about, that the people offering loans arent the ones holding the risk.
- mhog_hn 5y ago
  Regarding risk for the initial underwriter, there are two main elements I think: - fallout risk https://www.investopedia.com/terms/f/fallout-risk.asp https://www.investopedia.com/terms/f/fallout-risk.asp - pipeline risk: https://www.investopedia.com/terms/m/mortgage_pipeline.asp https://www.investopedia.com/terms/m/mortgage_pipeline.asp For the fallout risk an originator can typically model the impact on the value of a mortgage with a conservative low digit basispoint estimate (following past fallout patterns that have been observed for example), for the pipeline risk the originator may do some more exotic price modelling by deriving implied interest rate volatilities from market prices (of interest rate derivatives). Both risks are relatively speaking minimal given their short horizons and the (current) low volatility of interest rates. I am impressed with the quality of the website linked to by the author of this thread, great read!
  - basch 5y ago
    The website is of patio11 on hn https://news.ycombinator.com/user?id=patio11 https://news.ycombinator.com/user?id=patio11
freewilly1040 5y ago
It's a trade, the consumer exchanges certainty about costs for a higher fixed rate than they'd get otherwise. If the consumer doesn't like that they can get a lower cost variable rate mortgage just as easily.
rufus_foreman 5y ago
Many banks don't care, they are going to turn around and sell the loan. Some banks don't even make money off of the loan itself, they break even or even lose money originating the loan and make money servicing the loan - collecting the payments.

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.

basch 5y ago
>who the losers are in this system. People who dont qualify. People who misuse it. As is the case with much debt, there is debt given to people who consume it, spend it, lose it and owe it; and there is debt given to people who invest it, accrue with it, and profit from it. Many people may stumble through the process and benefit from it, while the purchasing power of others who cant get it is diluted.
- secabeen 5y ago
  Patrick also links a good newsletter at the end that goes into the "who are the losers" question a bit: https://byrnehobart.medium.com/the-30-year-mortgage-is-an-intrinsically-toxic-product-200c901746a https://byrnehobart.medium.com/the-30-year-mortgage-is-an-in...
nhoughto 5y ago
Interesting insights, my brain always goes to how to reduce inefficiency but there are many more things at play.
eldavido 5y ago
It's interesting you think there necessarily are "losers". Interest rates are set in a competitive market. At any given point, there's a relatively fixed supply of money being put into what's on offer. For buyers like pensions, it's simple: get the highest rate they can with acceptable risk and diversification. Keep in mind that not all of a fund's assets should be invested in super-long duration loans. Anyone running a fixed income portfolio understands this is a major source of risk (interest rate risk) as long-dated bonds are one of the most rate-sensitive investments possible. You'd do better with a blend of short, medium, and long-duration debt to ensure you don't end up hosed when rates move the wrong way. Also keep in mind, many net buyers of this stuff are using it to offset long-term liabilities -- insurance loss payments, pensions, etc. Insurance companies will adjust premiums based on earnings of their investment portfolios. And finally, keep in mind that interest rates aren't just a video game. There are major "real" drivers of them, economic growth being one--the demand for credit and its supply absolutely shifts over time, and throughout the business cycle. Real economic variables like demographics, home building, population shifts, the number of retired (more savings) vs working (more wage income) people in a population, etc. cause this stuff to move around a lot. If someone gets a higher rate, it's because at the time, there was more demand for credit, it wasn't just someone "losing" or getting "ripped off" that made that trade possible.

basch 5y ago

What percentages of conforming mortgages are sold off by the originators that wrote them, before the first payment is even due? If it is conforming, or close, there is almost no risk for the initial underwriter? I could be way off base, but that's mostly what the article is about, that the people offering loans arent the ones holding the risk.

mhog_hn 5y ago
Regarding risk for the initial underwriter, there are two main elements I think: - fallout risk https://www.investopedia.com/terms/f/fallout-risk.asp https://www.investopedia.com/terms/f/fallout-risk.asp - pipeline risk: https://www.investopedia.com/terms/m/mortgage_pipeline.asp https://www.investopedia.com/terms/m/mortgage_pipeline.asp For the fallout risk an originator can typically model the impact on the value of a mortgage with a conservative low digit basispoint estimate (following past fallout patterns that have been observed for example), for the pipeline risk the originator may do some more exotic price modelling by deriving implied interest rate volatilities from market prices (of interest rate derivatives). Both risks are relatively speaking minimal given their short horizons and the (current) low volatility of interest rates. I am impressed with the quality of the website linked to by the author of this thread, great read!
- basch 5y ago
  The website is of patio11 on hn https://news.ycombinator.com/user?id=patio11 https://news.ycombinator.com/user?id=patio11

freewilly1040 5y ago

It's a trade, the consumer exchanges certainty about costs for a higher fixed rate than they'd get otherwise. If the consumer doesn't like that they can get a lower cost variable rate mortgage just as easily.

rufus_foreman 5y ago

Many banks don't care, they are going to turn around and sell the loan. Some banks don't even make money off of the loan itself, they break even or even lose money originating the loan and make money servicing the loan - collecting the payments.