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Uh... so that's how US is able to get these 30-year fixed-interest mortgages? Effectively, by having the government to be the actual lender here – while the ban

by ilammy 4y ago

Uh... so that's how US is able to get these 30-year fixed-interest mortgages? Effectively, by having the government to be the actual lender here – while the banks are tasked with rubber-stamping on the risk assessment (“yup, looks like a standard loan to us”) and then raking in guaranteed, immediate profit after selling the loan and not caring about it anymore? (Well, unless they sell too many shitty loans, in which case they'd supposedly get their license revoked.)

jonahbenton 4y ago
No...but I recommend The Big Short, which is highly entertaining, and also educational.
ericmay 4y ago
Eh not so much “how they are able to”. At least as far as I know. But the banks have much more stringent regulations and verifications and aren’t just rubber-stamping loans anymore like they did before 2008. The rubber-stamping stuff has moved to crypto and stock exchanges.
refurb 4y ago
Yes, the 30 year mortgage wouldn’t exist without government backing. But the government doesn’t hold the loans for long. If they conform they are bundled and sold off. The government will back the mortgages in the bonds indirectly if they fail (which is why they need to conform to certain standards). Well, that was the original Plan but with quantitative easing the federal reserve bought a lot of the bonds as well.
mgraczyk 4y ago
Mortgage default rate in the US is extremely low, so empirically speaking I wouldn't worry about that. If anything the issue is that banks aren't able to lend to diverse borrowers, so you have to have income to get a loan, as is the complaint of the GP.
acjohnson55 4y ago
I work in the mortgage industry. The government buys some loans (the Fed has been purchasing mortgage-backed securities since the start of the pandemic), but generally, mortgages are bought by private investors. If the loans are "agency" loans (Fannie, Freddie, FHA), investors are guaranteed the principal of the loan if the borrower defaults. I can tell you that the agencies definitely do not rubber stamp the underwriting of the loans. If you make an underwriting mistake, you may have to buy the loan bank from the investor and it will impact your perceived loan quality and the prices you can get for your loan pipeline.
- chubbyFIREthrwy 4y ago
  I don't think you're disagreeing with the core point. By guaranteeing (some) mortgages, and setting standards for what mortgages it guarantees, Fannie et al have the effect of being a buyer for all those mortgages, even if it's private investors actually buying them. And since they are such preferential terms, such agencies effectively create an artificial class of lower-rate mortgages whose interest rates you can't get even if you reduce the risk by other means. Earlier comment with context: https://news.ycombinator.com/item?id=31000286 https://news.ycombinator.com/item?id=31000286
  - acjohnson55 4y ago
    Correct, I'm not exactly disagreeing, but just explaining how it actually works. Actually, in many cases, Fannie and Freddie (known as the GSEs) literally do buy the mortgages, through a program known as the cash window [1]. Some of these they hold in portfolio, but others they sell to the private market. But the GSEs aren't technically part of the government. They are specially chartered publicly traded companies, which are currently controlled by the government agency FHFA (confusingly completely distinct from the FHA) since going into conservatorship in 2008, as a result of the subprime crisis. In any case, it's important to note that the GSEs are profitable businesses, not part of the welfare state. They are able to guarantee conforming loans because - the underwriting criteria actually accurate reflect risk of default and loss - risk is shared with the loan servicer and for higher loan-to-value mortgages, private mortgage insurers. I yap on about this because it's actually a pretty fascinating bit of public policy and financial engineering, with the result of extending massive, long-term, fixed-rate, affordable loans to regular-ass people (with a free borrower option to terminate the interest costs through prepayment, to boot!) AND create an asset class for investors that is almost as liquid and riskless as treasury bonds. The liquidity of that secondary market is what allows rates to be so low, compared to custom-underwritten products geither lent from a bank's own portfolio or securitized into private-label mortgage-backed securities. The biggest bit of controversy I know of is that it tends to fuel home price growth, benefiting propery owners over those who buy in later. [1] https://www.machinesp.com/post/a-close-look-at-the-gse-cash-window https://www.machinesp.com/post/a-close-look-at-the-gse-cash-...

by ilammy 4y ago

jonahbenton 4y ago

No...but I recommend The Big Short, which is highly entertaining, and also educational.

ericmay 4y ago

Eh not so much “how they are able to”. At least as far as I know. But the banks have much more stringent regulations and verifications and aren’t just rubber-stamping loans anymore like they did before 2008. The rubber-stamping stuff has moved to crypto and stock exchanges.

refurb 4y ago

Yes, the 30 year mortgage wouldn’t exist without government backing. But the government doesn’t hold the loans for long. If they conform they are bundled and sold off. The government will back the mortgages in the bonds indirectly if they fail (which is why they need to conform to certain standards). Well, that was the original Plan but with quantitative easing the federal reserve bought a lot of the bonds as well.

mgraczyk 4y ago

Mortgage default rate in the US is extremely low, so empirically speaking I wouldn't worry about that. If anything the issue is that banks aren't able to lend to diverse borrowers, so you have to have income to get a loan, as is the complaint of the GP.

acjohnson55 4y ago

I work in the mortgage industry. The government buys some loans (the Fed has been purchasing mortgage-backed securities since the start of the pandemic), but generally, mortgages are bought by private investors. If the loans are "agency" loans (Fannie, Freddie, FHA), investors are guaranteed the principal of the loan if the borrower defaults. I can tell you that the agencies definitely do not rubber stamp the underwriting of the loans. If you make an underwriting mistake, you may have to buy the loan bank from the investor and it will impact your perceived loan quality and the prices you can get for your loan pipeline.

chubbyFIREthrwy 4y ago
I don't think you're disagreeing with the core point. By guaranteeing (some) mortgages, and setting standards for what mortgages it guarantees, Fannie et al have the effect of being a buyer for all those mortgages, even if it's private investors actually buying them. And since they are such preferential terms, such agencies effectively create an artificial class of lower-rate mortgages whose interest rates you can't get even if you reduce the risk by other means. Earlier comment with context: https://news.ycombinator.com/item?id=31000286 https://news.ycombinator.com/item?id=31000286
- acjohnson55 4y ago
  Correct, I'm not exactly disagreeing, but just explaining how it actually works. Actually, in many cases, Fannie and Freddie (known as the GSEs) literally do buy the mortgages, through a program known as the cash window [1]. Some of these they hold in portfolio, but others they sell to the private market. But the GSEs aren't technically part of the government. They are specially chartered publicly traded companies, which are currently controlled by the government agency FHFA (confusingly completely distinct from the FHA) since going into conservatorship in 2008, as a result of the subprime crisis. In any case, it's important to note that the GSEs are profitable businesses, not part of the welfare state. They are able to guarantee conforming loans because - the underwriting criteria actually accurate reflect risk of default and loss - risk is shared with the loan servicer and for higher loan-to-value mortgages, private mortgage insurers. I yap on about this because it's actually a pretty fascinating bit of public policy and financial engineering, with the result of extending massive, long-term, fixed-rate, affordable loans to regular-ass people (with a free borrower option to terminate the interest costs through prepayment, to boot!) AND create an asset class for investors that is almost as liquid and riskless as treasury bonds. The liquidity of that secondary market is what allows rates to be so low, compared to custom-underwritten products geither lent from a bank's own portfolio or securitized into private-label mortgage-backed securities. The biggest bit of controversy I know of is that it tends to fuel home price growth, benefiting propery owners over those who buy in later. [1] https://www.machinesp.com/post/a-close-look-at-the-gse-cash-window https://www.machinesp.com/post/a-close-look-at-the-gse-cash-...