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US Mortgage Lenders Are Starting to Go Broke
- andyrewwer 4y agoSo, what happens to loans owned by mortgage lenders when they go broke?
- jollyllama 4y agoWouldn't they be sold as part of the liquidation?
- bolasanibk 4y agoThey are sold to other banks.
- mcherm 4y agoThose loans are sold as part of the bankruptcy proceedings (if there is one) or as part of the sale of the company's assets (the more common outcome).
- namelessoracle 4y agoSucks the person who owes the debt cant get first bite at buying the firesale debt.
- BostonEnginerd 4y agoWhy can't they?
- parkingrift 4y agoThey don't and won't sell individual loans. They package them up so they can throw in all the junk loans.
- amelius 4y agoI suppose they want to sell to the highest bidder anyway.
- randomdata 4y agoThe mortgagor likely is the highest bidder. They have the least amount of risk seeing as how it is their own debt, allowing them to pay more than others, and still brings free money when purchased at a discount. Labour intensive, though. Packaging up many loans and selling it as a complete unit is far easier.
- deleted 4y ago[deleted]
- mupuff1234 4y agoWhy would they?
- tylersmith 4y agoIf they can't service their debt then they can't afford to buy the rest of it outright, even at a discount.
- scottyah 4y agoLots of people can pay off their mortgage but choose not to. If given a good enough discount it would make financial sense to do so.
- namelessoracle 4y agoOk, but what if you can service your debt? What if they are selling your 300k mortgage for effectively 50 to 100k? You could find financing for 50 to 100k, especially if you have a 300k house as collateral as part of it. Only the other bank gets the sweetheart deal. Same kind of problem with foreclosure auctions too btw. They require cash up front for those, you cant put a mortgage on a foreclosed house. (without it first being bought outright by the bank, who isnt gonna mortgage it to you for the foreclosed price)
- rayiner 4y agoThey’re not selling individual mortgages for 300k usually. The buyer is buying a tranche and the risk that many of them won’t repay.
- mamonster 4y agoJust because someone is selling 10 homes with a nominal mortgage value of 3 million total for 500k to a million does not mean that you can bid 50k on a single home from that pack. This stuff is always packaged and you need to buy the whole thing, maybe dig through it, pick out stuff you like, repackage the rest and sell it off. The troubled mortgage lender likely isn't even selling good loans initially, they will first try to recapitalize by dropping the garbage, and will only sell quality assets when they are really pressed to do so.
- onlyrealcuzzo 4y ago90%+ of mortgage owners do not have enough cash. Further, in most times MBSes are usually worth more than the debt - otherwise, modern banking wouldn't make any sense. Mortgages issued in the last 2 years at ~2.75% are probably worth less than the debt now. So it might actually be the case for a lot of these loans. That being said, the discount is not going to be anywhere close to 50%. The difference in the discount would be evened out by the difference in the interest rate you'd have to refinance at almost exactly. Considering the cost of refinancing, if you bought your own debt with some new debt from some new mortgage company - this would be a losing proposition for 99%+ of mortgages.
- hedora 4y agoI agree, but I see why they don’t want to skim the mortgages that could be paid off in a lump sum off the top of their bucket of dodgy loans. I’d love to see the law change to force owners of debt to give the person that owes right of first refusal whenever debt is sold. (Mostly for medical debt and collections agency situations, but also for mortgages.)
- lotsofpulp 4y agoThat makes no sense. A borrower would have incentive to default on the debt, so they can then purchase it at less than face value, effectively causing them to experience a gain and the lender to experience a loss. Why would anyone choose to lend under such terms?
- Volundr 4y agoThis could easily be addressed by simply not offering the option to someone in default, but even without doing that, I don't think your assertion makes sense. Not paying my mortgage on the idea that my bank will go brankrupt before they are able to reposses my house is a HUGE gamble. I doubt my monthly payment has any meaningful impact on my banks bottom line.
- lotsofpulp 4y agoIf I understood correctly, the proposition was to give borrowers the first right of refusal when a lender sells the debt, which can and does happen all the time without a lender going bankrupt.
- namelessoracle 4y agoSure, but the "value" of the mortgage is supposed to be that it represents twice (usually way more) of value in interest payments that the Debtor will pay over the life time. So why is the bank selling it for sometimes half of what the Debtor owes then on a fire sale scenario where the holder is having issues? One of the big problems that happens a lot with mortgages is that the bank sells it to this other bank and mix ups can cause all kind of problems for the debt holder. Give the debtor right of first refusal at price they are about to sell (simple form letter that they have 30 days to respond to). 9 times out of 10, debtor just lets it happen. But what WILL happen is a company will come along, offer what are basically refinance loans to service this situation, and the debtor gets helped out. The whole practice of tranching is toxic to begin with and if this discourages that its a double win.
- ortusdux 4y agoThat precedent could perversely incentivize people to seek out unstable lenders.
- DwnVoteHoneyPot 4y agowhich may help them become less unstable.
- marricks 4y agoI wonder why survival of the fittest has to always hurt the little guy. Buyers seeking out unstable lenders seems like a good way to encourage more stable lenders.
- deleted 4y ago[deleted]
- ALittleLight 4y agoWouldn't buyers seeking out unstable lenders discourage stable lenders? Because buyers would prefer their competitors?
- marricks 4y agoIf the unstable lenders folded and the mortgage holders could buy out their loans on the cheap, no? Then the shareholders of the lending company wouldn't be rich-people-broke-where-someone-buys-them-out-and-somehow-they're-all-still-rich they'd be actual-broke-where-they-lost-all-their-money-on-a-stupid-venture.
- kipchak 4y agoMatthew effect perhaps?
- _jal 4y agoWhen businesses abuse incentives and tip systemic risk into systemic crash, well, that's just the way the world works. When individual borrowers may have a transient opportunity to play games, suddenly folks are hot and bothered about moral hazard. I'd also note you could flip that argument on its head - more people seeking out unstable lenders would help capitalize them.
- __derek__ 4y agoThey already won: their mortgage requires a big haircut to sell off because their rate is so far below market.
- dylan604 4y agoThe person holding the debt of that mortgage does not win. The new bank coming in and buying the mortgage assets of the defaulting bank wins. The person holding the mortgage probably never even knows the difference.
- __derek__ 4y agoIt was a joke. Who owns the mortgage is irrelevant to the borrower, but the borrower gets to keep the below-market rate while the originator has to take a haircut on the deal. That's the sense in which they won.
- CoastalCoder 4y agoI don't think that's correct. IIUC, the lender who sells the debt takes a loss, but the amount of debt owed by the borrower remains the same.
- __derek__ 4y agoI was being cheeky. The people who took out these mortgages are paying a rate well below market-rate. They won in the sense that they're paying less to service the debt than the lender is paying to carry the mortgage.
- bdcravens 4y agoLoans aren't sold one-by-one; they are sold in bulk. If so the discount would be substantially less.
- sillystuff 4y agoThese debts are sold in bulk so you would need to buy a bunch of other debt too. But, there is a group that is buying up blocks of discounted bad debts and forgiving them. They call their program the "Rolling Jubiliee". https://debtcollective.org/what-we-do/debt-abolition/ https://debtcollective.org/what-we-do/debt-abolition/
- shaburn 4y agomorale hazard econ 101 should really be required for HN posting
- celim307 4y agoAre they sold Pennies on the dollar? Can I buy my own mortgage or is it bundled
- namelessoracle 4y agoGiven how modern banking works, its probably not only bundled but was chopped into 12 different pieces that was put in 13 different bundles :P
- susiecambria 4y agoAnd in the business, the pieces are referred to as tranches. For those who need a primer, check out https://www.compareclosing.com/blog/all-about-mortgage-tranches/ https://www.compareclosing.com/blog/all-about-mortgage-tranc...
- jimbob45 4y agoIs there a place for people like me that have lost complete faith in the public markets and banking systems? I've independently come to the conclusion that the NYSE/NSDQ are scams and want to stick with stuff like government bonds. I'm surely not the only one to think this way, right?
- rightbyte 4y agoThere are alot of scammy stuff going on in public companies but what is the scam on the exchanges themself? I mean surely most companies on the exchange are not scams either?
- jimbob45 4y agohttps://www.protocol.com/fintech/payment-for-order-flow-explained https://www.protocol.com/fintech/payment-for-order-flow-expl... https://www.npr.org/2014/04/01/297686724/on-a-rigged-wall-street-milliseconds-make-all-the-difference https://www.npr.org/2014/04/01/297686724/on-a-rigged-wall-st... PFOF and HFT mean that no matter how much you win, the exchanges and HFTs will always win more.
- pigtailgirl 4y ago-- John Oliver has a good segment on buying debt -- https://www.youtube.com/watch?v=hxUAntt1z2c https://www.youtube.com/watch?v=hxUAntt1z2c
- kickdaddy 4y agohttps://archive.ph/PiJwA https://archive.ph/PiJwA
- avmich 4y agoThis page with "One more step" and "Why you need to complete the CAPTCHA" isn't very helpful, unfortunately :( .
- ramesh31 4y agoSo the real story here is that banks did learn their lesson from 2008 (at least in regards to mortgages). The subprime market has been relegated to these fly-by-night operations that are poorly capitalized and pose no systemic risk.
- ak217 4y agoThat and inventory risk. It's a tale as old as commerce. You start by operating a service (brokerage, mortgage underwriting, web storefront, SaaS/PaaS, etc.) You get really good at it, and decide that you might start to warehouse some of the inventory that your customers handle, to improve efficiency and bundle/upsell. Time passes and the value of the inventory you hold exceeds and then dwarfs the value of your platform/service business. Then market conditions change, the value of your inventory declines, your budget blows up and you go bankrupt, learning the hard way that combining two businesses with very different capital dynamics is hard and hazardous. Also there is a difference between subprime lending and responsible lending that is nonetheless susceptible to interest rate risk. So far we have mostly the latter.
- dragontamer 4y agoWell, its good that "things are working as intended", but I think there's still the open question of what the state of the US economy will look like in 3 to 6 months. Nothing like terrible mind you, but there are strong questions about interest rates, demand destruction vs inflation, low unemployment (right now anyway), but slowing growth, etc. etc.
- refurb 4y agoMy understanding is mortgage lenders mostly originate loans. The use their line of credit to offer (mostly) conforming mortgages, doing the paperwork, underwriting, and closing. Then the mortgage is quickly sold off, the money recouped, so they can go and originate another mortgage. At any given time, they hold a very small fraction of all the mortgages they might originate in a years (in this example $10B at year).
- iancmceachern 4y agoYes, every loan I've received, even re-fis was sold within months to the final lender.
- indigodaddy 4y agoOften not even the final lender. One of mine changed hands 2-3 times (can’t remember) within a year or two.
- avrionov 4y agoDo you have to send money to a different company when the mortgage is sold?
- lbotos 4y agoYep! I've had two mortgage servicers in the first year of owning a home. The first offered bi-weekly payments, the second didn't. So you aren't even guaranteed the same "features".
- indigodaddy 4y agoYes for us and is a small hassle each time to re-set that up..
- lotsofpulp 4y agoSometimes.
- 4y ago
- toomuchtodo 4y agoThe interesting part is First Guaranty, majority owned by PIMCO and specializing in non-qm mortgages, ceasing operations.
- yardie 4y agoIf I understand the article correctly these mortgage lenders are financing sub-prime and non-conformal loans. Basically the loans so risky Fannie Mae don't want them. This also includes jumbo loans, the are non-conforming. If you have the typical FHA, VA, conventional mortgage not much has changed for you.
- dragontamer 4y agoConventional mortgages didn't change in 2007 either. Now I don't think we're about to see the black swan again. But its always the riskier-end of the market that reacts first. I think its important to keep an eye on the subprime / risky mortgages to get a feel on the market. The current question is "demand destruction", from a combination of inflation and rising interest rates. If the real economy out there is truly getting worse, then these little issues will become more and more common.
- __derek__ 4y agoThese lenders are not going broke because the mortgages are bad. They're going broke because they relied on short-term credit lines to originate mortgages, and rates have moved hard against them. Now they don't have the ability to rectify the situation without realizing a big loss on the mortgages.
- winternett 4y agoThe same consequences that a homeowner who over-buys has to face... I can't feel much sympathy for it.
- skrtskrt 4y agoConventional mortgages didn't change but the assets associated with them did take huge valuation hit when the bubble popped, which still matters for those packaging up loans, if the assets they have a claim to have dropped 40%.
- bushbaba 4y agoJumbo loans doesn’t mean risky.
- th1s1sit 4y ago
- rob_c 4y agounfortunately imo, good
- yuan43 4y ago> There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. ... This is the consensus view. Funny thing is, this is exactly the kind of thing people were yammering on about with respect to "subprime" in 2007. Contained. Don't worry about it. A few weak players will go under, but there is no systemic risk. Now, maybe that's true this time. Or not. What is certain is that the mortgage industry went through a metamorphosis since the GFC, and most of the players are now not banks. > “The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.” > In 2004, only about a third of the top 20 lenders for refinancings were independent firms. Last year, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which analyzes the industry for mortgage lenders. Since 2016, banks have seen their share of the market shrink to about a third from about half, according to news and data provider Inside Mortgage Finance. So what happens when the major source of debt fueling the ongoing housing debacle comes from "poorly capitalized" non-banks? The obvious answer is that the gravy train careens into a ditch. Less capital means fewer loans. Fewer loans mean house prices are no longer supported by debt. Given that they stopped being supported by incomes a long time ago, there's nothing left to prop the thing up. So it will certainly be different this time around. Every financial crisis is different in its own way.
- paulpauper 4y agoSo it will certainly be different this time around. Every financial crisis is different in its own way. But financial crisis are rare despite all the media attention they get. Just two major crisis in the past 100 years: 1929 and 2008. There were some smaller ones but nothing compared to those two. So it's more probable that this too will not become a full-blown crisis.
- petewailes 4y agoYou're missing 37-38, 45, 53, 58, 73, 81 and 90, and that's just the ones I can't think of off the top of my head. I'm sure there's probably double that number I can't remember, because they don't intersect with my areas of professional study. 29 was huge (way bigger than 08), but many of those others were in the ballpark of 08 or larger. As far as I'm aware, it's unlikely we'll ever see another as large as 29, but 08 sized? I'd expect another within 30-50 years of it.
- t_mann 4y agoWhile this may sound reminiscent of the 2008 crisis, I think there are some important differences according to the article: In 2008 the fundamental problem were defaults - people just weren't meeting their mortgage payments (and lots of financial engineering that spread the losses in ways nobody understood beforehand). This sounds like the problem is mainly related to rising interest rates, through a number of channels: 1) less demand for loans and thus less top-line revenue, 2) lower value of fixed-rate loans in wholesale markets (on which they seem to have relied), and potentially 3) higher refinancing costs if they didn't hedge out the interest rate risk in their books (fixed interest income, floating interest expenses). Banks generally hedge out these risks because regulation forces them to be very conservative in their risk management, but here it seems we're mostly talking about non-banks, so they may have fallen for the temptation of a little short-term profitability boost by saving on interest rate protection. I'm not saying that defaults aren't a problem, especially in this extremely high-risk subprime business that we seem to be talking about here, but there is some hope to think that those might be less bad this time. We're seeing a lot of inflation, and if wages keep pace with prices (conceivable in a time of low unemployment) then the burden of debt service on fixed-rate mortgages would actually become smaller in proportion to the overall household budget. Of course, there are still a lot of ways things could go quite wrong re defaults (eg prices have been skyrocketing in a lot of areas, if those start to plunge anything is on the table, even strategic defaults). But it's interesting to note that lenders can also face problems unrelated to defaults. I'm also curious how those actors (usually insurances) who took the floating end of interest rate swaps during the lows are doing now.
- JackFr 4y agoTo reiterate and sum up - during the crisis the price of mortgage backed assets was declining in a very low rate environment because of increased risk of default. In the current environment the price of mortgage backed assets are declining because of a high rate environment. Both are bad for non-bank lenders who are typically fairly leveraged and rely on short term lines of credit for that leverage. The big difference is that the underlying loans are still money-good, they’re just paying a low rate of interest.
- 4y ago
- ClassicOrgin 4y agoA concern I’ve had here in Florida is that we’ve had people move here and buy homes that are “affordable” with their remote NYC/SF based jobs. But, these same homes wouldn’t be affordable to them with local jobs because the salaries are so lower here. The banks didn’t consider it a factor when lending to them. If the tech layoffs continue this could be a real problem.
- 1270018080 4y agoSomeone getting laid off and having to take a lower paying job isn't something new that came with remote work. Remote work isn't going away either, and tech layoffs are marginal despite the headlines/clicks they generate.
- shaburn 4y agoregional wage delta spread is novel. it was one of the primary motivators of remote work
- yababa_y 4y agoThe entire industry is only a few million people, it’s hard to imagine that could impact so many people that is systemically unbalances the lenders.
- shaburn 4y agoHave you seen tech incomes relative to anything in the last decade? Then net out finance, law, real estate, and media that all profited off the tech sector. thank janet yellen and zero rates
- conanbatt 4y agoThe amount of properties that change hands are very few also. A net influx of people changes any local economy. What the OG poster misses is that their income is now a local income - so local incomes also rise.
- shaburn 4y ago
- tppiotrowski 4y agoWhere do non-bank mortgage lenders get the money to lend out? A bank gets money from depositors that it lends out but I don't understand how a non-bank mortgage company works.
- tinus_hn 4y agoThey can borrow it as well. It’s all just based on the expectation they’ll be able to pay it back. That is why the whole house of cards collapses when it suddenly turns out they actually can’t, because the risk is higher than expected, their insurance collapses or something like that.
- tppiotrowski 4y agoSo is it possible that banks are not financing mortgages directly but financing mortgage lending companies instead? This just seems silly.
- tinus_hn 4y agoIf you save at the bank you are financing the bank lending to mortgage companies. What’s the difference? It’s all about using money with a predictable amount of risk and reward.
- chrisBob 4y agoI see that the rising rates is part of the cause. Why were rates so low? My mortgage is financed at 2.25%, but it seems obvious that the Federal Discount Rate rate would rise over the 30 years of the mortgage. Why do 30 year mortgage rates follow the Fed rate so closely in the first place?
- grumpymouse 4y agoPart of the 2008 crisis was maturity mismatch of assets and liabilities. That's a fancy way of saying 'I get paid in 3 weeks but I have to pay the gas bill tomorrow'. If you lend money that's paid back over a long period of time (like a mortgage) and you're funding it by borrowing money that needs to be paid back much sooner, you're going to have difficulties when the market moves to make that short-term funding less available. It's a fundamentally risky position to be in. Banking regulation introduced since the 08 crisis (Basel III) forces banks to rein in these mismatches, but per the article many of these lenders are not banks..