4 ms·

in the US I find it strange that the mortgage interest rate is almost always fixed for the life of the mortgage. If you took a mortgage at 2% which is well abov

by fy20 4y ago

in the US I find it strange that the mortgage interest rate is almost always fixed for the life of the mortgage. If you took a mortgage at 2% which is well above the Fed's interest rate, then isn't the lender loosing money? Or is that not how it works? I'm from the UK where mortgages can fixed for a definite period, usually 2-5 years, then it changes to a variable rate mortgage (with the same provider), but there's always the option of choosing variable from the start. The variable part is a margin + the Bank of England base rate. I now live in Europe and here it's the same, except basically nobody chooses a fixed rate mortgage. The monthly repayments are recalculated every six months using the current EURIBOR rate - which is set by a group of banks themselves, not the European Central Bank (it sounds a lot like a cartel). Either way, I'm buying a house now when interest is the highest it's been for over a decade, but it doesn't really bother me as it will drop at some point and my monthly payments will go down.

rr808 4y ago
Yeah US has a weird system. The mortgages are packaged up and sold as a bond, so the investor who buys the bond has the interest rate and credit risk. If rates go up the value of these long term bonds go down. The bank or company that sold the original mortgage is protected. https://en.wikipedia.org/wiki/Mortgage-backed_security https://en.wikipedia.org/wiki/Mortgage-backed_security. It really relies on a lot of government coordination.
JumpCrisscross 4y ago
> which is well above the Fed's interest rate, then isn't the lender loosing money? There is a unique market for long-term rates hedging among American mortgage traders. And the government backstops the risk. Keep in mind, too, that America uses capital markets. Most of the world uses banks. (The U.K. being a puzzling counterfactual.)
lotsofpulp 4y ago
This link might help explain the taxpayer subsidies that result in the 30 year fixed with no prepayment penalty: https://himaxwell.com/resources/blog/30-year-fix-3-gse-reform-fate-30-year-mortgage/ https://himaxwell.com/resources/blog/30-year-fix-3-gse-refor...
topspin 4y ago
> the mortgage interest rate is almost always fixed It's policy. The New Deal created a secondary mortgage market through Fannie Mae (and later Freddy Mac) that normalized mortgages to 30 year fixed. There are many ways to structure mortgages in the US and not all mortgages are fixed, but the typical mortgage is because those mortgages are the most liquid given the structure of the US secondary mortgage market.
xenadu02 4y ago
I don't know why you'd want to deal with the European or UK system. It means your housing payment can fluctuate, possibly dramatically, due to actions entirely outside your control. Mortgages in the US generally don't have a payoff penalty after a certain amount of time (and some don't have one at all) so in a falling interest rate scenario you can simply refinance. To answer your question: the ultimate buyers (or should I say ultimate lenders) are taking the interest rate upside risk in exchange for stability. Mortgages just don't lose much money. When defaults are high they lose out on future interest and may take principle haircuts but they don't evaporate. Even most of the garbage from the 2007 financial crisis eventually recovered as housing recovered - comparatively few of the actual mortgages were written off. If you want that kind of stability you can buy US Treasuries to earn 1% (or even less). Or you can get into mortgages and earn 2.5% for almost the same risk. Those rates would be higher today of course since the fed is raising rates. You might rightly say that LIBOR or whatever rates don't fluctuate that much... in which case the same argument applies to the risk lenders take on in the US market.

by fy20 4y ago

rr808 4y ago

Yeah US has a weird system. The mortgages are packaged up and sold as a bond, so the investor who buys the bond has the interest rate and credit risk. If rates go up the value of these long term bonds go down. The bank or company that sold the original mortgage is protected. https://en.wikipedia.org/wiki/Mortgage-backed_security https://en.wikipedia.org/wiki/Mortgage-backed_security. It really relies on a lot of government coordination.

JumpCrisscross 4y ago

> which is well above the Fed's interest rate, then isn't the lender loosing money? There is a unique market for long-term rates hedging among American mortgage traders. And the government backstops the risk. Keep in mind, too, that America uses capital markets. Most of the world uses banks. (The U.K. being a puzzling counterfactual.)

lotsofpulp 4y ago

This link might help explain the taxpayer subsidies that result in the 30 year fixed with no prepayment penalty: https://himaxwell.com/resources/blog/30-year-fix-3-gse-reform-fate-30-year-mortgage/ https://himaxwell.com/resources/blog/30-year-fix-3-gse-refor...

topspin 4y ago

> the mortgage interest rate is almost always fixed It's policy. The New Deal created a secondary mortgage market through Fannie Mae (and later Freddy Mac) that normalized mortgages to 30 year fixed. There are many ways to structure mortgages in the US and not all mortgages are fixed, but the typical mortgage is because those mortgages are the most liquid given the structure of the US secondary mortgage market.

xenadu02 4y ago

I don't know why you'd want to deal with the European or UK system. It means your housing payment can fluctuate, possibly dramatically, due to actions entirely outside your control. Mortgages in the US generally don't have a payoff penalty after a certain amount of time (and some don't have one at all) so in a falling interest rate scenario you can simply refinance. To answer your question: the ultimate buyers (or should I say ultimate lenders) are taking the interest rate upside risk in exchange for stability. Mortgages just don't lose much money. When defaults are high they lose out on future interest and may take principle haircuts but they don't evaporate. Even most of the garbage from the 2007 financial crisis eventually recovered as housing recovered - comparatively few of the actual mortgages were written off. If you want that kind of stability you can buy US Treasuries to earn 1% (or even less). Or you can get into mortgages and earn 2.5% for almost the same risk. Those rates would be higher today of course since the fed is raising rates. You might rightly say that LIBOR or whatever rates don't fluctuate that much... in which case the same argument applies to the risk lenders take on in the US market.