3 ms·

So the standard mortgage rate is agreed on as "official inflation rate + x%"?

lazide 4y ago
Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.
- luckylion 4y ago
  Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
  - lazide 4y ago
    Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.
refurb 4y ago
No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).
- lazide 4y ago
  FYI, while the Fed was doing QE, they were buying almost all mortgage bonds. That was a core part of the program. It’s in the trillions. So yes, what you’re describing is true - but it has been extremely distorted for a very long time, intentionally. [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] [https://www.cbo.gov/system/files/2022-09/57519-balance-sheet.pdf https://www.cbo.gov/system/files/2022-09/57519-balance-sheet...]

Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.

luckylion 4y ago
Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
- lazide 4y ago
  Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.

refurb 4y ago

No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).

lazide 4y ago
FYI, while the Fed was doing QE, they were buying almost all mortgage bonds. That was a core part of the program. It’s in the trillions. So yes, what you’re describing is true - but it has been extremely distorted for a very long time, intentionally. [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] [https://www.cbo.gov/system/files/2022-09/57519-balance-sheet.pdf https://www.cbo.gov/system/files/2022-09/57519-balance-sheet...]