7 ms·

Not a particularly insightful article, but I suspect mortgages have a big part. If you're locked into a 2.5% mortgage trading that for 7% is a tough sell, given

Not a particularly insightful article, but I suspect mortgages have a big part. If you're locked into a 2.5% mortgage trading that for 7% is a tough sell, given property values feel pretty flat.

bryanlarsen 3y ago
Which is an odd state of affairs. Banks don't want that 2.5% mortgage on their books, so they should be offering incentives to get people off that mortgage. For example, offering a 4% rate to anybody holding a 2.5% mortgage would be a huge win-win for both sides.
- fallingknife 3y ago
  Banks hold almost no individual mortgage debt on their books. They are almost all packaged into agency securities backed by Fannie and Freddy
- bluGill 3y ago
  Banks don't care though, as they are not holding the mortgage, they are just servicing it. The mortgage itself is held by Freddy-Mac/Fanny-Mae, and sold on to bond holders. The bank is just charging a fee to service the loan, but the loan itself is on someone else's books. The above isn't 100% true, some banks do hold onto their own mortgages. However it is sill reasonable accurate.
  - bryanlarsen 3y ago
    That should make it even easier. If it has been securitized, the value of that security is way below par value. For example, your $500,000 mortgage at 2.5% might only be worth $300,000 on the open market. Somebody could buy that mortgage backed bond for $300,000 and offer you a $500,000 mortgage at 4% in exchange, resell that mortgage for $400,000 and pocket the $100,000 difference. If I understand correctly, this is how the Danish mortgage system works.
    - paul_f 3y ago
      Good idea, but mortgages are bundled together. You cannot split one off.
      - bryanlarsen 3y ago
        The owner of the bundle can.
    - antisthenes 3y ago
      Yes, well, the hiccup in your plan is someone voluntarily going from a 2.5% mortgage to a 4% mortgage. The incentive you would have to offer would erase most of that $100,000 difference you pulled out of a hat.
      - bryanlarsen 3y ago
        The incentive is the ability to move to a city with jobs without having to take on a 7% mortgage.
      - afavour 3y ago
        I’m not sure it’s quite that simple. I got a mortgage at 3% some years ago for an apartment. Since then we’ve had two kids and paid off a chunk of the mortgage with our monthly payments. At this stage in my life I’d absolutely be looking to convert that into buying a larger home and would be happy to pay a higher rate for it to happen. But not literally double, which is where rates are today.
    - zeroonetwothree 3y ago
      Why would you want to take this agreement? It’s equivalent to borrowing more against your house which isn’t inherently good. And we already have HELOC for people that want it
      - toast0 3y ago
        The proposed offer is to get a 4% loan on a different house in exchange for paying off the 2.5% loan on the existing home. It's good for the bank for obvious reasons, and it's good for the borrower (potentially) because it reduces the cost of moving.
  - wanttocomment 3y ago
    [flagged]
    - greenie_beans 3y ago
      [flagged]
      - deleted 3y ago
        [deleted]
      - wanttocomment 3y ago
        [flagged]
- mizzao 3y ago
  They already resold that 2.5% mortgage; some other party bears the risk now.
- xmcqdpt2 3y ago
  You mean offering a 4% rate on a new home right? Otherwise it's only a win for the bank! It's complicated with mortgages because, in the US, mortgages are mostly securitized and resold. This covers 65% of mortgages in 2022 according to https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1001.pdf https://www.newyorkfed.org/medialibrary/media/research/staff... So your mortgage isn't directly on your bank's book. The bank sold it, and then likely bought it back but as part of an MBS. In the US, there are a lot of small banks that rely on this to reduce their exposure to property prices in the local area they originate mortgages in.
- tclancy 3y ago
  Things don't work that way plus you're talking about having a loan for X at 2.5% and trying to offset it with a rate below the current market rate on what is likely a larger number than X and more years. Often substantially higher for both.
- lotsofpulp 3y ago
  > For example, offering a 4% rate to anybody holding a 2.5% mortgage would be a huge win-win for both sides. Why would they do that when the US government is paying 4%+, and is much more creditworthy than an individual? That is why a 30 year fixed home mortgage is ~6%+. Individuals have to pay a premium since they do not have the power to print USD, and so more default risk has to be priced in. Plus the labor expenses of underwriting and issuing a new loan.
  - bryanlarsen 3y ago
    Yes, that is exactly why the mortgagee would want to get rid of the 2.5% mortgage. It's worth maybe half of its par value. So if the mortgager wants to get rid of the mortgage so they can move, and the mortgagee wants to get rid of the mortgage because it's worth only half of its par value, there should be a massive incentive for a fair deal to happen. Instead, the only option is for the mortgager to pay off the par value, which is a huge windfall for the mortgagee and a rip-off for the mortgager. So the mortgager decides not to move and everybody loses.
    - lotsofpulp 3y ago
      > So if the mortgager wants to get rid of the mortgage so they can move, The borrower wants to sell the house, so their main concern for the sale of their house is to earn enough from the sale to pay off the mortgage and be able to buy another house. In which case a higher new mortgage interest rate for the new house could be offset by lower house prices, but supply and demand have not recalibrated to that (yet). But of course, selling a house is not between the mortgage borrower and mortgage lender, it is between the homeowner and the potential new mortgage borrower, so there is an additional party involved whose needs need to be met. > and the mortgagee wants to get rid of the mortgage because it's worth only half of its par value, there should be a massive incentive for a fair deal to happen. The lender can sell the mortgage debt anytime it does not want it (and probably has anyway). The lender is currently deciding to lend to the government, at 4%, or an individual homeowner (or whatever others borrower). Of course, if the least risky entity is giving you 4%, then everyone else needs to give you more than 4%. Interest rates from previously issued mortgages are not relevant in making the decision for which interest rate to lend at now.
- refurb 3y ago
  Banks don’t hold mortgages on their books.
- mindvirus 3y ago
  More straightforward in my mind would be letting people buy their mortgages. In a world of 7% mortgages, a 2.5% mortgage would only trade at ~68% of its value assuming they're both 10 years.
  - bryanlarsen 3y ago
    You may want https://en.wikipedia.org/wiki/Mortgage_industry_of_Denmark https://en.wikipedia.org/wiki/Mortgage_industry_of_Denmark
  - aidenn0 3y ago
    I don't know why I never thought until this moment about buying my mortgage. That seems super advantageous over just paying it off (or buying some other debt at par, since there is zero credit risk on a loan to myself).
mdtancsa 3y ago
The graph was trending down (if the #s are to be actually reliable) since the late 2000s, which was a consistent period of cheap money / low interest rates. If the recent higher interest rates were the driving factor, you would think the trend line would have been more stable leading up to Covid and then higher rates.

Not a particularly insightful article, but I suspect mortgages have a big part. If you're locked into a 2.5% mortgage trading that for 7% is a tough sell, given property values feel pretty flat.

bryanlarsen 3y ago

Which is an odd state of affairs. Banks don't want that 2.5% mortgage on their books, so they should be offering incentives to get people off that mortgage. For example, offering a 4% rate to anybody holding a 2.5% mortgage would be a huge win-win for both sides.

fallingknife 3y ago
Banks hold almost no individual mortgage debt on their books. They are almost all packaged into agency securities backed by Fannie and Freddy
bluGill 3y ago
Banks don't care though, as they are not holding the mortgage, they are just servicing it. The mortgage itself is held by Freddy-Mac/Fanny-Mae, and sold on to bond holders. The bank is just charging a fee to service the loan, but the loan itself is on someone else's books. The above isn't 100% true, some banks do hold onto their own mortgages. However it is sill reasonable accurate.
- bryanlarsen 3y ago
  That should make it even easier. If it has been securitized, the value of that security is way below par value. For example, your $500,000 mortgage at 2.5% might only be worth $300,000 on the open market. Somebody could buy that mortgage backed bond for $300,000 and offer you a $500,000 mortgage at 4% in exchange, resell that mortgage for $400,000 and pocket the $100,000 difference. If I understand correctly, this is how the Danish mortgage system works.
  - paul_f 3y ago
    Good idea, but mortgages are bundled together. You cannot split one off.
    - bryanlarsen 3y ago
      The owner of the bundle can.
  - antisthenes 3y ago
    Yes, well, the hiccup in your plan is someone voluntarily going from a 2.5% mortgage to a 4% mortgage. The incentive you would have to offer would erase most of that $100,000 difference you pulled out of a hat.
    - bryanlarsen 3y ago
      The incentive is the ability to move to a city with jobs without having to take on a 7% mortgage.
    - afavour 3y ago
      I’m not sure it’s quite that simple. I got a mortgage at 3% some years ago for an apartment. Since then we’ve had two kids and paid off a chunk of the mortgage with our monthly payments. At this stage in my life I’d absolutely be looking to convert that into buying a larger home and would be happy to pay a higher rate for it to happen. But not literally double, which is where rates are today.
  - zeroonetwothree 3y ago
    Why would you want to take this agreement? It’s equivalent to borrowing more against your house which isn’t inherently good. And we already have HELOC for people that want it
    - toast0 3y ago
      The proposed offer is to get a 4% loan on a different house in exchange for paying off the 2.5% loan on the existing home. It's good for the bank for obvious reasons, and it's good for the borrower (potentially) because it reduces the cost of moving.
- wanttocomment 3y ago
  [flagged]
  - greenie_beans 3y ago
    [flagged]
    - deleted 3y ago
      [deleted]
    - wanttocomment 3y ago
      [flagged]
mizzao 3y ago
They already resold that 2.5% mortgage; some other party bears the risk now.
xmcqdpt2 3y ago
You mean offering a 4% rate on a new home right? Otherwise it's only a win for the bank! It's complicated with mortgages because, in the US, mortgages are mostly securitized and resold. This covers 65% of mortgages in 2022 according to https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1001.pdf https://www.newyorkfed.org/medialibrary/media/research/staff... So your mortgage isn't directly on your bank's book. The bank sold it, and then likely bought it back but as part of an MBS. In the US, there are a lot of small banks that rely on this to reduce their exposure to property prices in the local area they originate mortgages in.
tclancy 3y ago
Things don't work that way plus you're talking about having a loan for X at 2.5% and trying to offset it with a rate below the current market rate on what is likely a larger number than X and more years. Often substantially higher for both.
lotsofpulp 3y ago
> For example, offering a 4% rate to anybody holding a 2.5% mortgage would be a huge win-win for both sides. Why would they do that when the US government is paying 4%+, and is much more creditworthy than an individual? That is why a 30 year fixed home mortgage is ~6%+. Individuals have to pay a premium since they do not have the power to print USD, and so more default risk has to be priced in. Plus the labor expenses of underwriting and issuing a new loan.
- bryanlarsen 3y ago
  Yes, that is exactly why the mortgagee would want to get rid of the 2.5% mortgage. It's worth maybe half of its par value. So if the mortgager wants to get rid of the mortgage so they can move, and the mortgagee wants to get rid of the mortgage because it's worth only half of its par value, there should be a massive incentive for a fair deal to happen. Instead, the only option is for the mortgager to pay off the par value, which is a huge windfall for the mortgagee and a rip-off for the mortgager. So the mortgager decides not to move and everybody loses.
  - lotsofpulp 3y ago
    > So if the mortgager wants to get rid of the mortgage so they can move, The borrower wants to sell the house, so their main concern for the sale of their house is to earn enough from the sale to pay off the mortgage and be able to buy another house. In which case a higher new mortgage interest rate for the new house could be offset by lower house prices, but supply and demand have not recalibrated to that (yet). But of course, selling a house is not between the mortgage borrower and mortgage lender, it is between the homeowner and the potential new mortgage borrower, so there is an additional party involved whose needs need to be met. > and the mortgagee wants to get rid of the mortgage because it's worth only half of its par value, there should be a massive incentive for a fair deal to happen. The lender can sell the mortgage debt anytime it does not want it (and probably has anyway). The lender is currently deciding to lend to the government, at 4%, or an individual homeowner (or whatever others borrower). Of course, if the least risky entity is giving you 4%, then everyone else needs to give you more than 4%. Interest rates from previously issued mortgages are not relevant in making the decision for which interest rate to lend at now.
refurb 3y ago
Banks don’t hold mortgages on their books.
mindvirus 3y ago
More straightforward in my mind would be letting people buy their mortgages. In a world of 7% mortgages, a 2.5% mortgage would only trade at ~68% of its value assuming they're both 10 years.
- bryanlarsen 3y ago
  You may want https://en.wikipedia.org/wiki/Mortgage_industry_of_Denmark https://en.wikipedia.org/wiki/Mortgage_industry_of_Denmark
- aidenn0 3y ago
  I don't know why I never thought until this moment about buying my mortgage. That seems super advantageous over just paying it off (or buying some other debt at par, since there is zero credit risk on a loan to myself).

mdtancsa 3y ago

The graph was trending down (if the #s are to be actually reliable) since the late 2000s, which was a consistent period of cheap money / low interest rates. If the recent higher interest rates were the driving factor, you would think the trend line would have been more stable leading up to Covid and then higher rates.