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Requiem for a bank loan
- cwillu 3y agoActual title is “Requiem for a bank loan”, we don't need to repeat the domain name.
- cypherpunks01 3y agoThis is a great rule of thumb: "a 1% increase in prevailing interest rates decreases the value of the loan by approximately 1% per year of duration". Especially good to keep in mind for borrowers who are trying to negotiate payoff amounts for fixed term loans. A 5% interest rate increase means you can potentially negotiate a loan payoff for significantly less than you owe for loans that have multiple years remaining. Has anyone been successful at this for consumer loans recently?
- wewtyflakes 3y agoThat is a neat idea; a calculator to plug in the numbers and get back a hypothetical payoff number. It would be also neat if we could track which lenders are willing to take the deal; it may lead to people preferentially using them in the future.
- hospitalJail 3y agoI dont totally understand this. Do you mean that you could refinance it to defeat the rule of thumb?
- sokoloff 3y agoSuppose I owe you a million dollars for 30-years at a fixed rate of 5%. If the prevailing rates are 5% or less (and you think I'll remain solvent), there's no real reason for you to take less than face value if I agree to pay it off now. Suppose then prevailing rates go up to 10%. Now you have incentive to take less than a million dollars if I pay it off now. You could take the million bucks and lend it back out at 10% now, but you're stuck with 5% with me. The question is "how much incentive/how much less would you rationally take?"
- jagged-chisel 3y agoBut the bank is in the position to “create money” to loan at 10% while also making that 5% on you. I don’t think it’s realistic to expect the bank to be interested in taking your (lower) payoff specifically to loan it at a higher rate.
- pwatsonwailes 3y agoDepends how many people come back willing to sell their loans, and what that does to the liquidity position of the bank, and their current intentions regarding investment and the capital requirements to execute that.
- sokoloff 3y agoThey still have reserve requirements, meaning the total money they can lend out isn't infinite and therefore the money they lent to me they might wish to have back and lend it out to someone else at the higher rate.
- AnthonyMouse 3y ago> They still have reserve requirements Do they? https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm > meaning the total money they can lend out isn't infinite and therefore the money they lent to me they might wish to have back and lend it out to someone else at the higher rate. That's assuming they have someone else to lend it out to who is not only equally creditworthy, but equally creditworthy at the higher interest rate and therefore payment amount.
- shawabawa3 3y agoBy that logic you would expect banks to create infinite money and drive interest rates down to 0.00001%. the fact that doesn't happen should hint that you've misunderstood how banks work
- stocknoob 3y agoBanks have a reserve ratio. The money lent suboptimally to you at 5% has an opportunity cost.
- lend000 3y agoSomeone clever enough to try this might also just invest their cash in treasuries and cut out the middleman's fees, unless you think you know better than the bank that interest rates will be coming down soon and the opportunity will evaporate (banks are not great at predicting market conditions as showcased recently by SVB and company but I wouldn't do it personally without some edge). Edit: Although if the bank was mismanaged into a bad liquidity situation, they might want to offer an even better price than the difference between treasuries would provide as incentive.
- gigel82 3y agoI got a chuckle out of that... I'd be very interested in hearing if this was ever done in the history of consumer loans (from a reputable financial institution). Don't get me wrong, I've got a 4% mortgage so would totally go for some of that "reduced loan payoff" stuff, but it's not realistic.
- dmoy 3y agoLikely not for mortgages at least, since those get packaged and securitized like immediately
- nradov 3y agoI'm pretty sure that consumer lenders will never negotiate with borrowers to allow paying off a loan in good standing for less than the balance. Usually they're only willing to negotiate if you're already in default, and your credit rating will take a hit either way. In many cases the loan will have already been securitized and sold to an outside investor so the servicer that you deal with might not even have the contractual authority to negotiate with you.
- bombcar 3y agoThis is correct. The only time you will get a chance to do this with a non-commercial loan (like a massive loan on a factory, etc) is if you got a loan that was so short term that the bank didn't bother selling it, and kept it in house. Then there is a slight chance that you can convince the bank to give you a bonus for refinancing with them.
- loeg 3y agoYeah, I've thought there should be a cash-out mortgage refinancing product for monetizing the difference between my 2.5% mortgage and prevailing rates north of 5%. Unfortunately, I don't think there is.
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- BlandDuck 3y agoIn Denmark this is a standard feature of fixed-rate mortgages. The rate for fixed rate mortgages is now around 4-5% p.a. If you had taken out a 30-year fixed rate mortgage for $100k when rates were around 1%, you can now prepay it for just $70k, i.e., at around a 30% discount. Another interesting feature is that the mortgage can stay with the property when it is sold (subject to the lender approving the new owner). This means that the current economic value of the mortgage can be factored into the purchase price.
- loeg 3y agoInteresting! > If you had taken out a 30-year fixed rate mortgage for $100k when rates were around 1%, you can now prepay it for just $70k, i.e., at around a 30% discount. Maybe this is a dumb question, but could you finance the prepayment with a new mortgage?
- beezle 3y agoBetter: a 100 bp increase in prevailing interest rates... edit to add: Also, in the context of loans/notes/bonds, duration refers to sensitivity of the price of the instrument to a small change in interest rates. Knowing the duration of the instrument is all you need, it is very odd to say 'by approximately 1% per year of duration' If the duration is 4 yrs, a 100bp increase in rates will result in a 4% decline in the price of the bond.
- SilasX 3y agoThe idea came up before on HN[1], where the upshot is, banks don't do this, because if they sell the loan at all, they sell a bunch at once, and there are game-theoretic reasons not to encourage this kind of deal. But Denmark gives you the right to buy your mortgage back under that formula, meaning you benefit from interest rates going both up and down.[2] [1] https://news.ycombinator.com/item?id=31189814 https://news.ycombinator.com/item?id=31189814 [2] https://news.ycombinator.com/item?id=32813598 https://news.ycombinator.com/item?id=32813598
- btilly 3y agoNo, you can't negotiate that. The problem is that the bank is carrying the loan on its books and pretending it has full value. Negotiating that improves their actual financial position, but requires recognizing the loss that they are trying to ignore. If the stop ignoring it then they are possibly going to fail. That is why the banking sector badly needs such a giant bailout right now.
- HWR_14 3y agoIt's not that they are pretending it has full value. They keep (some) loans on their books valued at "to maturity" not "to market". That's perfectly reasonable. The main problem is if they switch any loan from "to maturity" to "to market", every loan has to switch or none.
- toast0 3y agoIt's a units problem. Dollars today are not worth dollars tomorrow, there needs to be a conversion. You can argue about what the conversion should be, maybe mark to market isn't right for reasons, but it's a reasonable baseline guess. If you want to estimate current dollars, and forecast dollars at the end of the month, quarter, year, etc; that's fine too, and would probably give a better picture of the books than wrong math where current and future dollars are compared directly as if they were the same.
- HWR_14 3y agoThe thing is most of the time current dollars don't matter to a bank. They get money over a long period and then pay money out to account holders over a long period as well.
- Cullinet 3y agoBook value accounting only works if you have matching regulatory or matching duration capital for the original loan. Mortgage banks drove the UK bankrupt cap in hand to the IMF in 73 with far far less of a rates delta than is happening now. Edit : there was a similar breakdown of society as is happening already today almost everywhere , back in 73 in the UK. The main difference is that the banks managed to put much more of the pain onto the common man since then.
- bandrami 3y agoIt's a great reminder that a policy of secularly low inflation is a gift to creditors at the expense of debtors. Inflation wiped out more real student debt in 2022 than the forgiveness program attempted to.
- wonnage 3y agoOnly true if your earnings kept up with inflation
- bandrami 3y agoNo, the real value of the debt still fell even if your real earnings did too.
- user_named 3y agoNo
- ryandrake 3y ago> So I had a brief negotiation with First Republic, where I asked for (and got) a $100,000 credit line “for cash management purposes.” My recollection is that this took less than two hours total, inclusive of time to write the loan application. Fascinating look at a world that I just kind of assumed was only for the ultra-wealthy. Who knew one could simply stroll into a bank, and two hours later and a couple of signatures and handshakes, simply walk out with a $100K unsecured line of credit! Mind blown. I always just assumed that you had to show $millions in net worth or be some kind of Investment Banking super-partner to the bank in order to get such generous treatment. Or at least secure the credit with something. Wow.
- lief79 3y agoHe already had 100k in other accounts, and not just retirement savings. He was a safe bet.
- resolutebat 3y agoThere was nothing stopping Patrick from clearing out his other accounts, spending his line of credit on hookers and blow, and returning to Japan before the bank started knocking on his door.
- WalterBright 3y agoThat's why people who have good credit ratings get better terms.
- di4na 3y agoNothing stopping you to do something does not mean it is a likely event to happen ;) As you can see, the product selection of users and ongoing results shows that really well.
- hcknwscommenter 3y agoUnfortunately, your intuition is largely correct. The First Republic product was unique, and basically a marketing tool (as the article does explain). Typical unsecured rates for loans to individuals are floating, calculated as (libor/sofor) + some market rate, or maybe just prime+. The market rate can be quite high.
- BSEdlMMldESB 3y agoI'm interested "the metaphysics" of credit emission too bad this is not publicly permitted, I fear this stuff only gets discussed in private (occulted) societies and 'back rooms' (or private lounges) with lots of wooden furniture (I imagine) when somebody emits a credit for somebody else, they've set a requirement for the future, this has consequences that ain't so simple; and what's worse, that are all taboo to discuss with 'randos' (outsiders of any sort)
- Biologist123 3y agoThere’s some interesting ideas here of the type I’m interested in. Can you eleborate a little further?
- BSEdlMMldESB 3y agosure. but not here and not right now.
- NotYourLawyer 3y agoI don’t understand your question.
- BSEdlMMldESB 3y agomakes perfect sense: you see, I did not ask any questions. It was a complaint. also my comment settled at -2 points.
- NotYourLawyer 3y agoI don’t understand your complaint then.
- Biologist123 3y ago> The fundamental purpose of bank loans is to enable measured private risk-taking by leveraging a small amount of bank equity (from risk-taking investors) with a larger amount of risk-adverse deposits. Sometimes the risks are opening a restaurant or buying an apartment building in an up-and-coming neighborhood; here the risk was a crash project to build charitable medical infrastructure during a crisis. This is central to the author’s defence of the social importance of banks. And if only it were true, banks really don’t finance small businesses in a meaningful way anymore. At least not in the UK.
- rossdavidh 3y agoI have known people in the US who got 5-digit business loans to start their business. Not that they _should_ have been given those loans, mind you; restaurants are a horrifically high-flameout business in the US. But it happens.
- FormerBandmate 3y agoWhere do you think developers get their money?
- patio11 3y agoI sometimes joke that my investors in my first two software companies were Visa and Mastercard (i.e. I was actually loaned money from two large American banks) and by exit they made ~$20k in interest payments. I’m annoyed that signature loans have almost disappeared for small businesses, but the amount of credit extended to small businesses is not small. (Particularly if one does not exclude small real estate businesses from the definition of small business.)
- di4na 3y agoI uh. Check my small rural town high street. Check my small rural town industrial zone and friends that opened factories there. Check my own experience with bank when launching a bootstrapped company Banks definitely do loans for SMB. A lot.
- rossdavidh 3y agoMatt Levine (Bloomberg) has discussed recently, how it is not entirely out of the question that the basic idea of any bank "investing long-term" (i.e. loans, T-bills, etc.) with the money from short-term deposits, might be dying. The deposit money is far, far easier to pull out now, and since bank-runs are self-fulfilling prophecies...
- FormerBandmate 3y agoThat is the entire foundation of the economy. It is not dying, but we are all fucked if it does
- NotYourLawyer 3y agoNah the government could shore it up pretty easily. Just get rid of the cap on FDIC coverage and bank runs aren’t really a problem anymore.
- rossdavidh 3y agoOne theory is that private equity that needs to find places to invest, will provide the cash, and banks provide the places to invest it. In other words, the taking-deposits and the providing-loans parts of banks would no longer be connected to each other. Don't know if it will actually happen that way, of course.
- mattclarkdotnet 3y agoI'd be curious to hear @patio11's thoughts on how much the prevalence of fixed rate loans in America influences the high rate of bank failures. IIRC the USA is one of only a few developed countries to have this system (Germany is another but the housing market there is much more rental based). Most others have variable rates, so banks simply raise the rates when interest rates go up. This has other consequences, specifically for consumer ability to service those loans, but it does help stop banks from going under. To the extent there were problems in the UK and Australia for example, they were largely fixed by regulatory changes after the GFC.
- donavanm 3y agoI think youre slightly underestimating the prevalence of fixed term loans. While 30 years is most common to the US and nordics there are lot in the 5-10 year range globally. I vaguely recall something like 30-50% of loans being this type of fixed range globally. Can you explain more about why fixed terms are related to bank failures? IME very very few loans are held by the issuing bank. Almost all are resold, bundled & securitized, and then resold again as long term debt. Im missing why the bank would care that someone defaults later on. Its
- mattclarkdotnet 3y agoIt’s kind of the entire thesis of the piece that marking to market of fixed rate loans in a rising interest rate environment is what made First Republic insolvent. So you should ask @patio11 that question not me. Fixed interest rate loans do exist elsewhere but they tend to be fixed for a fairly short period relative to loan duration, and constitute a much smaller part of the book, so between the two effects you might be looking at an order of magnitude of difference between US banks and say Australian banks in terms of interest rate exposure. And then there’s the bit where the US simply opted all its banks except the big 4 out of Basel III regulation, which is why First Republic could exist in the first place, and only exist in the US.
- bullen 3y agoTo borrow is war with other means.