7 ms·

The 30-year mortgage is an intrinsically toxic product (2018)

52 points by kristianp 3y ago

roenxi 3y ago
It goes a lot deeper than the 30 year mortgage. The entire US financial system seems to be premised on the idea that free markets aren't reckless enough and that they needed to be pushed out into riskier territory. 30 year mortgages are one aspect of this strategy. Pumping money into stock and bond markets via the fed and the "President's Working Group on Financial Markets" are another wing drawing money into riskier assets. Listening to Peter Schiff talking about what happened when he tried to open a full reserve bank was also eye opening (spoilers: banking regulators do not like full reserve banks). I feel it is unfair that capitalism is tarred with the inevitable collapses that follow. Capitalists are being pushed to the brink here. The regulators are where the push comes from that forces the US economy to take far more risk than is sensible.
- zhte415 3y ago
  US 30 year mortgage, fixed rate as they are, are risk subsidised by Fannie Mae and Freddie Mac. It's a regulatory subsidy of the mortgage and ex-mortgage home owning class. That 'problem' is caused by regulation, structural regulation, not day-to-day regulatory enforcement or change. So where does that risk 'go'? Where do you suggest? What can regulators do to un-risk the risk that's been un-risked/passed on from those that take out mortgages?
  - roenxi 3y ago
    I'm not sure I follow the question, but presumably the people borrowing the money aren't bearing it and the people lending the money probably aren't stupid enough to lend money for 30 years at fixed interest rates. So by elimination, the the people holding the bag are probably the taxpayers. But I don't know the details of how the market works. Wouldn't surprise me if there are other quirks at play.
- psunavy03 3y ago
  This is such unadulterated bullshit. The purpose of a 30-year fixed mortgage is to build up equity over the course of someone's working career such that when it comes time for them to retire, they own their primary residence and only have to pay property tax on it until they die. This allows people to retire on a fixed income less than what they earned in the workforce, enabling their nest egg to actually BE a nest egg, and then also allows them to pass that property to their heirs, allowing for the beginning of generational wealth, if not the continuation thereof. If you rent for the same period of time, you piss away literally hundreds of thousands of dollars of home equity which you and your heirs can benefit from. But let's piss all over the greatest tool society ever created for creating generational wealth, because it's "capitalist," and that means it's icky.
  - htss2013 3y ago
    Except the average US mortgage holder buys and sells a house every 7 years. For the first 7 years the amortization schedule means you're paying almost all interest and building very little equity. You're also paying realtor fees and transaction costs each time. So while paying off a 30 year mortgage might have been to pay off the house and keep it forever, that's not how Americans treat it. They basically use it as a way to get 10-20x leverage on housing prices speculation, and if they profit, cash out 7 years later and do it again with a new house.
    - mihoda 3y ago
      1) your argument is right 2) but it hasn't been an average of every 7 years in at least 30 years. It's 13.2 years. And perhaps it shouldn't be. There's lots of foregone opportunities when you stick in a home and don't move to better employment.
cowl 3y ago
The article clearly says that it is for the US but I still can not think of a reason why that would be valid for US and not Europe for example. I'm not an economist but my math is simple. I compare the Mortgage rates with Rent rates and the fact is that Paying rent for 30 years is money sent down the drain. For an average difference of 10% you would be the owner of the house after 30 years instead of just wasting all your money on rent without anything to show for it. The whole discussion that this is a bet that your property will still hold or improve the value is meaningless, because even if it loses value (very improbable in most cases) it's still better than 0 that you are left with after paying 30 years of rent. Now all of my math is not valid anymore if you taking a mortgage as an investement and not for your first Home and maybe that is what the article is about but still the Mortgage is very helpful for many people and just because it doesnt make sense as an investment does not make it toxic.
- resolutebat 3y ago
  One big difference is that in many other countries, fixed rate mortgages are not available.
- irrational 3y ago
  We purchased a nearly 4,000 sf home on an acre 2 years ago. There are apartments within walking distance of our house that have rents higher than our mortgage payment. And not even that nice of apartments.
  - richardw 3y ago
    In Sydney. We’re renting a house for 35% of the mortgage price. And the rental is pretty crazy, so mortgage is ludicrous. Some places are just irrational.
- ozr 3y ago
  The NYT Rent v Buy calculator is pretty out of date at this point, but it's definitely not as straightforward as rent being throwing away money and a mortgage building equity. Upkeep is a non-trivial expense, opportunity costs of money put down, money still being not turned into equity via, e.g., property taxes and insurance (higher than renters), etc. Add in the bigger intangible of the flexibility you gain from renting, and it's going to be a very individual decision.
madsbuch 3y ago
if you make a bond type mortgage in Denmark, then you trade your bonds directly in the market. this has some benefits to the say home owners. They can speculate: When interest rates go up, refinance and sell you previous mortgage for cheap. When interest rates go down, refinance and reap the lower interest rates for just the refinancing costs (you can always repay this type of mortgage at rate 100). needless to say, the volatility on the bond markets had been extremely good for Danish home owners.
- breput 3y ago
  > When interest rates go up, refinance and sell you previous mortgage for cheap. Can you explain this, because it seems opposite to the rest of the world (and since this is Hacker News, world = USA). You refinance...at a higher rate, and this is a good thing long-term?
  - madsbuch 3y ago
    if you have a loan of 1m at 1% interest (yes, that was the interest in Denmark before covid), then you can sell that loan for 800k and refinance with a new loan of 5% interest. in turn you cut off 200k of your loan. This technique obviously only works under the assumption that the interest rates are going to drop long term, so you can refinance back to the lower rate later (which all of the people who made the trick believes).
    - egman_ekki 3y ago
      This up conversion can still make sense even if the interest rates don’t go down as with the 800k/5% mortgage, a larger portion of your monthly payment is made up of interest, thus also your tax bonus is higher and in net terms you can end up ahead even in time horizon of 20+ years before the down conversion.
      - madsbuch 3y ago
        Yep :)
dang 3y ago
Related: The 30-Year Mortgage Is an Intrinsically Toxic Product – By Byrne Hobart - https://news.ycombinator.com/item?id=32949987 https://news.ycombinator.com/item?id=32949987 - Sept 2022 (5 comments) The 30-Year Mortgage Is an Intrinsically Toxic Product (2019) - https://news.ycombinator.com/item?id=29774075 https://news.ycombinator.com/item?id=29774075 - Jan 2022 (149 comments) The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
- jaybrendansmith 3y ago
  Real estate might not always be the best investment, but it's the only type of investment that the vast majority of the poor and middle class can effectively make. In what other context would a bank ever lend a penniless college graduate $500,000? If these mortgages did not exist, think how long people would have to save their pennies to afford a home - probably most of their lives. That's how things used to be in the US, back before these mortgages were put in place after the great depression. It depresses me how little we all seem to remember about the New Deal. I think being born into wealth must inflict a certain blindness to the difficulties of others.
a13o 3y ago
I had this same intuition and built an inverted calculator a few years back where you tell it how much you want to pay and it tells you how much house you can afford. It compared what that payment gets you on a 30 year vs a 15 year mortgage. Obviously you can buy less house with the 15 year. But not that much less house, and the interest you pay will be so much lower, that it puts money in your pocket every year for 15 years; so it tells you what that is. I basically think we're all getting 30 year mortgages because we have to support the inflated house prices which drive the last generation's investments. If we aren't left holding the bag on this generational scheme, then who knows - the next gen may need 40 year mortgages to buy us out of our homes at their wage rates. https://observablehq.com/@a13o/anti-30-year-mortgage-calculator https://observablehq.com/@a13o/anti-30-year-mortgage-calcula...
- phicoh 3y ago
  The Netherlands had for a while a very popular mortgage where you only pay interest. So in effect an infinite mortgage. (It now less popular for tax reasons). The reasons that works is that in a 30 year period (in The Netherlands), prices of houses are likely to have gone up enough that the mortgage is only a small fraction of the value of the house. At the same time, due to inflation, the actual value of the mortgage in future currency units is also very low. So if you can expect a reasonable pension, there is no reason to worry about taking a very long time to repay a house. Obviously, the assumption is that houses will go up in value. If on average houses go down in value then this doesn't work at all.
  - Doxin 3y ago
    One of the main issues with that form of mortgage is that people didn't realize, for they were not informed, the payment for the entire house was due in full at the end of the run time. It left a lot of people going "Wait, what? I thought I had paid my mortgage for 30 years? what do you mean I need to re-mortgage my house?"
bullen 3y ago
The Mortgage Is an Intrinsically Toxic Product
xiphias2 3y ago
I believe quite the opposite: any kind of variable rate mortgage is a toxic product. It's a way of saying ,,I give you a loan but I don't tell you how much more money you have to pay me back, maybe 5 times more interest as you may think now''.
- automatic6131 3y ago
  That's because you've only thought about it for 5 minutes, or your don't know much about finance, and definitely that you haven't read the article in question.
breput 3y ago
A lot has changed since 2018, especially related to remote work, which negates several of the points of this article related to local labor markets and lack of mobility at least for some white collar jobs. If you only read Hacker News you might think WfH is dead, and it might be for FAANG-ish companies, but in my industry it is still as remote-centric as it has been since 2020. I see people hired every day and we don't even have a sales office in that entire state. So yeah, having a locked-in 2.75% 30 year mortgage is going to encourage you to stay put, but that's probably a net positive thing for society because you are going to be more invested in the the success of the school system, and the local library, and getting to know your neighbors. And if you're on the wrong side of the interest rates right now or need to move, maybe you have to rent for awhile or buy a more affordable house than you expected. That's nothing new and eventually things will revert and you'll be the next low interest 30 year mortgage homeowner. The banks will continue to win.
- lrem 3y ago
  Wait, do mortgages in the USA get cheaper with lower rates? In Europe it appears that they’re always the maximum the people will be willing to pay. The only effects of negative base rates was house prices launching into the stratosphere. The cheapest place on the market in my suburb is 1.75 million USD for a two bedrooms condo (80m^2 = 861ft^2) with one parking spot.
  - breput 3y ago
    No[*], but the monthly payments get more affordable. The principal doesn't change but if you're paying 3% on a mortgage and possibly getting a tax deduction on that interest so it might effectively be more like 2.5%, then you can decide to pay that down more if you're earning more on other investments. [*] It's arguable that low interest rates cause housing prices to rise, since more people can afford monthly payments on more expensive houses.
kapitanjakc 3y ago
I don't get why it's toxic. They are designed in that manner to make them money. Moreover, I also don't understand why people complain, you did not had money, so you asked banks for some, they gave it to you and are charging the interest. I also don't understand the argument of students loan, you did not had any money to study, they gave it to you, and they charge some interest. Over the years you might pay twice the amount you borrowed, but that's how interest work.
- constantly 3y ago
  Usury for one. Laws have been on the books since the 7th century BCE because it’s such a repugnant act.
  - kapitanjakc 3y ago
    At what rates does it go from reasonable rates to usury ? Do you guys not get the option to take the fixed rate?
  - cowl 3y ago
    usury: the action or practice of lending money at unreasonably high rates of interest.
jalapenos 3y ago
I view these as a mechanism to transfer life success from the group-thinkers to others. So long as you don't participate, and rent their 2% yield properties and invest your surplus into business, you'll come out on top.
system2 3y ago
Mortgage can be evil sometimes but I am extremely happy with mine. I purchased a house and after 3 years I am paying less than what I used to pay for 1 bedroom apartment. In 10 years, my fixed rate will make my investment even more handsome. Without mortgage I'd still be paying for rent, possibly forever. My house already appreciated over 30% in 3 years and better investment than keeping the money in the bank or even the best years of the market.
refurb 3y ago
The key point in the article: "For the individual, the fact that encouraging 30-year mortgages is a bad policy does not imply that getting one yourself is a bad deal." The criticism is separate from the benefit to consumers. One could argue it's not a good policy to have 30 year mortgages, and it just encourages more risky behavior. I can't disagree with that. But as a consumer, it has a ton of benefits.
nologic01 3y ago
Imagine a world without fixed-rate retail lending. In such as world managing interest rate risk is pushed to individuals, i.e., those least informed and equipped to manage it. Its hard to imagine that world being "intrinsically less toxic". In complex systems it is important (but not always easy) the distinguish effects of different causal order (the immediate role and impact, the second and third order effects etc.) The failings of modern financial systems are legion but incoherent rants in blog posts are not particularly helpful in sharpening and deepening our understanding of this beast we have created...

52 points by kristianp 3y ago

It goes a lot deeper than the 30 year mortgage. The entire US financial system seems to be premised on the idea that free markets aren't reckless enough and that they needed to be pushed out into riskier territory. 30 year mortgages are one aspect of this strategy. Pumping money into stock and bond markets via the fed and the "President's Working Group on Financial Markets" are another wing drawing money into riskier assets. Listening to Peter Schiff talking about what happened when he tried to open a full reserve bank was also eye opening (spoilers: banking regulators do not like full reserve banks). I feel it is unfair that capitalism is tarred with the inevitable collapses that follow. Capitalists are being pushed to the brink here. The regulators are where the push comes from that forces the US economy to take far more risk than is sensible.

zhte415 3y ago
US 30 year mortgage, fixed rate as they are, are risk subsidised by Fannie Mae and Freddie Mac. It's a regulatory subsidy of the mortgage and ex-mortgage home owning class. That 'problem' is caused by regulation, structural regulation, not day-to-day regulatory enforcement or change. So where does that risk 'go'? Where do you suggest? What can regulators do to un-risk the risk that's been un-risked/passed on from those that take out mortgages?
- roenxi 3y ago
  I'm not sure I follow the question, but presumably the people borrowing the money aren't bearing it and the people lending the money probably aren't stupid enough to lend money for 30 years at fixed interest rates. So by elimination, the the people holding the bag are probably the taxpayers. But I don't know the details of how the market works. Wouldn't surprise me if there are other quirks at play.
psunavy03 3y ago
This is such unadulterated bullshit. The purpose of a 30-year fixed mortgage is to build up equity over the course of someone's working career such that when it comes time for them to retire, they own their primary residence and only have to pay property tax on it until they die. This allows people to retire on a fixed income less than what they earned in the workforce, enabling their nest egg to actually BE a nest egg, and then also allows them to pass that property to their heirs, allowing for the beginning of generational wealth, if not the continuation thereof. If you rent for the same period of time, you piss away literally hundreds of thousands of dollars of home equity which you and your heirs can benefit from. But let's piss all over the greatest tool society ever created for creating generational wealth, because it's "capitalist," and that means it's icky.
- htss2013 3y ago
  Except the average US mortgage holder buys and sells a house every 7 years. For the first 7 years the amortization schedule means you're paying almost all interest and building very little equity. You're also paying realtor fees and transaction costs each time. So while paying off a 30 year mortgage might have been to pay off the house and keep it forever, that's not how Americans treat it. They basically use it as a way to get 10-20x leverage on housing prices speculation, and if they profit, cash out 7 years later and do it again with a new house.
  - mihoda 3y ago
    1) your argument is right 2) but it hasn't been an average of every 7 years in at least 30 years. It's 13.2 years. And perhaps it shouldn't be. There's lots of foregone opportunities when you stick in a home and don't move to better employment.

cowl 3y ago

The article clearly says that it is for the US but I still can not think of a reason why that would be valid for US and not Europe for example. I'm not an economist but my math is simple. I compare the Mortgage rates with Rent rates and the fact is that Paying rent for 30 years is money sent down the drain. For an average difference of 10% you would be the owner of the house after 30 years instead of just wasting all your money on rent without anything to show for it. The whole discussion that this is a bet that your property will still hold or improve the value is meaningless, because even if it loses value (very improbable in most cases) it's still better than 0 that you are left with after paying 30 years of rent. Now all of my math is not valid anymore if you taking a mortgage as an investement and not for your first Home and maybe that is what the article is about but still the Mortgage is very helpful for many people and just because it doesnt make sense as an investment does not make it toxic.

resolutebat 3y ago
One big difference is that in many other countries, fixed rate mortgages are not available.
irrational 3y ago
We purchased a nearly 4,000 sf home on an acre 2 years ago. There are apartments within walking distance of our house that have rents higher than our mortgage payment. And not even that nice of apartments.
- richardw 3y ago
  In Sydney. We’re renting a house for 35% of the mortgage price. And the rental is pretty crazy, so mortgage is ludicrous. Some places are just irrational.
ozr 3y ago
The NYT Rent v Buy calculator is pretty out of date at this point, but it's definitely not as straightforward as rent being throwing away money and a mortgage building equity. Upkeep is a non-trivial expense, opportunity costs of money put down, money still being not turned into equity via, e.g., property taxes and insurance (higher than renters), etc. Add in the bigger intangible of the flexibility you gain from renting, and it's going to be a very individual decision.

madsbuch 3y ago

if you make a bond type mortgage in Denmark, then you trade your bonds directly in the market. this has some benefits to the say home owners. They can speculate: When interest rates go up, refinance and sell you previous mortgage for cheap. When interest rates go down, refinance and reap the lower interest rates for just the refinancing costs (you can always repay this type of mortgage at rate 100). needless to say, the volatility on the bond markets had been extremely good for Danish home owners.

breput 3y ago
> When interest rates go up, refinance and sell you previous mortgage for cheap. Can you explain this, because it seems opposite to the rest of the world (and since this is Hacker News, world = USA). You refinance...at a higher rate, and this is a good thing long-term?
- madsbuch 3y ago
  if you have a loan of 1m at 1% interest (yes, that was the interest in Denmark before covid), then you can sell that loan for 800k and refinance with a new loan of 5% interest. in turn you cut off 200k of your loan. This technique obviously only works under the assumption that the interest rates are going to drop long term, so you can refinance back to the lower rate later (which all of the people who made the trick believes).
  - egman_ekki 3y ago
    This up conversion can still make sense even if the interest rates don’t go down as with the 800k/5% mortgage, a larger portion of your monthly payment is made up of interest, thus also your tax bonus is higher and in net terms you can end up ahead even in time horizon of 20+ years before the down conversion.
    - madsbuch 3y ago
      Yep :)

dang 3y ago

Related: The 30-Year Mortgage Is an Intrinsically Toxic Product – By Byrne Hobart - https://news.ycombinator.com/item?id=32949987 https://news.ycombinator.com/item?id=32949987 - Sept 2022 (5 comments) The 30-Year Mortgage Is an Intrinsically Toxic Product (2019) - https://news.ycombinator.com/item?id=29774075 https://news.ycombinator.com/item?id=29774075 - Jan 2022 (149 comments) The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)

jaybrendansmith 3y ago
Real estate might not always be the best investment, but it's the only type of investment that the vast majority of the poor and middle class can effectively make. In what other context would a bank ever lend a penniless college graduate $500,000? If these mortgages did not exist, think how long people would have to save their pennies to afford a home - probably most of their lives. That's how things used to be in the US, back before these mortgages were put in place after the great depression. It depresses me how little we all seem to remember about the New Deal. I think being born into wealth must inflict a certain blindness to the difficulties of others.

a13o 3y ago

I had this same intuition and built an inverted calculator a few years back where you tell it how much you want to pay and it tells you how much house you can afford. It compared what that payment gets you on a 30 year vs a 15 year mortgage. Obviously you can buy less house with the 15 year. But not that much less house, and the interest you pay will be so much lower, that it puts money in your pocket every year for 15 years; so it tells you what that is. I basically think we're all getting 30 year mortgages because we have to support the inflated house prices which drive the last generation's investments. If we aren't left holding the bag on this generational scheme, then who knows - the next gen may need 40 year mortgages to buy us out of our homes at their wage rates. https://observablehq.com/@a13o/anti-30-year-mortgage-calculator https://observablehq.com/@a13o/anti-30-year-mortgage-calcula...

phicoh 3y ago
The Netherlands had for a while a very popular mortgage where you only pay interest. So in effect an infinite mortgage. (It now less popular for tax reasons). The reasons that works is that in a 30 year period (in The Netherlands), prices of houses are likely to have gone up enough that the mortgage is only a small fraction of the value of the house. At the same time, due to inflation, the actual value of the mortgage in future currency units is also very low. So if you can expect a reasonable pension, there is no reason to worry about taking a very long time to repay a house. Obviously, the assumption is that houses will go up in value. If on average houses go down in value then this doesn't work at all.
- Doxin 3y ago
  One of the main issues with that form of mortgage is that people didn't realize, for they were not informed, the payment for the entire house was due in full at the end of the run time. It left a lot of people going "Wait, what? I thought I had paid my mortgage for 30 years? what do you mean I need to re-mortgage my house?"

bullen 3y ago

The Mortgage Is an Intrinsically Toxic Product

xiphias2 3y ago

I believe quite the opposite: any kind of variable rate mortgage is a toxic product. It's a way of saying ,,I give you a loan but I don't tell you how much more money you have to pay me back, maybe 5 times more interest as you may think now''.

automatic6131 3y ago
That's because you've only thought about it for 5 minutes, or your don't know much about finance, and definitely that you haven't read the article in question.

breput 3y ago

A lot has changed since 2018, especially related to remote work, which negates several of the points of this article related to local labor markets and lack of mobility at least for some white collar jobs. If you only read Hacker News you might think WfH is dead, and it might be for FAANG-ish companies, but in my industry it is still as remote-centric as it has been since 2020. I see people hired every day and we don't even have a sales office in that entire state. So yeah, having a locked-in 2.75% 30 year mortgage is going to encourage you to stay put, but that's probably a net positive thing for society because you are going to be more invested in the the success of the school system, and the local library, and getting to know your neighbors. And if you're on the wrong side of the interest rates right now or need to move, maybe you have to rent for awhile or buy a more affordable house than you expected. That's nothing new and eventually things will revert and you'll be the next low interest 30 year mortgage homeowner. The banks will continue to win.

lrem 3y ago
Wait, do mortgages in the USA get cheaper with lower rates? In Europe it appears that they’re always the maximum the people will be willing to pay. The only effects of negative base rates was house prices launching into the stratosphere. The cheapest place on the market in my suburb is 1.75 million USD for a two bedrooms condo (80m^2 = 861ft^2) with one parking spot.
- breput 3y ago
  No[*], but the monthly payments get more affordable. The principal doesn't change but if you're paying 3% on a mortgage and possibly getting a tax deduction on that interest so it might effectively be more like 2.5%, then you can decide to pay that down more if you're earning more on other investments. [*] It's arguable that low interest rates cause housing prices to rise, since more people can afford monthly payments on more expensive houses.

kapitanjakc 3y ago

I don't get why it's toxic. They are designed in that manner to make them money. Moreover, I also don't understand why people complain, you did not had money, so you asked banks for some, they gave it to you and are charging the interest. I also don't understand the argument of students loan, you did not had any money to study, they gave it to you, and they charge some interest. Over the years you might pay twice the amount you borrowed, but that's how interest work.

constantly 3y ago
Usury for one. Laws have been on the books since the 7th century BCE because it’s such a repugnant act.
- kapitanjakc 3y ago
  At what rates does it go from reasonable rates to usury ? Do you guys not get the option to take the fixed rate?
- cowl 3y ago
  usury: the action or practice of lending money at unreasonably high rates of interest.

jalapenos 3y ago

I view these as a mechanism to transfer life success from the group-thinkers to others. So long as you don't participate, and rent their 2% yield properties and invest your surplus into business, you'll come out on top.

system2 3y ago

Mortgage can be evil sometimes but I am extremely happy with mine. I purchased a house and after 3 years I am paying less than what I used to pay for 1 bedroom apartment. In 10 years, my fixed rate will make my investment even more handsome. Without mortgage I'd still be paying for rent, possibly forever. My house already appreciated over 30% in 3 years and better investment than keeping the money in the bank or even the best years of the market.

refurb 3y ago

The key point in the article: "For the individual, the fact that encouraging 30-year mortgages is a bad policy does not imply that getting one yourself is a bad deal." The criticism is separate from the benefit to consumers. One could argue it's not a good policy to have 30 year mortgages, and it just encourages more risky behavior. I can't disagree with that. But as a consumer, it has a ton of benefits.

nologic01 3y ago

Imagine a world without fixed-rate retail lending. In such as world managing interest rate risk is pushed to individuals, i.e., those least informed and equipped to manage it. Its hard to imagine that world being "intrinsically less toxic". In complex systems it is important (but not always easy) the distinguish effects of different causal order (the immediate role and impact, the second and third order effects etc.) The failings of modern financial systems are legion but incoherent rants in blog posts are not particularly helpful in sharpening and deepening our understanding of this beast we have created...