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There is a new thing happening though as well. Existing homeowners with 3-4% mortgages are not listing their homes for sale very often anymore because they aren

There is a new thing happening though as well. Existing homeowners with 3-4% mortgages are not listing their homes for sale very often anymore because they aren’t going to take 7% mortgage on the new property. This is keeping home prices pretty high. I don’t see a way for monthly mortgage payments to become affordable without this being addressed.

bryanlarsen 3y ago
That it is not being addressed is a ridiculously pure market failure. Let's say Jane & Joe have a mortgage at 3%, would like to move but don't have to move. The only reason they're not moving is because they're unwilling to take on a 7% mortgage. Somebody out there is holding the other end of that 3% mortgage, and would love to exchange that mortgage for one at a higher rate. If Jane & Joe could get into the same room as their mortgage holder they would quickly hash out a compromise, exchange their 3% mortgage for a 5% mortgage; the canonical win-win situation that's supposed to happen in a market. Both sides are willing to make a deal, so why can't they? But it's not happening because the bank they made the mortgage with doesn't actually hold the mortgage, it's bundled and sliced and sold on. This is a huge market opportunity, and you'd think that eventually the same forces that figured out how to slice & dice mortgages will figure out how to take advantage of this opportunity.
- s1artibartfast 3y ago
  This reminds me of the idea of people buying their debt out of collections, and I think it has the same price discovery challenges. You say 5% is a win win compromise between 3 and 7, but how does any bank know that Jane and Joe wouldnt have paid 7. Banks don't have a good tool to screen and price discriminate between customers for this to work.
  - bryanlarsen 3y ago
    Statistics. If you have a pool of people, some of whom would not be willing to jump without a good rate and some of whom would be, you offer it to everyone and you make more money than those who don't offer the good rate. This effect is known as the "consumer surplus". People willing to pay more get the same price as those who aren't.
    - s1artibartfast 3y ago
      But is not a given it works out that way. It depends on the statistics. You could just as easily give to everyone and lose tons of money.
      - bryanlarsen 3y ago
        No, they're losing money right now by not offering it. Right now they're losing money on their 3% mortgages. If it converts to 5% it turns a loss into a small profit. OTOH, if you don't offer the 5%, there are 3 scenarios: 1. the homeowner keeps the 3% and you keep losing money 2. the homeowner converts to a 7% with you and get a large profit 3. the homeowner converts to a 7% with somebody else and you make no profit. #1 and #3 are by far the most likely options, IMO.
        dmurray 3y ago
        There's a fourth scenario - the homeowner pays off the mortgage early. In the US, early payment can involve a penalty, so the homeowner buys out the loan significantly above market rate. Over the course of a mortgage, a significant number of homeowners will find they "need" to relocate for work or to join a partner or to upsize or downsize. Offering these people a big improvement on "pay a penalty rate to discharge your loan early" would cost the banks money, so they need to pitch any refinancing offer where it makes enough profit off the other homeowners to be worthwhile.
- tinco 3y ago
  Would a bank pay cash to be relieved of a 3% mortgage? My brother sold his house half a year ago when he split up from his partner. I'm pretty sure they had a 15yr 2% mortgage. Did they do the bank a huge favor by just selling the house and dissolving the mortgage?
  - D13Fd 3y ago
    Yes it would be a favor, assuming there is enough demand that the bank can then use the money from the 2% mortgage to issue a 7% mortgage or another >2% mortgage. Otherwise probably no.
    - bryanlarsen 3y ago
      They don't have to put it into a 7% mortgage, they can put it into a 4.6% 30 year t-bill, or something in between.
  - bryanlarsen 3y ago
    Yes, they did the bank a huge favour. But likely they didn't have a choice, ~75% of mortgages are non-transferable, and they cannot hold the mortgage without the collateral of the house. But if they were part of the ~25% of mortgage holders with transferable or assignable mortgages they had other options.
    - tinco 3y ago
      Yeah so I was wondering if a possible solution to your proposed market failure could be a service that motivates people to get rid of their mortgages by buying them off. This would eliminate the problem of having to find a counter party, you only have to find the people willing to compromise on their 3% mortgages. Basically the business would be: Find the amount of money banks would pay upfront to the holders of the 3% mortgages, market that amount of money to the holders looking to move that otherwise wouldn't want to. It would create a little bit of extra liquidity in the market and it might allow home owners to deploy their excess capital that they now hold back because of the awful deal they get. Weird thing, I'm in The Netherlands and here 100% of the mortgages are transferable to a new house, at least within the same bank. I tried googling why that is but I only found all the banks advertising the fact without saying if they do that to comply with some government regulation.
- Ekaros 3y ago
  Why would anyone offer a 5% mortage? That is only 0.4% over 30 year bond... Not nearly enough risk premium. Considering everything involved with mortgages.
  - bryanlarsen 3y ago
    But trading a 3% note for a 5% note straight up would be a fabulous deal. Sure, there would be a discount on the 5% note, but very small compared to the discount on the 3% note.
  - s1artibartfast 3y ago
    The idea is that it would be 2% over the existing mortgage. If a lender has 1mm tied up in a 3% loan, They would love to convert that to a 5% loan on 1mm.
    - lotsofpulp 3y ago
      A lender does not have $1M tied up in a 3% loan. Many lenders have small pieces of that $1M tied up in multiple mortgage backed securities with various tranches of seniority. The paperwork required to undo all of that and re-underwrite the debt would be enormous.
      - s1artibartfast 3y ago
        Yes, but that is the question and premise. There is a lot of money to be made if someone can figure out how to do that paperwork. There are 12 trillion dollars of mortgage loans in the US, so converting a tiny fraction from 3% to 5% would be a goldmine. Essentially a 66% return for doing "the paperwork". That's 660k profit for doing the paperwork on a loan previously worth 1mm. This is obviously rare today due to the paperwork complexity. That complexity IS the alleged market failure.
        deleted 3y ago
        [deleted]
        3y ago
- maxerickson 3y ago
  In a market with good liquidity, this happens via price adjustment. (The valuation of bonds for example)

bryanlarsen 3y ago

That it is not being addressed is a ridiculously pure market failure. Let's say Jane & Joe have a mortgage at 3%, would like to move but don't have to move. The only reason they're not moving is because they're unwilling to take on a 7% mortgage. Somebody out there is holding the other end of that 3% mortgage, and would love to exchange that mortgage for one at a higher rate. If Jane & Joe could get into the same room as their mortgage holder they would quickly hash out a compromise, exchange their 3% mortgage for a 5% mortgage; the canonical win-win situation that's supposed to happen in a market. Both sides are willing to make a deal, so why can't they? But it's not happening because the bank they made the mortgage with doesn't actually hold the mortgage, it's bundled and sliced and sold on. This is a huge market opportunity, and you'd think that eventually the same forces that figured out how to slice & dice mortgages will figure out how to take advantage of this opportunity.

s1artibartfast 3y ago
This reminds me of the idea of people buying their debt out of collections, and I think it has the same price discovery challenges. You say 5% is a win win compromise between 3 and 7, but how does any bank know that Jane and Joe wouldnt have paid 7. Banks don't have a good tool to screen and price discriminate between customers for this to work.
- bryanlarsen 3y ago
  Statistics. If you have a pool of people, some of whom would not be willing to jump without a good rate and some of whom would be, you offer it to everyone and you make more money than those who don't offer the good rate. This effect is known as the "consumer surplus". People willing to pay more get the same price as those who aren't.
  - s1artibartfast 3y ago
    But is not a given it works out that way. It depends on the statistics. You could just as easily give to everyone and lose tons of money.
    - bryanlarsen 3y ago
      No, they're losing money right now by not offering it. Right now they're losing money on their 3% mortgages. If it converts to 5% it turns a loss into a small profit. OTOH, if you don't offer the 5%, there are 3 scenarios: 1. the homeowner keeps the 3% and you keep losing money 2. the homeowner converts to a 7% with you and get a large profit 3. the homeowner converts to a 7% with somebody else and you make no profit. #1 and #3 are by far the most likely options, IMO.
      - dmurray 3y ago
        There's a fourth scenario - the homeowner pays off the mortgage early. In the US, early payment can involve a penalty, so the homeowner buys out the loan significantly above market rate. Over the course of a mortgage, a significant number of homeowners will find they "need" to relocate for work or to join a partner or to upsize or downsize. Offering these people a big improvement on "pay a penalty rate to discharge your loan early" would cost the banks money, so they need to pitch any refinancing offer where it makes enough profit off the other homeowners to be worthwhile.
tinco 3y ago
Would a bank pay cash to be relieved of a 3% mortgage? My brother sold his house half a year ago when he split up from his partner. I'm pretty sure they had a 15yr 2% mortgage. Did they do the bank a huge favor by just selling the house and dissolving the mortgage?
- D13Fd 3y ago
  Yes it would be a favor, assuming there is enough demand that the bank can then use the money from the 2% mortgage to issue a 7% mortgage or another >2% mortgage. Otherwise probably no.
  - bryanlarsen 3y ago
    They don't have to put it into a 7% mortgage, they can put it into a 4.6% 30 year t-bill, or something in between.
- bryanlarsen 3y ago
  Yes, they did the bank a huge favour. But likely they didn't have a choice, ~75% of mortgages are non-transferable, and they cannot hold the mortgage without the collateral of the house. But if they were part of the ~25% of mortgage holders with transferable or assignable mortgages they had other options.
  - tinco 3y ago
    Yeah so I was wondering if a possible solution to your proposed market failure could be a service that motivates people to get rid of their mortgages by buying them off. This would eliminate the problem of having to find a counter party, you only have to find the people willing to compromise on their 3% mortgages. Basically the business would be: Find the amount of money banks would pay upfront to the holders of the 3% mortgages, market that amount of money to the holders looking to move that otherwise wouldn't want to. It would create a little bit of extra liquidity in the market and it might allow home owners to deploy their excess capital that they now hold back because of the awful deal they get. Weird thing, I'm in The Netherlands and here 100% of the mortgages are transferable to a new house, at least within the same bank. I tried googling why that is but I only found all the banks advertising the fact without saying if they do that to comply with some government regulation.
Ekaros 3y ago
Why would anyone offer a 5% mortage? That is only 0.4% over 30 year bond... Not nearly enough risk premium. Considering everything involved with mortgages.
- bryanlarsen 3y ago
  But trading a 3% note for a 5% note straight up would be a fabulous deal. Sure, there would be a discount on the 5% note, but very small compared to the discount on the 3% note.
- s1artibartfast 3y ago
  The idea is that it would be 2% over the existing mortgage. If a lender has 1mm tied up in a 3% loan, They would love to convert that to a 5% loan on 1mm.
  - lotsofpulp 3y ago
    A lender does not have $1M tied up in a 3% loan. Many lenders have small pieces of that $1M tied up in multiple mortgage backed securities with various tranches of seniority. The paperwork required to undo all of that and re-underwrite the debt would be enormous.
    - s1artibartfast 3y ago
      Yes, but that is the question and premise. There is a lot of money to be made if someone can figure out how to do that paperwork. There are 12 trillion dollars of mortgage loans in the US, so converting a tiny fraction from 3% to 5% would be a goldmine. Essentially a 66% return for doing "the paperwork". That's 660k profit for doing the paperwork on a loan previously worth 1mm. This is obviously rare today due to the paperwork complexity. That complexity IS the alleged market failure.
      - deleted 3y ago
        [deleted]
      - 3y ago
maxerickson 3y ago
In a market with good liquidity, this happens via price adjustment. (The valuation of bonds for example)