4 ms·

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.

by Ekaros 3y ago

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]
    - lotsofpulp 3y ago
      How are you calculating the 66% return/$660k profit?
      - s1artibartfast 3y ago
        just ballparking it based on the ratios of the rates, 5/3. This is concervative due to the way loans compound and amortize. If you had a loan you were looking to net 1mm profit, you would net > 5/3 or >166% the profit a the the higher rate. If you put it in an actual calculator, a 2 million,3%, 30-year loan will pay the bank back 3mm (1mm profit). The same principal at 5% will pay the bank back 3.8mm (1.8 profit, e.g >166%) The numbers themselves are less relevant than the value proposition. If you could tell a bank that you will increase the profit on already invested capital, with no additional investment, they should jump on it.

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.

by 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]
  - lotsofpulp 3y ago
    How are you calculating the 66% return/$660k profit?
    - s1artibartfast 3y ago
      just ballparking it based on the ratios of the rates, 5/3. This is concervative due to the way loans compound and amortize. If you had a loan you were looking to net 1mm profit, you would net > 5/3 or >166% the profit a the the higher rate. If you put it in an actual calculator, a 2 million,3%, 30-year loan will pay the bank back 3mm (1mm profit). The same principal at 5% will pay the bank back 3.8mm (1.8 profit, e.g >166%) The numbers themselves are less relevant than the value proposition. If you could tell a bank that you will increase the profit on already invested capital, with no additional investment, they should jump on it.