6 ms·
Mortgages are a manufactured product (2022)
- gnabgib 2y agoPreviously on HN (199 points, 2 years ago, 222 comments) [0]: https://news.ycombinator.com/item?id=29937545 https://news.ycombinator.com/item?id=29937545
- mvkel 2y ago> If you replaced your current mental model for mortgages with “it’s like a paper electronic flow meter for money, possibly with less paper these days”, it would improve your ability to understand the mortgage industry. I feel even more confused
- beezlewax 2y agoYep that was the last thing I read. Absolute gibberish
- abrichr 2y agoThe second half of the following sentence clears it up: > The analogy is less about providing visibility into the contents of pipes (though mortgages must do that) and more “highly specialized manufactured widget that the entire world sits downstream of.”
- epolanski 2y agoDoes it? I feel even more confused. I think many people would benefit from getting something out of the Economist's style guide: https://cdn.static-economist.com/sites/default/files/store/Style_Guide_2015.pdf https://cdn.static-economist.com/sites/default/files/store/S...
- mvkel 2y agoNo. Why use "widgets" and "electronic flow meters" as analogies? The average person knows even less about those than mortgages. Here's my attempt: Mortgages are not primarily a service that a bank provides to homeowners. They are akin to a farmer growing crops to sell to a food processing company. The food processing company (like institutional investors) doesn't want to deal with the complexities of farming (like dealing with individual homeowners). Instead, they prefer to buy large quantities of raw produce (bundles of mortgages) and process it into packaged food products (guaranteed cashflows). Just as the food processing company focuses on producing and selling packaged food rather than farming, pension funds focus on managing payouts to retirees rather than issuing individual mortgages. Banks, like farmers, have to grow (originate) the raw product (mortgages) to sell it in bulk to these large institutions, thus transforming the upfront cash into a steady stream of future revenue.
- bryanrasmussen 2y agoargument clearer if it just said "it's a flow meter for money" then you can analyze that and see if it makes any sense. Can't say it makes sense for me. Maybe it makes sense for the banks, but not the person with the mortgage.
- toxik 2y agoBut even then, a flow meter exists and works by physical laws. The device and the contract are separate. A mortgage is an abstract agreement that works because we simulate its dynamics (well the bank does). The device and the contract are one and the same.
- bryanrasmussen 2y agoall analogies, metaphors, and similes will fall apart at some point as the two things being analogized are not exactly alike (otherwise there would not be any need to analogize)
- toxik 2y agoOf course, but a useful analogy must bring some new perspective to a thing. Here it just made me wonder what point the author is trying to make.
- yareal 2y agoIt's a terrible analogy, and does nothing to simplify or abstract in plain terms. And it pervades the rest of the article in a confounding way.
- jjmarr 2y agoThe thesis is that mortgages are not primarily a service a bank provides to a homeowner. They are a financial product that banks sell to institutional investors (as an example) that want a guaranteed cashflow decades into the future. Of course, a multibillion dollar pension fund does not want to directly write John Doe a mortgage and deal with him. Their business is giving money to pensioners, not selling mortgages. They would rather buy a bundle of thousands of mortgages at once and outsource the hassle of taking the payments to someone else. The bundling and administration of mortgages is akin to a manufacturing process for electronic flow meters. The customer just cares about seeing a number go up, and pension funds just want to see money hit their accounts. Since a great way of turning a bunch of cash upfront into a larger amount of cash over decades is through mortgages, banks unfortunately have to find actual people and help them buy a house.
- hkt 2y agoA thought I've had regularly is that any financial product so widely required ought to be provided at cost (base rate of interest) through central banks. Why bother with middlemen? As the author says, it is because the mortgage is hardly for my benefit. Its purpose is to grant some privileges to those who remain on the treadmill of work for a long time without falling off, and to act as something like a tax, levied on behalf of the absurdly wealthy + institutional investors.
- anamax 2y ago> A thought I've had regularly is that any financial product so widely required ought to be provided at cost (base rate of interest) through central banks. Why bother with middlemen? In the US at least, govt has problems running "retail." (It also has problems running wholesale, as evidenced by the give-aways to BlackRock, but ...)
- deprecative 2y agoThe US certainly has issues with even accepting the government being able to do good things. A small but highly vocal part of the populace has all but ensured the well is poisoned. I think we could, if we wanted, create an institution like the USPS for financial services. That would be able to issue a mortgage. It's not going to happen for the simple fact they're doing their best to privatize the USPS and beloved programs like Social Security.
- Joel_Mckay 2y agoThe securitization of mortgages, health care, and education. All were simply fund-managers monetizing other peoples misery, and now many are realizing every party line is the same BS. People are angry, but often for the wrong reasons since wall-street washes accountability by design. Unfortunately, ridiculous wealth and miserable populations seem a desirable trade in some cultures. Thank god it is not my task to try and fix it =)
- abrichr 2y agoFTA: > A widespread misconception about mortgage securitization is that it was created to make Wall Street rich. … > Mortgage securitization, and secondary sales of loans, and other mechanisms cause mortgages to migrate from the banking sector to pools of capital which are more structurally insulated against the interest rate cycle.
- yareal 2y agoWhich has the effect of....? At the end of the day, the reasons these choices exist is to make someone rich. The mechanism (shielding from interest rate cycles) is just an implementation detail.
- SpicyLemonZest 2y agoIt's not just an implementation detail. In the 80s there was a big event known as the S&L crisis (https://en.wikipedia.org/wiki/Savings_and_loan_crisis https://en.wikipedia.org/wiki/Savings_and_loan_crisis), where an interest rate spike which was not adequately shielded led a substantial fraction of all US mortgage lenders to fail.
- refurb 2y agoIt has the effect of being able to provide homeowners with cheap 30-year fixed mortgages. I'm surprised you're against it.
- forgetfreeman 2y ago
- 20240519 2y agoI thought the weird thing about mortgages is it is new money that expands the money supply.
- Scarblac 2y agoNot necessarily, that's only if it's financed by bank accounts that continue being money themselves. If they're financed by large investors, it's not new money. (it's money if its extremely liquid - the bank account holders can still do things with their invested money)
- hkt 2y agoThat's not correct: cash that is not in circulation is not part of "broad money" in the same way, so it is still right to say that money is created when a mortgage is issued if that mortgage is backed by large investors. At least as I understand it, investments in financial instruments are not usefully regarded as money.
- ilya_m 2y ago> it is still right to say that money is created when a mortgage is issued if that mortgage is backed by large investors. Is it? Since the house seller wants to have cold, hard cash (or, these days, an incoming wire transfer, which still counts as M1), the large investors need to cough up that much money to make the transaction happen.
- globular-toast 2y agoHouses are bought in a chain, though. In a chain there might be only 1/10 people taking the cash out.
- ilya_m 2y agoFirst, ~10-20% of residential home sales are new (the proportion swings widely year-to-year), with a non-trivial fraction of their costs going to materials and labor. Second, 5-6% of the typical sale go toward the agents and closing costs. Again, this is money that leave the system. Third, if some of the sale proceeds are applied to repaying an existing mortgage or to finance a home purchase, this is neutral as far as the "investor-backed mortgages create money" argument goes.
- rwmj 2y ago> A mortgage has a quirky little subcomponent called a Mortgage Servicing Right (MSR). Every month, it needs to collect money from the borrower and send that money… somewhere. This implies, minimally, a mailbox where you can send checks, someone to open the mail, and a phone number with a CS representative who can answer questions like “What is my current balance?” and “Did you get the last check I sent you?” Like, seriously? Sending bits of paper through the post to make payment? Having to call someone up instead of logging in to your mortgage account online?
- dpe82 2y agoYes, some people in this world still prefer to operate with paper checks and use the telephone.
- SomeCollegeBro 2y agoThe majority of people pay online. Obviously the mail and phone options need to be available too though.
- to11mtm 2y agoThere's the other part of the servicing bit they are leaving out. - Giving a Payoff amount for whatever reason - Reporting to agencies - Trying to work with the client when payments are missed, ideally ethically. - (Before COVID this was true, I know it was at least temporarily suspended, dont think still suspended but might be) If above fails, remitting payment to the owner of the loan during that period between 'first missed payment' and 'able to apply for and receive relief from Fannie/Freddie' Those things cost, and depending on your originator, may or may not be baked into the price as to how well it works.
- sanxiyn 2y agoI know this post is about money, but I want to talk about electronic flow meters than money so I will. The description of "Japanese company making the best electronic flow meters" strongly suggests it is Keyence. They are the best indeed. Keyence is the 3rd largest Japanese company by market capitalization, next to Toyota and Japan's largest bank (Mitsubishi). Larger than Sony, larger than Nintendo, larger than Honda, etc. Keyence does sensors and nothing but sensors. If you want to learn about the science of flow meters, you can visit a site maintained by Keyence, Flow Knowledge. Where you read that electromagnetic flow meters (this is proper name for "electronic" flow meters, which may be used for lay audience) detect flow by using Faraday's Law of induction. https://www.keyence.com/ss/products/process/flowknowledge/ https://www.keyence.com/ss/products/process/flowknowledge/
- EduardLev 2y agoWow, what a great website. I wish I had found that back when I was a chemical engineer.
- bitschubser_ 2y agoUhhh this highly depends on the industry… for industry grade flow meters Endress+Hauser or Emerson are actually the first that come into my mind
- cushychicken 2y agoThey also make great digital microscopes.
- ramchip 2y agoVery tangential, but as a worker in Japan I find it depressing how Keyence's recruiting material proudly shows a software engineer's typical day that starts at 8:30AM and ends around 8:00PM. No wonder it's so hard to raise kids. https://www.keyence.co.jp/jobs/software-engineer/ https://www.keyence.co.jp/jobs/software-engineer/
- deleted 2y ago[deleted]
- davidgerard 2y ago(2022)
- somid3 2y agoThis article would make a great YouTube video -- reading it is painful, watching it will be delightful.
- skybrian 2y agoRecently, financial regulators have become concerned that nonbank mortgage originators and servicers would do poorly in a financial crisis. [1] They aren’t on the hook for the risk of nonpayment, but they are for other risks, it seems? Apparently they are worried about supply chain disruption resulting in fewer mortgages. The risks section of Rocket Mortgage’s annual report has some possibly useful descriptions, but I don’t have the background to put them into context. [1] https://www.cnn.com/2024/05/13/economy/mortgage-company-risk-regulation-fsoc/index.html https://www.cnn.com/2024/05/13/economy/mortgage-company-risk...
- menzoic 2y agoThe electronic flow meter analogy is killing me
- jcul 2y agoI'm not sure they intended flow meters to be an analogy for mortgages. But rather flow meter factories to be an anology for banks that create mortgages. Flow meters or any other widget are needed by many different industries but probably not by flow meter manufactories. Mortgages are useful products for pensions etc. but not so much for banks. Otherwise I don't really understand the analogy either.
- epolanski 2y agoIn Europe (or at least Italy and Poland which I know a bit) mortgages are mostly instruments to get new clients. Banks barely make any money at all from mortgages, but they can then upsell you other things. Mortgages rates depend on lending rates published by the European Central Bank, and on top of that banks apply a small spread (generally below 1%). But they don't love the instrument at all, it doesn't make much money if any.
- Ylpertnodi 2y agoMy .it bank is making bundle off me.
- grob-gambit 2y agoIn the US, mortgage banking is about 20% or so of a regional bank on up in terms of revenue generation. Modern banking is an incredibly complex business so you could basically say no single division makes much money vs the other parts as a whole. I think that would be a wrong way to view the business though. As if banks would not be in mortgage lending if they could. It is quite the opposite, any one bank would love for the other banks to get out of mortgage lending.
- notfromhere 2y agoBanks in the us usually just originate them then promptly sell them to Fannie May. Otherwise they just handle payments, etc.
- mindvirus 2y agoThis is a fascinating article, though I'm not sure I grok the analogy about flow meters. Given they're so securitized, I wish I could buy back my own mortgage at a discount given how much interest rates have risen. It feels that given the notes about conforming mortgages being fungible, that product/service should exist.
- taffer 2y ago> I wish I could buy back my own mortgage at a discount given how much interest rates have risen But why would you want to do that? If you take out a fixed-rate loan and interest rates rise, you are already making a profit. Financially, there would be no further benefit from the buy-back of the loan.
- mindvirus 2y agoPresumably I'd be able to buy it back at $0.60 on the dollar since that's what the market value of a low interest mortgage would be on today's market of 7% mortgage rates. I'd want to do it so I could sell my place and move. No doubt if I sell my place now, the bank is just taking that money and lending it out again, making a profit on the difference in rates.
- patrickthebold 2y agoYes, but that boils down to changing the terms of your loan in your favor. You probably should ask yourself: How much of a premium on your mortgage would you have paid to have the option to pay it off at market rates if rates happen to go up. A similar example: in the US, typically loans have no prepayment penalty, but in practice you are paying for that option. I'm theory you could get a lower rate if you agreed to a high fee if you prepay. I think it ends up not being worth it for lenders to give you so many options when picking your loan terms, simply because lots of people won't understand the subtitles/there's not much demand for those products.
- jjav 2y ago> I wish I could buy back my own mortgage at a discount given how much interest rates have risen You can! Even if not directly. Take the lump sum cash you'd have to use to buy off your mortgage today. Put it into an interest-bearing instrument of your choice that is paying these higher rates today (higher than your mortgage). Us that to pay the monthly mortgage and the different is profit.
- scarface_74 2y agoI understand how mortgages work and didn’t learn anything new from the articule. I am not criticizing the article for that. But if I didn’t know how this all works, the article would have made me more confused.
- laylower 2y agoTalking about US mortgages without referring to the FDIC guarantees shows that the writer is not actually knowledgeable.
- deleted 2y ago[deleted]
- lotsofpulp 2y agoWhat does the FDIC have to do with mortgages? Isn’t almost all mortgage debt immediately sold to the government (Fannie Mae/freddie Mac/ginnie Mae)?
- evolve2k 2y agoCan someone here help me unpack social impact financing or what is also called a social loan in the context of this article. Social impact financing is a range of approaches that help fund social causes by bringing new financial products beyond just giving donations and hoping for the best. A social loan essentially provides a low interest loan to say a social enterprise that explicitly seeks to produce a measurable social outcome in addition to meeting basic financial obligations. An example is a social housing trust that exists to provide more disability housing. My question is what’s the dynamic with the various players? I can see on one end is a “social investor” who is willing to provide/invest capital for a below market earning rate (in exchange for knowing the social outcomes are occurring). And at the other is the social enterprise obtaining the funds. But what’s the dynamic in the middle? I’m trying to access these sorts of funds so trying to understand better the impact / neutrality or otherwise of various parties involved in manufacturing a fairly niche social loan product.