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> A mortgage is basically a commodity, so a as long as you have several competing actors margins should approach zero. No, it should approach the chance that i

> A mortgage is basically a commodity, so a as long as you have several competing actors margins should approach zero. No, it should approach the chance that it won't get paid back, which is decidedly not zero.

dagw 12y ago
The margins the banks make should approach zero, and that takes into account the fact that sometimes they'll get back slightly less than they lend out. However to get the type of interest rates we are talking about here you can probably only borrow at about 75-80% the price of the house and only for a relatively secure house, so the expected payback for the banks is pretty close to 1.0.
- vidarh 12y ago
  I borrowed at 90% LTV at 0.59% over Bank of Englands base rate. But yes, the expected payback is pretty close to 1. Especially since of course you're required to insure the house etc., so their risk is mainly that property values could tank but of course that risk for any given loan diminishes rapidly over time as more gets repaid, so the average risk across a large pool of loans is pretty low.
- URSpider94 12y ago
  Would you like to explain that to all of the American banks who lost billions of dollars when housing prices crashed? Also, when a customer defaults on a mortgage, the bank gets "one house", not the cash value of the house. The bank then has to care for the house, list it with a broker who takes a sales commission, pay property taxes on the house, fix any damages that the prior owner may have left, and sell the house (which in the US housing crash meant competing against dozens of other foreclosures on the market in the same neighborhood).
  - fennecfoxen 12y ago
    The fact that banks were so competitive going after mortgage business that they ended up losing money on houses is actually a very good illustration of the grandparent poster's description of pressure on margins. "We'll give everyone a rate so low we'll lose money!" -- that's some killer competition right there.
  - dagw 12y ago
    when a customer defaults on a mortgage, the bank gets "one house", not the cash value of the house. In the US. We're talking about Europe here and the laws are different. But in most parts of Europe you can't just hand over the keys to your house and be clear of your loan.

dagw 12y ago

The margins the banks make should approach zero, and that takes into account the fact that sometimes they'll get back slightly less than they lend out. However to get the type of interest rates we are talking about here you can probably only borrow at about 75-80% the price of the house and only for a relatively secure house, so the expected payback for the banks is pretty close to 1.0.

vidarh 12y ago
I borrowed at 90% LTV at 0.59% over Bank of Englands base rate. But yes, the expected payback is pretty close to 1. Especially since of course you're required to insure the house etc., so their risk is mainly that property values could tank but of course that risk for any given loan diminishes rapidly over time as more gets repaid, so the average risk across a large pool of loans is pretty low.
URSpider94 12y ago
Would you like to explain that to all of the American banks who lost billions of dollars when housing prices crashed? Also, when a customer defaults on a mortgage, the bank gets "one house", not the cash value of the house. The bank then has to care for the house, list it with a broker who takes a sales commission, pay property taxes on the house, fix any damages that the prior owner may have left, and sell the house (which in the US housing crash meant competing against dozens of other foreclosures on the market in the same neighborhood).
- fennecfoxen 12y ago
  The fact that banks were so competitive going after mortgage business that they ended up losing money on houses is actually a very good illustration of the grandparent poster's description of pressure on margins. "We'll give everyone a rate so low we'll lose money!" -- that's some killer competition right there.
- dagw 12y ago
  when a customer defaults on a mortgage, the bank gets "one house", not the cash value of the house. In the US. We're talking about Europe here and the laws are different. But in most parts of Europe you can't just hand over the keys to your house and be clear of your loan.