81–90 of 127 posts
In 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 m…
Earlier quoted context omitted.
I'm guessing this is in reference to the first shitheads to decide manufacturing synthetic investment instruments backed by home mortgages was a good idea?
The article explains why, yes, it was a good idea in the context of the US banking system.
Earlier quoted context omitted.
I’ll tell you why - because the government promoted it. Fannie and Freddie were complicit.
This is another widespread misconception. The mortgages that got the economy in trouble were the no-doc, no income verification type mortgages - ie “non conforming”. By definition, a non conforming loan isn’t backed by Fannie and Freddie. I had multiple non conforming loans I got before the crash. Yes they ended up just like you suspect.
In 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 m…
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.
Earlier quoted context omitted.
Yep that was the last thing I read. Absolute gibberish
The 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.”
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.
Earlier quoted context omitted.
This is another widespread misconception. The mortgages that got the economy in trouble were the no-doc, no income verification type mortgages - ie “non conforming”. By definition, a non conforming loan isn’t backed by Fannie and Freddie. I had multiple non conforming loans I got before the crash. Yes they ended up just like you suspect.
I have news for you... Source: worked briefly in mortgage underwriting before the crash.
I’ve had 5 first mortgages in my lifetime and only one was “conforming”.
My latest one was a unit in a condotel where I live the majority of the year. No government institution would ever back and no income verification loan on a mixed use commercial/personal secondary home.
Talking about US mortgages without referring to the FDIC guarantees shows that the writer is not actually knowledgeable.
Isn’t almost all mortgage debt immediately sold to the government (Fannie Mae/freddie Mac/ginnie Mae)?
In 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 m…
In 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…
Earlier quoted context omitted.
The 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.…
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? 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 o…
In all financial instruments risk & return are intertwined and inversely correlated. If the mortgages could be provided at the base rate of interest that would imply they have zero risk. But mortgages do have some risk, although a very low one compared to e.g. buying stocks, so the rate is necessarily above the zero-risk rate.
> 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
The 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.…
This is completely true, when viewed from that angle.
But if we look at it from that angle, this is just a restatement of capitalism.
Every for-profit business has the goal to obtain a profit stream. Whatever service or product they provide is just the "trick" to make that happen. I put trick in quotes because if it is a useful service or product then it is useful to the purchaser, even if the ultimate motivation for the company was to make money.
But that's not a bad thing, it's a win-win. The issuer makes money, someone gets something of value to them (being able to buy a property in this case).