Adverse Market Refinance Fee Implementation now December 1
fhfa.gov
fhfa.gov
This has already started in some of the most overinflated areas. When this becomes widespread owning property will be a liability. Owing debt with property as collateral will be financially ruining for most of the middle class.
It is interesting that Bezos' "your margin is my opportunity" nor Andreessen's "software eats the world" has yet to discount real estate valuations.
The rational emergent response from young generations is to reject conventions surrounding real estate, as that entire ecosystem is completely unsustainable for the majority of the population. The young generations have been completely shafted on real estate.
Generally, the younger generations are completely screwed if they try to fit within the SFH model. To just survive, they'll probably need to start thinking in terms like "individual/single-family model of living is monetizing my distrust of peers", finding like-minded to group together and re-capture cost-efficiencies of scale for themselves.
I've long wanted to find a tract of 16 ha / 40 acre to experiment with integrating a number of ideas I've seen floating around the net. Lstiburek-grade building envelopes, combined package/people PRT, centralized laundry and food services, on-site food forest production, waste stream co-generation, etc. All to work out the details of answering the question, "what is the absolute minimum number of people, minimum de-centralized organization, minimum processes and minimum automated tech tree needed to replace 80-90% of what we normally pay retail for, with wholesale/distributor costs?"
I'd like to see for example, what would happen if people with less financially-remunerative prospects but with a good work ethic were made a contractual promise: you put in your time helping those with better financially-remunerative prospects with tasks that we can't automate yet, like housekeeping and grounds maintenance, and you'll get treated with respect and dignity, have the same educational and medical services for your children as theirs, won't get taxed out of your living quarters in your old age, and be cared for within the same community in your old age (mixing it up with the toddlers and kids at first, then receiving hospice care for example by trained teenagers in later stages when warranted).
In general, I've long thought it really weird that the incentive structures nominally put in place and heavily promoted to us drive us apart where we're easy financial pickings for large, organized institutions, instead of driving us together and funnel compounding interest valuations of the group's network effects into the group's benefit instead of shipping it outside of the group. I strongly suspect dominant cultural factors obscure the recognition of those emergent network effects, and the drive to assign monetary valuations upon many factors is leading to bad abstractions from lossy information transfer. But realistically, maybe I'm just doomed to figure out via defeat in detail why homo sapiens sapiens in general cannot be trusted, as this is all too hand-wavy at this time for my taste.
What's the mechanism you're thinking will cause this? Based on what you've said, I can imagine you're thinking either a crash in property values that leaves people underwater on their debt or widespread property damage by people that have 'stopped respecting property law'.
Regarding theft/violence/vandalism, it can happen just as easily to a home you rent as to a home you "own". Regarding property value declines, any decline that's financially ruinous is going to ruin _someone_, and the debate then becomes who's left holding the bag when it happens and how that negative impact propagates outward through the broader economy.
(But I'd be interested to hear more of your point of view.)
Nice misinforming title, op.
@dang please fix the title.
Submitters: please follow the site guideline about titles: "Please use the original title, unless it is misleading or linkbait; don't editorialize."
(Submitted title was "New US mortgages will include 0.5% “adverse market fee” starting Dec first")
I would be surprised if out of work people can refinance a home mortgage loan without proof of income.
What we'd always tell the borrowers is "don't make any life changing decisions while your in this process. Do it AFTER we give you the money!"
Why would an employer ever reveal this? Seems like all liability for no gain.
Since 2008, the market for "Non-Agency loans -- i.e., not Fannie and not Freddie" has dwindled. Almost all loans originated at banks end up and Fannie/Freddie.
Banks are just the originator.
Looks like this was announced 25 August?
I refinanced my own mortgage three times in the last year and a half. Three times! I started 2018 at 4.5% and now I'm at 3.0% (30Y Fixed). And I'd do it again if we got to 2.5%.
But that also means all those bonds that were expecting 30 years of 4.5, 4.0, and 3.5% interest are going to perform lower than promised because my interest money isn't going into those anymore. And we can't have that now, can we?
Because of COVID I was able to do it in the parking lot of the title company with my dog in the backseat. Done in 20 minutes.
(the wealthy escape this fee by paying with a mix of cash and non-conforming "jumbo" loans)
1. ...use a margin loan collateralized by their stock to purchase the property for cash, paying a 0.8% (variable) interest rate on the outstanding balance (potentially avoiding 5% in real estate broker fees)
2. ...deduct 100% of the interest - regardless of the amount - as an investment expense.
3. ...then borrow the same amount, buy a nice, conservative 20+ year bond fund like TLT, and use the 1.6% dividend to pay off the interest on the margin loan for both the property and the bond fund :o
Margin is a wonderful thing, if you've got the collateral.
Happy I plan to close my re-fi on 11/20, though.
Let's say you have $10M in stock that you're fairly confident will retain its value. The regulation T initial margin is 50% and maintenance margin is 25%. If you wanted to buy a $1M property, there's no reason you can't borrow $1M against your stock and buy a house with the cash and borrow another $1M to buy TLT with. Except for, you know, your personal risk tolerance.
InteractiveBrokers will charge you only about 1% these days, less if you borrow more, as low as 0.75% [1].
[1] https://www1.interactivebrokers.com/en/index.php?f=44427&gcl...
Also, it's possible to borrow against your securities even for the non ultra wealthy. I know IBKR offers reasonable rates, does anyone else know of any others?
Schwab Pledged Asset Line appears to be in third place for most amounts, but really only makes sense if you want to loan over 2.5MM (then the rate is 1.75%.) They won't even let you loan less than 100k. So Schwab barely makes sense, and only if you don't mind the bad rate -and- have over 5MM there, which is a shame, because I otherwise like Schwab.
DeGiro is an excellent option in Europe, with rates rivaling IBKR.
SPX box spreads are another option, but that gets a bit more complicated.
And you're absolutely correct, nobody should use margin unless they know what a margin call is. I would personally only lend some 10-20% of my portfolio max to help with liquidity.
A short explanation of margin, for those who don't know: Normally, the initial margin requirement is 50%, with a 25% maintenance requirement. AKA (assets)/(assets + margin) has to be more than 0.5 to start, but if the value of the assets in the account drop, this is allowed until (assets)/(assets + margin) < 0.25, upon which you face a margin call and must add cash or sell assets. So, with $100 in stock you can loan $100; if the value of the stock goes below $50, you're under the 25% maintenance requirement and you get a margin call. Worth noting that while some brokers give you a few days, IBKR simply auto liquidates, giving you no chance to add cash. (More details here: https://www.elitetrader.com/et/threads/your-experiences-with...) The reason why a margin call/auto liquidation is bad is that this generally happens during a market dip, meaning you are forced to sell your positions at a serious loss, locking that loss in.
There are other risks to borrowing a serious percentage of your assets, however. A margin loan is a unique type of loan where payment in full can be demanded at any time. While this is somewhat rare, brokers do sometimes get spooked for various reasons (external market movements, your own investor profile etc) and will rapidly increase your margin requirements. For example, IBKR recently increased requirements across the board by 35% due to the election. While your bank will always be satisfied with regular mortgage payments and never demand sudden payments, in theory your brokerage could demand the full amount of your margin whenever they wished. That's another good reason to limit your margin to 10% or 20% of your portfolio: if this happened, you would only have to sell that smaller portion.
That said, margin loans are the cheapest form of capital available to most people who own securities AFAIK. So there's that massive advantage. Another advantage is that it can help with taxes: while selling securities is a taxable event, getting a loan on them is not. Keep in mind that if you spend your margin cash on more investments, you can deduct the interest, but you can not deduct margin interest on margin used for personal expenses.
This creates a mixed, more diverse portfolio with lower risk.
The cost of providing the service isn't huge: there are already systems in place to provide you with money at a broker - the main cost is the systems to automatically sell securities when the value goes down. But that's not _too_ crazy complex.
And it makes a hell of a lot of money. IBKR reported _hundreds_ of millions of dollars of net interest income on customer margin loans in 2019. Those hundreds of millions were made on a net interest margin around 1.7% (an even lower ~1% in 2020!) Traditional loans, people default all the time. But margin loans are collateralized by the securities in the account. For example, you hold 100 shares of Apple in the account, which is the collateral for the margin loan. You can't default: if you try to run away with the cash, well, they have your Apple shares. Really, the only time they lose money is when the value of those securities drops significantly faster than they can sell them, and the borrower racks up a large debt and can't pay it back. But that happens so rarely that the overall program remains very, very profitable.
If you're curious about reading about the times it goes wrong, here's an interesting link [0] describing how users with options lost a lot of money IBKR had to cover - keep in mind that 88MM was what they had to initially cover, and they undoubtedly recovered a lot of that back over time from the borrowing users.
[0] https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3...
If you have a substantial portfolio, you can just reach out to the customer support line at your brokerage of choice and ask them to match IBKR. They may not get you all the way but they'll get you close.
Ameritrade Institutional offers clients ~1.5% at the moment so that's probably a reasonable proxy for a lower bound at Ameritrade.
At no point will the client directly use the borrowed money to purchase a home. They will use the borrowed money to purchase securities, which are (by definition) for investment purposes, and for which 100% of margin expense is deductible.
Coincidentally, they will also have sold some securities at some other time in the year, and used the proceeds of that sale to buy a home (with cash).
This is not a free lunch as you make it out to be. You're essentially borrowing short and lending long. It works so long as the short term interest rate stays below the long term interest rate, which is far from guaranteed. Wework tried doing the same thing with office space, and they were thoroughly criticized for how risky it is.
https://en.wikipedia.org/wiki/Structured_investment_vehicle#...
In a low interest rate but potentially high inflation environment, modest leverage is probably more responsible then underlevering by holding a lot of cash-like assets.
GUH
Title is misleading.
The government providing a lower interest rate increases house prices, and therefore the amount people have to borrow in the first place. But if you're a wage earner, house prices will appreciate faster than your wages depending how low interest rates are driven and how long they are kept there. This results in a greater portion of one's income over their lifetime going towards paying for their property.
It's the same thing with student loans.
It really isn’t. The US federal budget is trillions of dollars.
That could provide free education, health care, subsidized housing, improved transit, high speed rail, or any number of tangible and meaningful benefits.
Whole integer percent increases in tax revenue are absolutely meaningful as well. Even if the integer is a small integer.
If we hit over 50% as predicted (and the last 12 months have been very beneficial to the upper classes), no, the middle class doesn't have the majority of the money.
>CBO Chart, U.S. Holdings of Family Wealth 1989 to 2013. The top 10% of families held 76% of the wealth in 2013, while the bottom 50% of families held 1%. Inequality worsened from 1989 to 2013.[1]
https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...
[1] https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...
Credit quality has declined because some borrowers in the population have unobservable risks due to the coronavirus impact on the economy. Someone has to pay for that. Borrowers are the obvious choice. To the extent that borrowers have visible risk characteristics, they pay directly; you can (incredibly) still sell Fannie Mae loans which are in covid-related forbearance, but they'll want a 5 to 7% discount on these. (For a full table of Loan Level Price Adjustments: https://singlefamily.fanniemae.com/media/9391/display )
The wealthy generally do have many options on what to do with their money, which presumably includes hiring a financial advisor who could tell them that the interest spread between a conforming loan and a non-conforming loan is far higher than the impact of ~0.5 points.
(A "point" in mortgage parlance is a one-time fee due at loan signing; the primary use of them is "Pay points to buy down your interest rate." Fannie Mae decreasing the amount they'll pay your mortgage provider for the mortgage sold to them implies that the same mortgage available post the fee would cost you Fannie Mae's fee in points.)
What I don't understand is how that ties in with socialism. In modern times, in developed countries, socialism generally pulls the poor up and the rich down (e.g. scandinavia, northern europe, canada-sort-of). How did you reach the conclusion that a relatively right-wing government is socialist?
They of course omit this opinion when it's rich people getting government handouts