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Comment by asah | Hacker News Reader

Tax the middle class, lovely idea - they have all the money, after all. /s

(the wealthy escape this fee by paying with a mix of cash and non-conforming "jumbo" loans)

The really wealthy can:

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.

Can you reborrow against the property at 100%? Most places I’ve seen will only lend on business owned or investment properties at 50% LTV

If you already have a ton of stock, the property is irrelevant.

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...

Your first two steps were right, but most of the really wealthy aren't bothering with stuff like TLT. If you want something super safe, there are safer options, and if you want return then you can mix those safe things with something offering better returns.

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?

What are safer options out of curiosity?

I don’t believe risk-free returns exist for long in the investing world anymore with fed rates at near zero. However lower-risk and safer options than a pure TLT portfolio are The Ray Dalio All Weather Portfolio, the Rick Ferri Core 4 Portfolio, the Harry Brown Permanent Portfolio, and the ETFs SWAN or SHV.

thanks for the pointers from you both

Well, naturally there are the short duration Treasuries, which are a solid bit safer than 20 year Treasuries. But it of course depends what you consider your risk tolerance to be, and what risks do you want to protect against. For example, a US Govt default is very unlikely, but possible, and while you can hedge against it, that'll cost you money. If you want to get into the really unlikely events, like hyperinflation, gold can play a part of a hedge against that.

IBKR (interactive brokers) is the only one I know with the lowest margin interest rates. However, no one should be using portfolio margin unless they know what a margin call is.

Just took a brief look at the landscape and it seems like M1 Finance gets close with 2% margin rates for access to cash - if you pay for their premium subscription. So, not as cheap as IBKR, but seems to be second best.

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.

Thanks for sharing your knowledge, it's really interesting! Do you know if margin lending is profitable for the brokers if the borrowed money isn't re-invested? I'm thinking that the 2% is not a lot compared to the cost of providing the service.

It's not the most profitable way to make money as a financial institution. But it is a very safe way since there are basically collateral assets on hand that don't have to be repossessed like a car or home.

This creates a mixed, more diverse portfolio with lower risk.

On the contrary, it is enormously profitable. If a brokerage charges you 3%, their profit is 3% - cost to borrow money for them - any losses. Losses are rare, they occur once in a blue moon when a major market crash happens. The cost to lend money is currently extremely low (fed funds rate is nearly 0), so yes, they're absolutely printing money with their margin loans. To the tune of several hundred million dollars a year for IBKR, actually!

You're very welcome! I'm glad someone found it interesting :)

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...

> ... does anyone else know of any others?

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.

You can only deduct the margin interest if you're buying property for investment purposes, not for personal use.

He's describing "tax aware borrowing." JP Morgan explains this to their clients here: https://www.jpmorgan.com/jpmpdf/1320698073211.pdf ; the example on the bottom of page 2 walks through the mechanics.

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).

Very insightful, thanks for sharing.

>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

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.

This is a variation of the old lend-long-borrow-short strategy that blew up spectacularly in 2007:

https://en.wikipedia.org/wiki/Structured_investment_vehicle#...

The safety here is within a context where housing is an incremental and relatively uncorrelated expenditure compared to the rest of your assets. It's one thing to lever to 1.2x your net worth with a highly diversified portfolio, versus using a specific kind of bet to lever 2x, 4x, + to maximize returns.

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.

Paying cash (and financing in general) has 0 relationship to whether you pay real estate broker fees.

I suppose that's true, I was thinking more a private sale being an additional optimization but to your point that's not linked to wealth at all.

Margin is also a dangerous thing that poses extinction risk. People learn that every crash.

As a neat optimization you don't have to make your entire home purchase on margin. If you want to buy a modest 1 bedroom in SF for $1M (lol) you can make a $250,000 down-payment via margin loan and take the other $750,000 as a mortgage, so you get the full deductibility of both the mortgage and the downpayment, and you can still see future appreciation in your equity position. YMMV, of course, and subject to your personal risk tolerance.

>subject to your personal risk tolerance

GUH

Providing subsidized loans to people is a tax on the "middle class" - or more accurately, the set of people who rely on income from wages and do not have sufficient investments to benefit from devaluation of the USD and appreciation of equities.

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.

The interest rate environment will, net of this one-time fee, still make purchasing a home this December much cheaper than it was last year at the same time. (3.1% versus 3.9% for a 30 year fixed.)

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.)

You forgot the part where you frame is as "taxing the rich" but silently move the goalposts when you realize that their billions don't actually go that far on a national level.

Not sure what your sarcasm is supposed to mean. The middle class _do_ have most of the money, and raising taxes on the ultra-wealthy wouldn’t make a meaningful difference in revenue.

A wealth tax would raise tens or hundreds of billions a year, which is a pretty meaningful amount of revenue...

> which is a pretty meaningful amount of revenue...

It really isn’t. The US federal budget is trillions of dollars.

I disagree. In both relative and absolute terms an increase of tens or hundreds of billions of meaningful.

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.

>A September 2017 study by the Federal Reserve reported that the top 1% owned 38.5% of the country's wealth in 2016. According to a June 2017 report by the Boston Consulting Group, around 70% of the nation's wealth will be in the hands of millionaires and billionaires by 2021.

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...

People with a net worth of 1M are definitely (upper-) middle class, unless we’re using that term in two totally different ways. I’d be curious what fraction of the total wealth is held by them as opposed to by the super-rich.

Where do you live that a net worth of 1MM is just upper middle class?

The USA. People with 1MM in net worth typically have professional-class jobs like doctor, lawyer, engineer, etc., and still need to work for a living.

Anywhere where returns on $1 million is not enough to indefinitely sustain a lifestyle significantly above poverty level, so... anywhere in the US. Someone who is obligated to work to sustain their lifestyle is middle-class.

Please qualify the scoping or share the basis for your assertion "The middle class _do_ have most of the money...", as this pie chart [1] shows US middle class net worth is about 4%, not what I interpret as "most of the money". Either your scoping of your assertion is for a different nation (in which case it isn't pertain to this discussion thread of a US-centric news story), the scoping of the "most of the money" term is different than what I use, our scoping of "middle" is different, or there is something else I'm misunderstanding about your assertion. I don't consider the bottom 95% of households as "middle", and you'd have to get there to even approach rough parity with the remaining 5%, and by then that 95% is not much of a "middle" any longer, so I'm not clear what you consider "middle".

[1] https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...

Tl dr; they are charging a small fee on Fannie and Freddie refinance loans. Loans originated elsewhere do not have this fee.

Title is misleading.

This trend will only continue. Until middle class will be driven into the ground and the whole thing collapses.

Let's also not forget that this is another way to subsidize housing security for current (boomer) homeowners at the expense of putting homeownership farther out of reach for the young.

This is a fee on refinancing. It effects current homeowners who want to refinance, not people who are looking to secure a mortgage for a new home.

Missed that, which makes my comment pretty dumb. I stand corrected!

To be fair, the title does say "New US mortgages". Way to own it ;-)

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