Hacker News Reader

Comment by thinkerswell | Hacker News Reader

What is the cause of it being do different from the rest of the world?

Government policy. The US has multiple quasi-government mortgage market makers (because just one is somehow not enough...) that define baseline terms for home mortgages, and everyone must play their tune. See Fannie Mae and Freddie Mac. Seriously. That's what they're named.

There is another one tangentially involved as well that I can't remember the name of.

Exactly. Fannie Mae and Freddie Mac buy about around 70 percent the mortgages issued by banks. They only by conforming mortgages, meaning conforming to their terms.

https://www.investopedia.com/articles/economics/08/fannie-ma...

See also the Federal Housing administration which insures loans.

https://www.hud.gov/program_offices/housing/fhahistory

One can see there really isn't a laissez faire free market at work when it comes to housing in the US. The government is in deep and it's regulated out the ying yang.

> One can see there really isn't a laissez faire free market at work

One would think. Yet there is never a shortage of "See! That's Capitalism For You" comments.

> See Fannie Mae and Freddie Mac. Seriously. That's what they're named.

Well, colloquial names for "FNMA" (Federal National Mortgage Association) and "FHLMC" (Federal Home Loan Mortgage Corporation) anyway

Great depression is why.

Before real estate loan terms were exploitive interest only loans that the bank could call in any time. Worse they could demand payment in a fixed amount of gold. And when they foreclosed the owner lost his entire collateral.

First three years of the great depression was an orgy of foreclosures driven by bankers greed and panic. FDR closed the banks, seized all gold except for personal jewelry. The new deal introduced 30 year fixed rate mortgages to make sure the banks couldn't do that again. Loosening rules led to the 2008 crisis where they did it again. But the rules did still protect most.

We also have 20 to 30 years fixed rates in Belgium. It seems to be possible in France, Germany, The Netherlands, …

So I’m not sure that the US is actually an exception.

A family member recently got a long term fixed low rate mortgage in Belgium and I’m curious about how different things are compared to the UK. UK mortgages are higher, shorter term.

Is the Belgian bank losing money compared to the UK one? Is there state intervention?

There is no state intervention. Depending on market conditions, a 30 years fixed can have a higher rate than 25 years.

It’s basically hedged with long term bonds (Belgian or European) + a profit margin for the bank + risk based on your profile (age, health, employment history, …)

I guess UK banks are just hedging with shorter term bonds compared to Belgian ones.

In the UK it's long been possible to get a kinda long term fixed rates - at least 10 years.

They just don't tend to sell very well - when interest rates are low [1], it's not particularly appealing to fix at 2.69% for 10 years when you could fix at 1.94% for 5 years or 1.25% for 2 years.

And coming off the back of two decades of rock bottom interest rates, a lot of people didn't anticipate that they'd be remortgaging at a >5% interest rate.

[1] https://web.archive.org/web/20170921064712/https://www.barcl...

Spain is also similar. We recently locked in a 2.65% for 5 years but 15 years around 3% was also available. That 15 year came with early repayment penalties though.

The big difference is that in most European countries I know of you are locked into that fixed rate for the duration of the loan and cannot re-finance or pay it off early without getting hit with huge penalty fee, essentially equal to the lost interest payments the bank would be missing out on. In the US you can pay off and/or renegotiate early without those penalties.

Paying off an extra 10% of the loan each year without penalty is usually possible in the Netherlands for a 30 year mortgage. I did it this year.

This sounds strange. Banks typically hedge their fixed rate loan portfolio because there aren't many equivalent long-dated fixed-rate funding sources available to them. If the US market is such that borrowers can repay early or renegotiate long-dated fixed-rate mortgages without penalties, the banks are practically guaranteed significant losses when fixed-rates decline. Do US banks just charge higher spreads than European ones to compensate for this? That sounds undesirable, similar to tax loopholes: everyone pays more to compensate the enlightened few that actually take advantage of something that _everyone_ would want to do.

The US mortgage market is essentially backstopped by the US government. Banks can sell the fixed rate mortgages to a government backed bank at a guaranteed rate and so don't have to hold the interest rate risk on their books. The US government (both parties) has long believed that home ownership is important and have a lot of policies to encourage it, this is one of them.

You can repay early in the Netherlands as well. A friend of mine works for a major bank to hedge the risk of their mortgage portfolio. He mentioned once that the biggest risk for Dutch banks is not the risk of default, but risk of early repayment. This always surprised foreign investors when they did due diligence to invest in Dutch mortgages.

There are ways they use to hedge for this risk. I don't know if this is desirable, but that is probably the case in the US as well.

Not true, depends on European bank. I did pay my mortgage which was originally 25 years IIRC in Czech republic fully, one time payment, with no extra fees associated to this. Whether bank was happy or wanted me to keep paying all those years is another story, but their contract specifically allowed it.

In my French mortgage, I have 25 year fixed part, no point paying down that one earlier since the fee would be the sum of all the fixed interest for 25 years (what you wrote). Then the other part is calculated every 3 months from EURIBOR (not that great now, just like elsewhere). This one I can pay partially or fully anytime without any fees.

My Swiss mortgage is completely different and unique beast (also split in 2 parts, one fixed 1 variable from Saron rate), nothing you can see anywhere else in the world IIRC. 20% cash downpayment as usually, then in next 15 years I need to pay off another 15% of the property, and rest is just interest payments. We'll never fully own the property, and its very disadvantageous tax-wise to own it(so nobody here does it if they can avoid it). Swiss invented an additional property tax (Imputed rental value) that is calculated from hypothetical rent you could extract from given property, and you are taxed also from this theoretical income, even if its your primary residence.

Reply on news.ycombinator.com