> 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
I feel even more confused
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. They would rather buy a bundle of thousands of mortgages at once and outsource the hassle of taking the payments to someone else.
The bundling and administration of mortgages is akin to a manufacturing process for electronic flow meters. The customer just cares about seeing a number go up, and pension funds just want to see money hit their accounts.
Since a great way of turning a bunch of cash upfront into a larger amount of cash over decades is through mortgages, banks unfortunately have to find actual people and help them buy a house.
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 on behalf of the absurdly wealthy + institutional investors.
In the US at least, govt has problems running "retail." (It also has problems running wholesale, as evidenced by the give-aways to BlackRock, but ...)
Mortgages themselves are unusually public in the US and probably staying that way. Other people don't get 30 year fixed loans, that's a huge benefit and inflation defense.
Mind that the US is somewhat unique in its subsidy of early-prepay 30y fixed mortgages - they exist nowhere else, because no sensible private lender would offer such a product otherwise (or a huge markup).
- It is the norm to use either a variable rate or series of short fixed rates
OR
- Redemption fee is capped (for instance in France it’s capped at one quarter worth of interest).
I’m not sure it’s normal anywhere to have a 30 year fix which you can’t get out of? Which country are you thinking of?
Granted, that’s kind a _weird_ product; I think only one lender provides it, and the market norm is definitely for fixes in the 5 year range (often with redemption penalties waived if you’re moving); after 5 years, you either transition to a variable, move lender, or re-fix. This seems to be more of a market norm/preference thing, though; Avant, the lender who does the 30 year one, appears to be able to make it work economically.
One oddity in the Irish market that maybe makes this easier is that mortgage lenders are only allowed charge, essentially, at most the cost to _them_ of breaking a fix as an early redemption fee. In practice, this is usually not all that high and may be zero. I’m not sure how many other countries have this rule.
Imagine a 30y yielding 3% with new loans yielding 6%. That bond would be priced at half its face value in order to make up for the yield difference - and in theory the debtor would have to pay that difference to buy it back.
The only way loans like that can be cheaper is an option/insurance (which costs money) in the loan to cover that risk.
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.
*Originators.
An insightful point. And here's a related one. The worst thing the financial industry could endure is for government to run a balanced budget year after year.
In the same way that a homeowner is not the primary customer of a mortgage, the government is not the primary customer of its deficit. That debt is absolutely necessary not only to finance the services provisioned by the government, but for the successful operation of the entire financial industry.
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).
> 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.”
I think many people would benefit from getting something out of the Economist's style guide:
https://cdn.static-economist.com/sites/default/files/store/S...
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.