The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll make a mortgage transaction every 20 years on average, but if you try to live in a giant commune like a 90s era sitcom, it'll financially collapse every 2 years and ya gotta live somewhere so you'll be entering into new transactions the bank can middleman every two years rather than every twenty years. They probably will make less money off each transaction, maybe lose some of the time, but if you increase transaction volume by 10, as long as their profit drops less than 90% its a net gain for them on average.
Also interest is profit to the financial institution, they'll make far more money off ten two year mortgages than one twenty year mortgage. With a side dish of the bank eating all the equity in interest in fees meaning the participants will be much poorer after twenty years meaning the bank can extract ever more middleman profits off the victims.
The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage.
I think the nightmare scenario for financial institutions is people buying houses for cash. No mortgage, no down-payments, no middlemen. The west coast right now is seeing an increase of such transactions. Add to that the slew of services trying to get around realtors, and the future may be bleak for such financial institutions.
One can only hope...
I don’t, but all the appliances sellers here advertise it so people must do it.
I recently replaced a refrigerator, which was over 40 years old and which I'd done multiple overhauls myself on over the years.
Appliance store had lots of refrigerators in the $3,000-$16,000 range. With lots of features and compartments, multiple icemakers, LED zoned glow lighting, exotic hinges, internet connectivity, etc.
I got a good fridge for $500 for cash. No icemaker and a single fridge and freezer door so it had the highest energy efficiency rating, higher than all the high tech fridges there with exotic energy saving features. And plenty of room inside because it wasn't taken up by compartments and drawers and icemakers.
So... if most people are financing as you speculate, maybe it is because they are going for these $5000 refrigerators that don't work as well as the $500 refrigerators.
Also I just know that all the internet, digital stuff, and touchscreens on the $5000+ fridges is going to break down in a few years and cost a fortune to repair. No thanks!
If I had invested the money in my stock portfolio instead, I would be ahead of the game since in the US (I realize the article is about the UK) mortgage rates are ridiculously low, stock returns are good, and mortgage interest is deductible.
I like to upgrade my houses though including major demolition which the lienholder of record sometimes doesn't want to go for without trouble. I have more freedom with the property with an outright purchase. Despite the fact I'd have more money taking a mortgage and investing my investment gains have been dramatic enough that I'd rather have the freedom.
Anyone working in IT should own at least one house outright by age 30 if they want to and if the can't they need to upgrade their skills, switch jobs, or stop spending irresponsibly. Starting salaries for recent grads from decent colleges are $90k now on average. That's people with no experience. After 10 years everyone should be making a lot more than that and all these rates are vastly more than anyone needs to live on. Save save save in the early years, then invest. Don't spend earned income on anything other than bare essentials. Spend from surplus investment income. Lots of people are in trouble every month spending all their earned income despite making $180-$400k and they never get ahead. There's no excuse for that. Cut expenses to what the poor spend and invest the surplus until you can permanently live well off your investments. But continue working at that point.
I graduated ~7 years ago. Besides this figure being far higher than I experienced as a starting salary,
1) These salaries are for high cost of living areas. Rent can and often is $25,000 or more a year.
2) These high cost of living areas, homes can and readily list for $1,000,000 or more, which is, in your estimate, 11 times the starting yearly salary, ignoring every and all expenses.
3) These 'decent colleges' can put you in several hundred thousand dollars in debt.
4) $180-$400k is not in the salary range for most software developers. This is well above average.
There's no way I'm buying a home when I'm 30. When I do, there is no way I will own it outright. And I feel like I make a good living for myself.
So after 8 years of living the bare minimum life style and using up the a good portion of your youth on saving money, you can finally outright buy a 800sq foot house in the poorer communities of silicon valley.
Sounds like a great plan to me. /s
Note you could invest the money while you build it, but get if the market tanks, good buy money
You do 10 years. Let's do 8 years instead so we take our next move age even 30. Using your numbers there's 465.5 saved total. But we put that in the market each year in boring run of the mill bread and butter commodity stocks with half decent dividends and reinvest the dividends. Over all we see a modest 7% annual return from the market all together, both gains and dividends. So we're 30 and have $625k in fungible stocks that can be cashed in. Similar to 617.5k but somehow having 0% returns, and we're 2 years ahead.
So the only option is to buy a lousy house in a bad neighborhood with crime in a city where homeless guys are blowing each other on the sidewalks which are strewn with feces and AIDS infected heroin needles?
No of course not. If in such an area the only rational thing is to move to another area.
Now if you bought a house in this hot market that house appreciated more than 7% for these 8 yrs. But you also were paying 4% or so on a mortgage. Still you have a big gain. You paid $480,000 for a condo in 2010 and now it's worth $1.3 million (12.5% APR). BTW, I'm using real numbers for a family member's property in the bay area with these exact years. So that's nice cash infusion as well, rather than losing money on rent. However ignore that, let's just go with rent and stock gains instead, which I recommend anyway. I don't recommend people pay cash for houses like I do unless they have a reasonable justification for doing so. It's better to let the bank front it when mortgage rates are low as they are.
Anyway so you get a transfer to Topeka or Bismarck or Austin or Durham. You buy a mansion with a swimming pool and a horse barn on a 2 acre parcel. Or maybe you decide to commute 10 minutes from outside town where you buy a 4500 sq ft farm house on 75 acres of land. And you pay $250,000 either way. If you had bought your condo in 2012 you have around $1 million to spend, if not you have around $625k to spend. The rest you leave in those stocks.
You took a big salary hit moving. Went from $140k with $300k in bonuses and equity to $110k and $300k in equity/bonuses if managed to move in-company but different office across country, or $110k and no equity if not. Either way your living expenses drop to near zero. Company has full benefits so you're paying utilities, low property tax, and food. Maybe $500 a month total since your mansion is paid off. Now you have $104k a year to stuff into those low yield commodity stocks.
But you get "lucky", like everyone who invests long term. It's not luck, it's just persistence. One of those stocks takes off. Or maybe you have an equity event in a company you're consulting with who couldn't pay market rate. So that's a few million here or there.
I'm not lucky or special. I just do basic common sense stuff and avoid stupid stuff. I know car mechanics who have done better than me by retirement with their investments because they took more risks. But I have done OK and my value is above $30M. I'm old and now have health problems, so it's nice.
It seems really backwards to consider this the nightmare scenario. This is exactly what everybody wants: for people to take a mortgage once and pay it off eventually.
A business that considers healthy finances a nightmare scenario is a predatory business that needs to die.
A healthy economy would make investors compete over those investment opportunities. If a lot of investors want to put their money into residential single-family mortgage loans, and only N families seek to borrow with that type of loan per year, the investors would have to offer lower interest rates for every level of default risk. This limits the amount of money the investors can make by lending, so some go off to look at different types of investment. The rate of return naturally sorts itself out such that it increases with increasing risk.
When rates of return are low, entrepreneurs generate more investment opportunities at all levels of risk. But housing starts and transfers are more closely associated with employment opportunities, which tend to trail new business starts. People don't buy houses unless they have jobs that pay enough to buy houses, and they don't have better jobs unless businesses are expanding and labor is getting more scarce.
What seems to be happening is that middlemen are assembling artificial investment opportunities with a falsified risk profile, in order to capture investment dollars that would otherwise leave to find other opportunities with a better return/risk ratio. Some of those investments would have eventually sloshed back into mortgages, filtered through new employees or promoted employees, to replenish the pool of available investment opportunities. So the risk fraud is self reinforcing; the more it happens, the more it has to happen in order to maintain the status quo.
If the financial institutions are completely serving the mortgage market, that excess money has to go into other investments, or it loses its value. They won't be mortgage investments, but there are only so many of those around to pick up. The "nightmare scenario" is "OMG! We need to find another parking spot for our colossal pile of money! And the available ones are SOOOO FAR--like 50m away!"
Are hospitals predatory?
I guess this is the clearest case ever of why regulation is important. Good regulation provides businesses with incentives that help rather than harm society.
"Healthy" society is a weasel word here though: a qualifier that turns this into a "no true scotsman".
In this one, and most real societies, hospitals do want people to visit more often. Their incentives are geared towards that.
And not just "visit more often" -- hospitals (well, hospital execs, doctors, etc) want (and do) all kinds of things detrimental to society:
- to charge more for healthcare
- to add hidden charges
- to perform unneeded operations and treatments to make profit (even if the patient not only doesn't need them, but can be in danger from them)
- to prescribe drugs that the drug companies wine and dine them to promote, whether they're needed or not
And whole more besides.
E.g. https://www.scientificamerican.com/article/unnecessary-tests...
https://eu.usatoday.com/story/news/nation/2013/06/18/unneces...
http://discovermagazine.com/2018/apr/doctors-wined-and-dined
https://theconversation.com/whos-paying-for-lunch-heres-exac...
This might be true, but I would expect citations. I might be biased, is only anecdote, but my experience around the world would single out USA as a place where this is predominant.
Besides, not all the hospital visits are equal, a clear example of how we can align the incentives are vaccination campaigns.
Sure, but most of the discussion on HN focuses on a USA context.
In my country for example, such incentives might not be predominant re: public healthcare (since the staff gets paid whether they have more patients or not), but they are with private practices.
Maybe this is true in the US but not sure it's valid point in Europe where, given how the health system works, most of the time patients are actually a cost for the business hence less patients the better really.
Hence the other arguments he made, about gas stations want you to burn more fuel, etc.
It's about how for-profit incentives of companies can be detrimental to society.
Price-sensitive customers may feel differently.
The Surgery Center of Oklahoma[0][1], for instance, makes a profit while providing better, lower-cost treatments than traditional hospitals. And they actually have transparent pricing.
[0] https://surgerycenterok.com/ [1] https://reason.com/reasontv/2012/11/15/the-obamacare-revolt-...
https://eliresidential.com/blog/2018/6/12/what-is-the-averag... http://nahbclassic.org/generic.aspx?genericContentID=194717
This is very interesting and produces an odd incentive structure. The only upside I can think of is mortgage terms might be favourable to the buyer as the lenders just want a higher mortgage turnover which can't happen if people are stuck in mortgages for too long.
Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market?
It seems like a win win, at least for people who have access to 4% interest.
My favorite rebuttal to that argument is this Q&A: https://money.stackexchange.com/questions/89245/should-i-buy...
To quote the top answer:
> Ask them if you already owned the house, would they be advising you to take out a mortgage in order to invest elsewhere. If not, ask them to explain the difference between taking out a mortgage on the day you buy the house and taking the same mortgage out the day afterwards.
If I owned a house (with no mortgage), I wouldn’t take out a mortgage on it just to invest those funds in the market. Some people might, but that’s too much risk for me.
If your mortgage is big enough (over 750k as of the last tax bill, which is not that uncommon in some real estate markets) or small enough (so you don't itemize your tax deductions; that roughly corresponds to mortgages under $300k for married couples, I would think), then putting money into paying off the mortgage has a guaranteed 4% _after-tax_ return for some number of years that depends on where you are in your mortgage payoff cycle.
Would you buy a government bond on those terms in the market?
There are obviously liquidity issues with home equity that are much less of a problem with bonds, but I am also not seeing any 4.5% (generously assuming a 12.5% marginal rate on your bond interest) US treasuries bonds in the market right now, at any maturity.
You're still losing a little but you will be ready for emergency home fixes & getting sacked with random specials from your city which are usually at a higher interest rate.
Of course if you have tons of cash, then for sure throw it in some ETFs in the market.
People take out long term mortgages but it is quite common to re-mortgage on the same property to get a better deal...and usually people go with a different lender in those cases
Or to "extract" equity as money to spend. There's a huge amount of advertising out there trying to convince people they should take out a home equity loan and spend the resulting money.
This is only true provided that the mortgage rate for this person is below or at the federal funds rate, right? Given how low it is, even in the nightmare scenario they're making good money.
Though for the originating institution you're generally correct.
Well, that's a bit of encouragement to overpay my upcoming mortgage.
Increased risk does not benefit the lender.
Lenders do not want real estate, or the work it takes to get it. They want regular payments.
a lender’s job is to price default risk. if they could do this properly (pricing at a premium), they’d prefer higher risk because it would net them more profits (this is supposed to be reigned in by regulations on risk exposure but we saw how effective that was a decade ago). so higher risk does generally benefit the lender.
however, lenders are horrible at being real estate investors and property owners/managers, so they’d rather avoid (most) foreclosures as it’s less profitable to them. they’ve even gotten out of managing the loans in many cases, preferring to sell them off and reinvesting the money in new loans instead. it’s specialization at work.
This changes when banks exploit mispricing or miscalculation of risk by other lenders, to undercut them or to buy low risk debt at high risk prices.
Major underwriters want regular payments. If they wanted market value property, they would invest in that instead.
If banks wanted to foreclose property, why wasn't 2008 a winning year for banks?
This was one of the major ways the black middle class was hollowed out since homeownership was one of the major sources of middle class wealth gain.
[0] https://www.chicagoreader.com/chicago/contract-selling-redli...
No, it's not more valuable.
When a property is repossessed by a lender, it is sold (often at auction) by the lender. The proceeds (minus costs for admin, auction fees, legal costs) will be put towards the debt. If there is money left over, then it goes to the borrower.
So, in the best case, the lender gets their money back (and loses the chance to earn interest for the remainder of the mortgage term). In the worst case, they get back less than they were owed.
Don't forget that you hardly repay any capital at all in the first years of mortgage which is in favour of the lender. Similarly in a lot of countries like Spain, UK, France, ... if you LTV is too low, the bank charge you for a specific insurance that covers loss of value of the property.
The common wisdom was that indeed the bank would rather have people paying their debt, but I'm not so sure it is still necessary the case. One sibling comment to yours provide a different point of view, talking about how bank takes money of transation and more transaction is more money. Following the 2008 crisis that showed that the backend debt component of the mortgage is actually instrumentalised and resold and the element I mention here, I wouldn't be surprised if, for some banks at least, repossession is not part of their revenue stream.
Is this just what they do as it makes financial sense to them, or is there some law or similar prompting them to do it? I was wondering if holding on to strategic property would be beneficial. But if they are immediately selling all property that is repossessed then it doesn't sound as ominous as I imagined and actually sounds like the most beneficial thing that could be done, for the market and potential buyers.
When banks end up owning properties is usually when there are no bidders; the starting bid is usually either the amount of delinquent debt or the total of the debt and any other costs that can be charged to the borrower. The bank has effectively shown that the house is worth less than what was owed at that point in time, and then it's their job to get rid of it (in some cases a bit of staging will go a long way, in others, they'll have to sell it for much less or hold it for a long time or both)
As far as I'm aware there's no law demanding they turn around and sell, but it makes a lot of sense to.
There are practical problems relating to specialization in the industry; there are no participants at this time who could play the proposed game. There are salespeople-transactors companies who need to turn their working capital over every month or so; the people who sell you a loan for a commission and then sell the loan to a national servicing company next month, they need to turn that working capital over every month or two or they go out of the business of selling loans because they run out of cash to turn over in new loans. Meanwhile the national servicers specialize in logistics, sort of, by trying to optimize cheap and poor customer service to turn (junk) bonds and such into the largest income stream they have; they optimize all internal processes on being identical and simple and fast and dumb. They're in the business of raising money, buying lots of small income streams, then milking it for all its worth via monthly payment transactions and trying to branch out into long term real estate investing is problematic for that business model level. Why don't restaurants own farmland, because skilled farmers and skilled restaurant operators usually aren't the same people so two people trying to do that would overall make far more money if one tried to be the farmer and one tried to be the restaurant chain owner.
There are real estate investment trusts but they tend not to be a tiny department of a sales org or a servicing org. REITs tend to be stereotypical investment organizations that happen to buy real estate and derivatives and holding companies rather than Apple or Google stock; not a desk at your local bank branch or a dude in the mail room at a national service center.
The closest analogy is probably pawn shops. Those guys will sometimes do weird things to optimize return on their collateral. Its probably a good thing they tend to be smaller and less centralized than the world wide megacorporate financial system.
That is a significant misunderstanding of fractional reserve banking. Banks can only lend money they have, i.e. that customers have deposited. They can't just invent money to lend. So, a bank with $100,000 in cash can only make loans totaling $90,000 with it (assuming a 10% reserve requirement).
By financialising the mortgages and other loans, the banks can now treat them as if they were lendable cash. A bit like they can treat gold bullion like cash.
They'll likely sell at an auction for cash too. With two houses otherwise identical, one being sold normally, one as a reposession, you'd go for the normal one. How much less would you pay for a repossession which runs a risk of the previous owners coming back to haunt you?
In hot markets sure, maybe a bank might see a default and repossession as a good thing, but I doubt they are optimizing for those scenarios.
https://fred.stlouisfed.org/series/DRSFRMACBS
A rate of 2-4% is about average for the US, I'm told most lenders model default rates of up to 8%, though given 2008 I'm guessing 10% will be seen in some forecasts from now on.
As a side note, the above site fred.stlousfed.org has some of the best clean data that you can find for free for modelling purposes
And lenders always want to be repaid as there is no incentive for them to repossess a house as its auctioned off and the owner get any excess return above what they own.
As others have said, banks don't want to be holding on to property any longer than they have to.
While that may include plenty of fees etc, theres limited upside.
This classic example is lenders forcing an auction into which they know the only likely bidder is a related company of the lender.
Google "jointly and severally liable".
This is called "joint and several liability" and is the legal position for many agreements when a party is made of several people (at least in the UK).
For example, people sharing a flat/house as renters will have the same liability unless they have separate tenancies. This is extremely common but surprisingly many people have no clue about it and think that they are fine paying "their share" of the rent.
The risk if they don't look after their security properly is that the lender ends up owning (say) a 1/3rd joint share in a property which they are not permitted to sell without permission from the other 2 owners and on which they are not entitled to any rent and can't evict the defaulting borrower. There are cases where this has been the result of a defective mortgage arrangement. Understandably, that's not something lenders really want to risk.
It is possible for property to be owned with only one name on the deeds and one name signing the mortgage deed by establishing a trust.
If you want the lender to consider multiple incomes on that basis then you'd need guarantors and you then run into the problem that this probably needs specialist human legal input so it is suddenly not a mass market product.
It's also worth noting that under joint and several liability, the tenants would usually have the right to then sue one another for the relevant shares if the lender went after one of them for the whole amount.
I notice this more and more, along with promotion of clearly trivial stories to the front page - is a banal and contrived tweetstorm about Trump/race/trans/gender/tax issues justifiably worth elevating above a story like Venezuela, or rampant knife crime, or any number of other inconvenient yet important stories about which the BBC chooses to avert its eyes?
I believe that much of what is motivating their current direction seems to be desperate fear of becoming irrelevant in a changing media landscape (an existential threat given that with falling engagement the license fee would eventually become untenable), hence their degeneration into a crumby buzzfeed simulacra. Another reliable institution subverted and going down the tubes, hey ho.
Ignoring the headline. This seems to be mostly beneficial to the lenders more than anyone else. The risk of a non-payments and financial issues is much higher and repossessions will be higher.
> Even if four people's names are on a mortgage, if one or more stop paying, the mortgage lender has the right to demand full repayments from whoever they can reach, he explains.
You only have to consider divorce rates to see the maligned incentives. Can someone more knowledgeable than me on the subject of mortgages explain if repossession is more valuable to the lender than someone paying off their debt? Intuitively it feels like repossession is worth more on a long enough time scale but would be interested in insights from someone else.