> There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. ...
This is the consensus view. Funny thing is, this is exactly the kind of thing people were yammering on about with respect to "subprime" in 2007. Contained. Don't worry about it. A few weak players will go under, but there is no systemic risk.
Now, maybe that's true this time. Or not. What is certain is that the mortgage industry went through a metamorphosis since the GFC, and most of the players are now not banks.
> “The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.”
> In 2004, only about a third of the top 20 lenders for refinancings were independent firms. Last year, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which analyzes the industry for mortgage lenders. Since 2016, banks have seen their share of the market shrink to about a third from about half, according to news and data provider Inside Mortgage Finance.
So what happens when the major source of debt fueling the ongoing housing debacle comes from "poorly capitalized" non-banks? The obvious answer is that the gravy train careens into a ditch. Less capital means fewer loans. Fewer loans mean house prices are no longer supported by debt. Given that they stopped being supported by incomes a long time ago, there's nothing left to prop the thing up.
So it will certainly be different this time around. Every financial crisis is different in its own way.
> Fewer loans mean house prices are no longer supported by debt. Given that they stopped being supported by incomes a long time ago, there's nothing left to prop the thing up.
As anecdata, I was looking at a mortgage in SF recently (didn’t end up with one) and non-bank lenders offered me 2-3X the debt that a bank would offer, including rocket mortgage, which told me I could take out debt where the monthly payment was ~100% of my post-tax income (and 5% down). This was with no co-signer. I do have strong income and income growth potential (SWE in SF) but yikes I laughed at the guy on the phone when he told me the numbers because it was unreal.
Anyways I don’t have a mortgage and I really hope the availability debt to people absolutely crashes and takes housing prices with it.
This is more a financial signal of a real estate debacle created by the federal government and federal reserve. Literally the only way to "save" the market will be back to low rates as soon the spending and money printing move through the system and thus cool inflation.
Ya know the funny thing is, when you start to scratch at the surface of the main drivers of "inflation" over the past year, you start to find a lot of non-competitive markets, that is to say, price gouging.
My current reading is that the "consensus" wasn't wrong per se, just maybe naive? So far as I can tell, "true" inflation was minor and relatively transitory. What wasn't is problems like collusion amongst a small handful of market owners and other consequences of extreme consolidation like one factory for formula going down erasing 40% of formula production over night.
> Given that they stopped being supported by incomes a long time ago
How large of a mortgage you can take is directly supported by your income. Certainly, debt lets people can afford more with less, but the income supports the debt, which supports the housing prices.
So it will certainly be different this time around. Every financial crisis is different in its own way.
But financial crisis are rare despite all the media attention they get. Just two major crisis in the past 100 years: 1929 and 2008. There were some smaller ones but nothing compared to those two. So it's more probable that this too will not become a full-blown crisis.
You're missing 37-38, 45, 53, 58, 73, 81 and 90, and that's just the ones I can't think of off the top of my head. I'm sure there's probably double that number I can't remember, because they don't intersect with my areas of professional study.
29 was huge (way bigger than 08), but many of those others were in the ballpark of 08 or larger. As far as I'm aware, it's unlikely we'll ever see another as large as 29, but 08 sized? I'd expect another within 30-50 years of it.
I don't agree with this characterization. I would suggest 'A Short History of Financial Euphoria' by Kenneth Galbraith. His thesis is bubbles happen like clockwork. I agree with you that they do vary in magnitude.
While this may sound reminiscent of the 2008 crisis, I think there are some important differences according to the article:
In 2008 the fundamental problem were defaults - people just weren't meeting their mortgage payments (and lots of financial engineering that spread the losses in ways nobody understood beforehand). This sounds like the problem is mainly related to rising interest rates, through a number of channels: 1) less demand for loans and thus less top-line revenue, 2) lower value of fixed-rate loans in wholesale markets (on which they seem to have relied), and potentially 3) higher refinancing costs if they didn't hedge out the interest rate risk in their books (fixed interest income, floating interest expenses). Banks generally hedge out these risks because regulation forces them to be very conservative in their risk management, but here it seems we're mostly talking about non-banks, so they may have fallen for the temptation of a little short-term profitability boost by saving on interest rate protection.
I'm not saying that defaults aren't a problem, especially in this extremely high-risk subprime business that we seem to be talking about here, but there is some hope to think that those might be less bad this time. We're seeing a lot of inflation, and if wages keep pace with prices (conceivable in a time of low unemployment) then the burden of debt service on fixed-rate mortgages would actually become smaller in proportion to the overall household budget. Of course, there are still a lot of ways things could go quite wrong re defaults (eg prices have been skyrocketing in a lot of areas, if those start to plunge anything is on the table, even strategic defaults). But it's interesting to note that lenders can also face problems unrelated to defaults.
I'm also curious how those actors (usually insurances) who took the floating end of interest rate swaps during the lows are doing now.
To reiterate and sum up - during the crisis the price of mortgage backed assets was declining in a very low rate environment because of increased risk of default. In the current environment the price of mortgage backed assets are declining because of a high rate environment. Both are bad for non-bank lenders who are typically fairly leveraged and rely on short term lines of credit for that leverage.
The big difference is that the underlying loans are still money-good, they’re just paying a low rate of interest.
agree, good summary. in very simplifying algebra, if you have a fixed mortgage rate r and a market interest rate i, then you'd expect the wholesale market price p of the loan to adjust such that i ~ r/p plus some markups for risk, cost, profit,... so if r is fixed and i is pushed up by the Fed, then thing that has to give is p (going down), even if the risk markup doesn't change
If I understand the article correctly these mortgage lenders are financing sub-prime and non-conformal loans. Basically the loans so risky Fannie Mae don't want them. This also includes jumbo loans, the are non-conforming.
If you have the typical FHA, VA, conventional mortgage not much has changed for you.
Conventional mortgages didn't change in 2007 either.
Now I don't think we're about to see the black swan again. But its always the riskier-end of the market that reacts first. I think its important to keep an eye on the subprime / risky mortgages to get a feel on the market.
The current question is "demand destruction", from a combination of inflation and rising interest rates. If the real economy out there is truly getting worse, then these little issues will become more and more common.
These lenders are not going broke because the mortgages are bad. They're going broke because they relied on short-term credit lines to originate mortgages, and rates have moved hard against them. Now they don't have the ability to rectify the situation without realizing a big loss on the mortgages.
Conventional mortgages didn't change but the assets associated with them did take huge valuation hit when the bubble popped, which still matters for those packaging up loans, if the assets they have a claim to have dropped 40%.
in general, you shouldn't really be affected much by this as a borrower, provided you don't have a problem meeting the payments. there'll be some communication regarding the change in who's charging you, and it'll be harder to get someone on the phone to talk to about anything, but in principle you don't need to worry if that happens to your lender.
Relative risk may be higher because of the Fanny Mae requirements, but there are other variables including loan to value ratios that can adjust accordingly
A concern I’ve had here in Florida is that we’ve had people move here and buy homes that are “affordable” with their remote NYC/SF based jobs. But, these same homes wouldn’t be affordable to them with local jobs because the salaries are so lower here. The banks didn’t consider it a factor when lending to them. If the tech layoffs continue this could be a real problem.
Have you seen tech incomes relative to anything in the last decade? Then net out finance, law, real estate, and media that all profited off the tech sector. thank janet yellen and zero rates
Someone getting laid off and having to take a lower paying job isn't something new that came with remote work. Remote work isn't going away either, and tech layoffs are marginal despite the headlines/clicks they generate.
Tech layoffs will accelerate in December as FANG doesn't need to finance the DNC's "everything is fine in the economy look at employment" narrative. Many remote will be first to go.
My understanding is mortgage lenders mostly originate loans. The use their line of credit to offer (mostly) conforming mortgages, doing the paperwork, underwriting, and closing.
Then the mortgage is quickly sold off, the money recouped, so they can go and originate another mortgage.
At any given time, they hold a very small fraction of all the mortgages they might originate in a years (in this example $10B at year).
This feature of the US mortgage system seems wild to me, as a Brit. When i take out a mortgage with a lender, i continue to owe money to that lender, and only that lender, until i repay it. If the lender wants that risk off their books, they can (and do!) sell mortgage-backed securities, which carry away the financial risk of the mortgage, whilst leaving their contract with me intact.
It seems very strange, and terrible for borrowers, that you can form a contract with one entity, and then have it transferred to another without your agreement. From what i've heard, those transfers aren't purely formalities either, people get hit with weird charges sometimes.
This describes the US system as well. The 'servicing' (who you pay each month) of the loan might change hands, but the underlying debt was bundled and sold off already. In the US, many banks don't service loans. I assume, that "Fund X" buys the securities using funds from 401ks, etc, and they kick the servicing to a preferred partner. The partner gets paid some cut. The fund gets the yield, the fees are paid out to to the servicing entity.
This is why the 2008 event was so disruptive. Mortgage brokers were labeling everything as AAA, and the funds were buying them up. Banks weren't risking their own capital, they want the 401k holders to own the debt, and they just take their cut. It's a nice racket, can't figure out how to break in, though.
I don't see how it's weird. You do agree that the debt can be sold to somebody else. And it's not like anything actually changes, other than the payment portal you use.
It's an incredibly tightly regulated system, and the buyer of the debt is still subject to the exact same contractual obligations that the originator had.
It's not that I think it's weird because I think something shady is going on. I think it's weird because where does this process add value? I argue it doesn't. In my experience, things like this, financial instruments, the people that sell them and make a living in the churn only make their money when there is a transaction. The more transactions, the more fees and etc. they can charge. They make money when money changes hands, not necessarily by making something of value.
I've never, ever been charged a fee for having my mortgage sold to another company, and what they do with the debt after everything has been signed isn't my concern. I just find the company offering the best rate, terms, and ability to close the underwriting, and I go with them.
You're basically asking, why do retail stores exist? Why don't people go shop directly from the central distribution warehouse?
They make money somehow. All the people that are employed in that industry, tha companies, they're making money somehow, even if if you can't point to a line item on a specific transaction.
Exactly. Retail stores basically don't exist (or are in a clear downward trend) for the same reasons. People realizing they don't add value and they can just buy their stuff directly.
It's the same here, how does quicken loans add value? They do something the people they sell the loan to can't? Not really, it's just marketing. Quicken loans has built a marketing funnel, they get the loans, then sell them. The value they add is marketing.
Even nicer is often if the borrower defaults that loan is sold to aggressive debt collectors for pennies on the dollar. Those debt collectors now hound you and litigate against you to get as much from you as they can. This is rampant with cc debt.
The servicing and the loan itself are often split; the larger banks continue to service the loans they sold off often; the mortgage brokers don't even do that (most attempt to never service the loan at all).
It is possible to find mortgage loans that are not resold, but you may pay for the privilege (or get a 10 year loan, those are short enough that they're often not worth reselling).
Everyone is constantly selling/flipping these loans but I guess someone has to be holding a pretty big bag at any given time… is the point that you don’t want to be holding that bag for too long? The whole thing seems crazy to me.
No, the point is that from the seller's point of view, the return on a sold loan/pool is higher than if you kept the loans, because the buyers pay a premium for the privilege of buying, and that premium goes straight into the seller's pocket. Then they will use that pocket cash to go buy some (% of) other loans from originators in different industries / different geographic locations / other different characteristics that they can't originate enough of themselves to have a sufficiently diversified portfolio to satisfy investors and board members who are risk averse. It is not about passing off the risk entirely (credit unions have to retain at least 10% ownership for themselves, for example), since you are still going to buy % participation in other loans that have risk, but about trading out a large investment at a lower return for a smaller investment at a higher return.
I don't think most people realize how big the MBS market is. Most of the damage in 2008 wasn't from reckless Wall St traders and financial engineering, it was simply from a decline in housing prices on the back of a bubble that was created by the US Govt.
A large portion of it was outright fraud by the mortgage brokers and the rating agencies. The agencies slapped everything as 'investment grade' so the worthless securities could get bankrolled by everyone's retirement plans.
Had an issue with my 2020 tax return (the IRS is months behind) so my lender decided to actually keep and service my loan. We spent months going around and around with the IRS before they even offered that option, which says a lot about how uncommon this is.
Depends on the lender, that is how a lot operate. Some provide servicing as well, and will cherry pick their safest loans to service while tranching and selling the rest.
I agree, but I see why they don’t want to skim the mortgages that could be paid off in a lump sum off the top of their bucket of dodgy loans.
I’d love to see the law change to force owners of debt to give the person that owes right of first refusal whenever debt is sold. (Mostly for medical debt and collections agency situations, but also for mortgages.)
A debt holder can typically pay off their debt any time they want. I think what you're proposing is to pass along the discounted price to the debt holder. Eg. if the lender is going bankrupt and selling the debt for 30% of it's value, they should offer that purchase price to the debtor? There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place. It's just not a norm in business because bankruptcies and liquidations are easier/faster to conduct if you can move the assets in a single/few transactions. It also encourages default from the borrowing side.
Beyond it being easier to sell in bulk to another firm, I think a business would never do this voluntarily because it distills out people who were most likely to pay and makes the remaining debt slightly more toxic on average.
They would have to have a discount much lower than 30% to homeowner, and a way steeper discount to the firm buying the remaining bundle of people who didn’t take the offer.
I think it's worse than slightly more toxic, it would be virtually unsellable.
People with decent credit will simply get a new loan for 70% of their principal; kind of like refinancing.
That means rather than having to buy both the good and bad loans in bulk, firms can cherry pick the loans they want to buy.
Any loans left after that cherry picking will have already been turned down by the potential buying firms. They're effectively un-sellable, because everyone has already turned down buying them by refusing to issue a new loan in it's place.
I don’t think they are saying it’s a bad thing for the market, they are saying it’s a very bad thing for the seller, so why would they shoot themselves in the foot that way?
>There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place.
That's exactly the point. There is nothing prohibiting them from doing that but they don't do it anyway because it makes life a little more difficult for them while making like substantially more difficult for the debt holder. Parent post is suggesting enforcing an inversion of that dynamic - put more power in the hands of the debt holder and less in the hands of the debt owner. A law is absolutely required to overcome the natural incentives at play, if that is the goal.
If a lender is facing bankruptcy, how are they going to fund the infrastructure necessary to negotiate with tens of thousands of borrowers? If a lender is not yet on the brink of bankruptcy, but sees it coming, don't you think if this was a viable business model for a lender to avoid liquidation they would pursue it?
Your proposed law wouldn't even make life easier for anyone but the richest debtors, who don't need a law to protect them. The vast majority of people live paycheck to paycheck and have de minims savings. If you offered them a 30% discount to pay off their mortgage (or even a 50% discount), they have no way to come up with that payment without going out and obtaining another loan.
A) Not my proposed law, just being an advocate for parent post's position.
B) It's not really necessary to consider how the lender will fund the infrastructure necessary to comply with the law. That's sort of how laws work. If you want to operate in that space, you have to obey the law or not operate in that space. Either they will stay in that business or they won't. What is necessary to consider is the secondary effects of that decision, which would likely be decreased access to credit for borrowers with marginal credit. Might be OK, might not.
C) RE: whether it's a viable business model, see above.
D) RE: benefiting richer debtors proportionally more than poorer ones, that's relatively easy to handle - we have all kinds of policies that are targeted to benefit one economic class over another. Most of them are tuned to help the richest, but there are plenty tuned to help the poorest or the middlest. It's not a problem so long as we build in the correct dials to tune those parameters.
E) RE: unavailability of credit to low-income debtors to take advantage of this scheme - I have no doubt that new enterprises would form to take advantage of this economic niche. It might be higher risk, and come with a somewhat higher rate, but it might be viable to make a marginally risky $40,000 loan where it would not be viable to make that same loan at $100,000, particularly if the loan was secured by the property. That is in effect already happening, it's just the bank buying the loan from another bank that gets the benefit.
It makes life a LOT more difficult for the company. Even setting aside the administrative hassle, imagine how this works in practice. All the debtors who are paying attention and have money pay off their loans at a discount. The loans that remain are the worst of the worst, and they fetch an even lower price in bankruptcy.
Exactly. The same thing already happens at 100% value with refinancing (example: all those with good credit can refinance their student loans with the companies that popped up, those who are likely to default can't).
I don't see why the debt holder has any skin in this game at this point. They're not being harmed in any way, they still owe what they owe on the same terms. Why should they benefit? Why should a law require that they benefit?
This stance hits me as entitlement cloaked within anti-capitalism/pro-consumerism.
> Eg. if the lender is going bankrupt and selling the debt for 30% of it's value, they should offer that purchase price to the debtor? There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place
The argument you replied to isn't that the law should be changed to allow this to be offered to the debtor.
The argument is that the law should be changed such that this is required to be offered to the debtor, prior to offering an external sale.
What's the price they're required to offer the debtor in that scenario? How does anyone know that's a fair price when there has been no other offers? Why should it be the debtor that benefits from the lender's misfortunes?
This whole thing reeks of entitlement to me. If you take out a loan expect to pay it off. Don't expect that if the lender goes belly up that means you got some get out of jail free card.
To your first two questions, the Right Of First Refusal[0] has a long history of being a financial instrument for just about anything. I see no reason why this would be something different.
The current system, to me, has just as much entitlement, just from the other side. Why should it be some unrelated party that benefits from the lender's misfortunes. The lending is between two parties, and it seems reasonable to keep it that way unless both parties agree not to.
Even more sensibly. I think it should be after someone has given an offer. As such market price would be set and lender could just buy at that or even have arrangement of getting someone else to pay and move loan to that.
Ofc, the original buyer could offer instead offer to refinance.
The loans are usually sold as a bundle, with an aggregate risk calculation.
If you first skim off the "best" loans, the ones held by debtors in a position to pay them off at a reduced rate you know have a higher risk/lower value bundle.
So what do you do with the new remaining bundle of loans? Offer those debtors the ability to pay them off at even greater reduced rates?
Eventually you iterate down to the highest risk lowest value bucket that almost nobody would see the value in purchasing.
If the aggregate risk calculation is correct, the gross proceeds from a bunch of unbundled transactions would be exactly the same even with some unsold since the risk calculation would have taken that into account.
Huh? Which lenders are those? Real estate owners are almost always free to refinance loans at any time, regardless of the current lender's financial condition. Those things are entirely unrelated. But other lenders aren't going to issue new loans at below market rates just for the sake of reducing pressure on one of their competitors. That would be crazy. If some lenders go bankrupt that's fine.
It’s not below market rates, it’s at market rates. If the fire sale price of a $300k outstanding loan is $100k and must be offered to the debtor first then any bank should be salivating at the prospect of offering the buyer a $100k loan to cover it and you just turned a risky $300k loan into a way less risky $100k loan.
You have concocted a preposterous, unrealistic scenario. There is no "fire sale" just because the lender is insolvent. Another lender will buy the assets. The lenders who are going broke constitute a small fraction of a huge market. The value of a mortgage only becomes significantly impaired if the borrower is in default and the underlying real estate has lost significant value. A deadbeat borrower who is already in default won't have the cash to buy out the loan at the actual market rate, or the credit rating to refinance with another lender, so the whole concept is just ridiculous.
Seriously, stop making up fake numbers and look up price quotes on real mortgage-backed securities. The real world doesn't work anything like what you're describing.
That makes no sense. A borrower would have incentive to default on the debt, so they can then purchase it at less than face value, effectively causing them to experience a gain and the lender to experience a loss.
This could easily be addressed by simply not offering the option to someone in default, but even without doing that, I don't think your assertion makes sense. Not paying my mortgage on the idea that my bank will go brankrupt before they are able to reposses my house is a HUGE gamble. I doubt my monthly payment has any meaningful impact on my banks bottom line.
If I understood correctly, the proposition was to give borrowers the first right of refusal when a lender sells the debt, which can and does happen all the time without a lender going bankrupt.
Sure, but the "value" of the mortgage is supposed to be that it represents twice (usually way more) of value in interest payments that the Debtor will pay over the life time. So why is the bank selling it for sometimes half of what the Debtor owes then on a fire sale scenario where the holder is having issues?
One of the big problems that happens a lot with mortgages is that the bank sells it to this other bank and mix ups can cause all kind of problems for the debt holder. Give the debtor right of first refusal at price they are about to sell (simple form letter that they have 30 days to respond to). 9 times out of 10, debtor just lets it happen.
But what WILL happen is a company will come along, offer what are basically refinance loans to service this situation, and the debtor gets helped out.
The whole practice of tranching is toxic to begin with and if this discourages that its a double win.
No that's a terrible idea which would damage the mortgage market. Your scenario is unrealistic. Mortgages aren't actually sold at "fire sale" prices unless the borrower has already defaulted and the value of the property has significantly declined. A debtor in default is unlikely to be able to refinance, even for a slightly lower balance.
Mix ups with selling mortgages or servicing rights do occasionally occur but they are rare and impact relatively few borrowers.
These debts are sold in bulk so you would need to buy a bunch of other debt too. But, there is a group that is buying up blocks of discounted bad debts and forgiving them. They call their program the "Rolling Jubiliee".
The person holding the debt of that mortgage does not win. The new bank coming in and buying the mortgage assets of the defaulting bank wins. The person holding the mortgage probably never even knows the difference.
It was a joke. Who owns the mortgage is irrelevant to the borrower, but the borrower gets to keep the below-market rate while the originator has to take a haircut on the deal. That's the sense in which they won.
I was being cheeky. The people who took out these mortgages are paying a rate well below market-rate. They won in the sense that they're paying less to service the debt than the lender is paying to carry the mortgage.
I wonder why survival of the fittest has to always hurt the little guy. Buyers seeking out unstable lenders seems like a good way to encourage more stable lenders.
If the unstable lenders folded and the mortgage holders could buy out their loans on the cheap, no?
Then the shareholders of the lending company wouldn't be rich-people-broke-where-someone-buys-them-out-and-somehow-they're-all-still-rich they'd be actual-broke-where-they-lost-all-their-money-on-a-stupid-venture.
When businesses abuse incentives and tip systemic risk into systemic crash, well, that's just the way the world works. When individual borrowers may have a transient opportunity to play games, suddenly folks are hot and bothered about moral hazard.
I'd also note you could flip that argument on its head - more people seeking out unstable lenders would help capitalize them.
Why's that a perverse incentive? As long as they're not getting bailed out on the taxpayer's dime, let them go broke and let the debt be sold at a discount (and thus more likely to be forgiven).
Ok, but what if you can service your debt? What if they are selling your 300k mortgage for effectively 50 to 100k?
You could find financing for 50 to 100k, especially if you have a 300k house as collateral as part of it.
Only the other bank gets the sweetheart deal.
Same kind of problem with foreclosure auctions too btw. They require cash up front for those, you cant put a mortgage on a foreclosed house. (without it first being bought outright by the bank, who isnt gonna mortgage it to you for the foreclosed price)
Further, in most times MBSes are usually worth more than the debt - otherwise, modern banking wouldn't make any sense.
Mortgages issued in the last 2 years at ~2.75% are probably worth less than the debt now. So it might actually be the case for a lot of these loans.
That being said, the discount is not going to be anywhere close to 50%.
The difference in the discount would be evened out by the difference in the interest rate you'd have to refinance at almost exactly.
Considering the cost of refinancing, if you bought your own debt with some new debt from some new mortgage company - this would be a losing proposition for 99%+ of mortgages.
They definitely aren't selling your 300k mortgage for effectively 50 to 100k if the assumptions you make hold (e.g. there actually is a 300k house as collateral), so the whole premise is flawed.
First, it seems they're selling at something like 85%, so they're selling a $300k mortgage for something like $250k.
Second, the main reason they're selling because these collaterals have fallen in value and so it now would be much less than $300k.
Third, any $300k mortgages it would be possible for you to get financing for the $250k simply would not be sold as part of such a discount package (because those are likely worth the full $300k or close to that), the discounted sale gets those loans for which they (knowing all the data) know that an equivalent financing won't be granted in this market - because anyone who'll grant you a $250k financing will rather buy the same thing from a lender for more than $250k as part of a large scale package deal with less overhead; refinancing is a reasonable option only if they can lock in a much better interest rate and thus make it more profitable.
Just because someone is selling 10 homes with a nominal mortgage value of 3 million total for 500k to a million does not mean that you can bid 50k on a single home from that pack. This stuff is always packaged and you need to buy the whole thing, maybe dig through it, pick out stuff you like, repackage the rest and sell it off. The troubled mortgage lender likely isn't even selling good loans initially, they will first try to recapitalize by dropping the garbage, and will only sell quality assets when they are really pressed to do so.
The mortgagor likely is the highest bidder. They have the least amount of risk seeing as how it is their own debt, allowing them to pay more than others, and still brings free money when purchased at a discount.
Labour intensive, though. Packaging up many loans and selling it as a complete unit is far easier.
Is there a place for people like me that have lost complete faith in the public markets and banking systems? I've independently come to the conclusion that the NYSE/NSDQ are scams and want to stick with stuff like government bonds. I'm surely not the only one to think this way, right?
There are alot of scammy stuff going on in public companies but what is the scam on the exchanges themself? I mean surely most companies on the exchange are not scams either?
HFT has reduced spreads of some equities to a penny, all market participants benefit from increased liquidity.
Also, Citadel is buying retail order flow because they’re reasonably certain they can capture the spread and not get run over by an institutional trader with more information than the market maker. They aren’t frontrunning your 20 share order because you aren’t going to move the market by purchasing 20 shares.
Zero commissions and tight bid/ask spreads are better for an individual than no PFOF and $5/trade transaction fees with 25-50 bps bid/ask spreads.
This gives you lower fill prices stop worrying about things extraneous to your investing bracket. You should worry about allocating long term to sensible pieces of the pie chart and minimize churn.
Payment for order flow is what underpins commission-free trading. Say what you will, but as a long-term investor, I'm always trying to minimize fees and commissions.
It's extremely hard to win as a small-money day trader, so I won't play that game.
I doubt they'd be sold for pennies on the dollar. Assuming you have a fixed rate mortgage, it's worth less now because interest rates went up.
If you ignore all the transaction/processing fees. You could borrow some number less than your principal balance at today's rates ~5%, and use that to buy your current mortgage at a discount (it dropped in value). But your monthly payment would end up the same. Higher interest on a lower principal balance.
If they're secured loans they don't sell for pennies on the dollar.
Even the worst of the liar loans didn't sell that low (the whole problem is nobody knew how to price them, but they were sure they were worth something).
Only bad debt is sold for such a discount. A normal mortgage with nothing wrong with it will be sold at full value, i.e. sold to someone who wants to make money on the interest.
So the real story here is that banks did learn their lesson from 2008 (at least in regards to mortgages). The subprime market has been relegated to these fly-by-night operations that are poorly capitalized and pose no systemic risk.
It's a tale as old as commerce. You start by operating a service (brokerage, mortgage underwriting, web storefront, SaaS/PaaS, etc.) You get really good at it, and decide that you might start to warehouse some of the inventory that your customers handle, to improve efficiency and bundle/upsell. Time passes and the value of the inventory you hold exceeds and then dwarfs the value of your platform/service business. Then market conditions change, the value of your inventory declines, your budget blows up and you go bankrupt, learning the hard way that combining two businesses with very different capital dynamics is hard and hazardous.
Also there is a difference between subprime lending and responsible lending that is nonetheless susceptible to interest rate risk. So far we have mostly the latter.
Well, its good that "things are working as intended", but I think there's still the open question of what the state of the US economy will look like in 3 to 6 months.
Nothing like terrible mind you, but there are strong questions about interest rates, demand destruction vs inflation, low unemployment (right now anyway), but slowing growth, etc. etc.
I see that the rising rates is part of the cause. Why were rates so low? My mortgage is financed at 2.25%, but it seems obvious that the Federal Discount Rate rate would rise over the 30 years of the mortgage. Why do 30 year mortgage rates follow the Fed rate so closely in the first place?
Part of the 2008 crisis was maturity mismatch of assets and liabilities. That's a fancy way of saying 'I get paid in 3 weeks but I have to pay the gas bill tomorrow'.
If you lend money that's paid back over a long period of time (like a mortgage) and you're funding it by borrowing money that needs to be paid back much sooner, you're going to have difficulties when the market moves to make that short-term funding less available. It's a fundamentally risky position to be in.
Banking regulation introduced since the 08 crisis (Basel III) forces banks to rein in these mismatches, but per the article many of these lenders are not banks..
They can borrow it as well. It’s all just based on the expectation they’ll be able to pay it back. That is why the whole house of cards collapses when it suddenly turns out they actually can’t, because the risk is higher than expected, their insurance collapses or something like that.
If you save at the bank you are financing the bank lending to mortgage companies. What’s the difference? It’s all about using money with a predictable amount of risk and reward.
This is the consensus view. Funny thing is, this is exactly the kind of thing people were yammering on about with respect to "subprime" in 2007. Contained. Don't worry about it. A few weak players will go under, but there is no systemic risk.
Now, maybe that's true this time. Or not. What is certain is that the mortgage industry went through a metamorphosis since the GFC, and most of the players are now not banks.
> “The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.”
> In 2004, only about a third of the top 20 lenders for refinancings were independent firms. Last year, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which analyzes the industry for mortgage lenders. Since 2016, banks have seen their share of the market shrink to about a third from about half, according to news and data provider Inside Mortgage Finance.
So what happens when the major source of debt fueling the ongoing housing debacle comes from "poorly capitalized" non-banks? The obvious answer is that the gravy train careens into a ditch. Less capital means fewer loans. Fewer loans mean house prices are no longer supported by debt. Given that they stopped being supported by incomes a long time ago, there's nothing left to prop the thing up.
So it will certainly be different this time around. Every financial crisis is different in its own way.