Item — HN Reader

The thesis is that mortgages are not primarily a service a bank provides to a homeowner. They are a financial product that banks sell to institutional investors (as an example) that want a guaranteed cashflow decades into the future.

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.

5 comments

> The thesis is that mortgages are not primarily a service a bank provides to a homeowner.

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.

The US generally had (has) smaller banks than Europe in relation to the economy (from regulation), so keeping mortgages on balance sheet wasn't an great option. Securitization was one way to make a financial markets product out of mortgages.

They are a financial product that banks sell to institutional investors

*Originators.

> The thesis is that mortgages are not primarily a service a bank provides to a homeowner.

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).

A thought I've had regularly is that any financial product so widely required ought to be provided at cost (base rate of interest) through central banks. Why bother with middlemen?

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.

> A thought I've had regularly is that any financial product so widely required ought to be provided at cost (base rate of interest) through central banks. Why bother with middlemen?

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 ...)

The US certainly has issues with even accepting the government being able to do good things. A small but highly vocal part of the populace has all but ensured the well is poisoned. I think we could, if we wanted, create an institution like the USPS for financial services. That would be able to issue a mortgage. It's not going to happen for the simple fact they're doing their best to privatize the USPS and beloved programs like Social Security.

The US has a good deal more public services than other countries; privatized mail, utilities and mass transit are all pretty common.

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.

The government is almost never the right provider of a commodity service. What possible benefit is derived from having the government manage the making of loans, already a competitive market?

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).

Maybe that’s because Americans move around more and can’t be nailed to a house for 15-30 years like every european homeowner is (where you can neither refinance nor pay back early without paying essentially all future interest payments at once - US mortgage conditions are insanely good).

In AU the standard is a floating rate mortgage, with most fixed alternatives capping out at 5 years (which obviously has much more limited up and downside than a longer duration 30y equivalent). Those fixed loans can be more or less expensive than the variable rate, depending on market conditions.

In general, in Europe, either:

- It is the norm to use either a variable rate or series of short fixed rates

- 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?

I got a 20 year fixed at 1.125% and I am really happy the bank can’t get out of it. I really did wonder why they even gave me that money but who am I to complain.

Eh, I think that’s a slight exaggeration. In Ireland you can get a 3.8% 30 year fix which allowed overpayment of up to 10% of balance/year, and redemption penalties capped at 2% of balance. This is, in practice, cheaper than virtually any US mortgage today, unless you’re only planning to keep the mortgage a few months.

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.

Its hard to believe a 30y fixed bond wouldn't cost a ton of money to break, depending on the point you sell it.

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.

> ought to be provided at cost (base rate of interest) through central banks

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.

Banks are not a middleman between you and the central bank. A central bank isn't a bank in any way, shape or form, but a regulator and supervisor of the banking system.