The history and opportunity of the modern mortgage [video]

https://a16z.com/2019/05/31/why-your-mortgage-is-so-complicated-the-history-and-opportunity-of-the-modern-mortgage/

by notlukesky • 7 years ago

80 48 7 years ago

a16z.com

tomglynch2• 7 years ago

The video is very American centric - is this the case in other countries ie Australia?

notlukesky3• 7 years ago

There is some info here on some other countries:

https://en.m.wikipedia.org/wiki/Mortgage_loan

Narkov• 7 years ago

Yes and no. Australia has mortgage brokers and financial institutions that collateralise or group loans for resale. We don't have equivalents for the government run Fannie Mae/Freddie Mac though.

echopom2• 7 years ago

The video is very American centric

Honestly I'm very happy this video was "American Centric" mortgage are by definition very complex and specific to each country but America has one the most complex financial and legal system on earth.

robocat• 7 years ago

I did see an article comparing Australia with NZ.

"[In Australia] there are bundle and package fees, and related 'discounts', to complicate matters.", "And 80% of all Aussie home loans are wrapped up around these opaque bundle arrangements."

https://www.interest.co.nz/news/99862/shifting-competitive-f...

tomglynch2• 7 years ago

Every time they say "Fannie Mae and Freddie Mac" they've got some weird double-speak thing going on. Happens at 2:36 and 3:41 if you want to have a listen. Very odd and sounds exactly the same both times. Is this to prevent voice-to-text from working?

Links to video at those times:

[1] https://youtu.be/z3vdcrI7xak?t=156

[2] https://youtu.be/z3vdcrI7xak?t=221

notlukesky3• 7 years ago

Think it happened when they did the editing and merged voice with background music/sound.

flurdy• 7 years ago

There are a few startups disrupting the mortgage industry. In the UK, Habito [1] is doing pretty well.

Though I mostly know of Habito because I have had friends work for them as they have at least some of their systems have been written in Haskell [2].

[1] https://www.habito.com

[2] https://www.infoq.com/presentations/habito-mortgage-broker

notlukesky3• 7 years ago

Habito has a cool tagline:

“Don't go through mortgage hell.”

monkeydust• 7 years ago

I used Habito recently to get a quote on remortgage. I don't get the disruption tag, they are simply a mortgage broker with some nice forms. Trussle is another one in the UK.

In the end found a cheaper deal through my own research. A broker is only as good as the percentage of market they cover.

walrus01• 7 years ago

If you really want to go down a rabbit hole of real estate weirdness, research why title insurance is required, and read up on some examples of fuckups that have occurred with land ownership records and scams...

dredmorbius• 7 years ago

Any particular instances come to mind?

baybal22• 7 years ago

Moral of the story, do not be in debt, do not get into debt

yardie• 7 years ago

That is certainly one way of looking at it. The other is to make sure the debt is working for you. NYC, LA, or SF is the same for housing you’re either extremely rich or your taking out multidecade loan for a home. If you’re working in one of those cities you’re in debt or paying off someone else’s debt.

benj111• 7 years ago

Why not? where do you think the interest from your savings comes from? Does every company that wants to expand have to sell stock? What if I want to buy a car to take advantage of that really well paying job, but don't have the money because I don't have that really well paying job.

Debt has it's problems, don't throw the baby out with the bath water though.

bko2• 7 years ago

How is that the moral of the story? If anything, the government sponsored entities are artificially lowering interest rates which you can use to borrow, so it makes sense to take advantage of that cheap credit.

baybal22• 7 years ago

America, a supposedly a capitalist society. I expected Americans to be at least more finally literate than people from the bloc.

Artificially low interest rates may well benefit you to some tiny extent, but imagine just how much more benefit is given to a bank. You still take an enormous risk, staking all your livelihood, and the bank get a near free way to make money. That's not equitable.

The prime majority of people have no genuine need to own a home, yet the 100+ years of state+banks instilling the mortgage culture managed to make it look so. It hurts me to see that even intellectuals on HN don't seem to see through that.

Every time I raise that, somebody jumps with a calculator to show me "how much I miss out." I am not missing out anything of that, unlike near 2 millions of once well off, middle class Americans who got screwed by "a low risk mortgage"

echopom2• 7 years ago

This is really great content by A16Z.

It shows how complex building a Fintech in US actually is , often due to how many different partners you will actually need to depend on.

In this specific case , you would need to have each partners offer an API that you could call to automate the mortgage workflow.

Obviously , due to the nature of the financial sector it's very likely those partners don't have those APIs and don't want to build them because they are sitting on a very profitable business and have no plan to change that anytime soon.

I can draw a comparison to Airbnb , where most of their jobs wasn't so much to build "disruptive tech" but to lobby local administration to let people rent their appartement to individuals , while hotel industry was lobbying the other way around.

It becomes even more complex when you realize you'll have to do this at global scale to build a unicorn.

sarah_k• 7 years ago

Myself and a few others woulc like to use cryptocurrency to enable fractional ownership of property where anyone in the world can buy and sell 'shares' or just own them as an investment. This is happening with art too.

sokoloff• 7 years ago

For residential, there’s some adverse incentives at play. If I borrow from someone and give them equity, my incentive to improve (or even maintain) the property is dramatically curtailed.

Conversely, if we try to alleviate that, maybe a lender ends up on the hook for a call for their 10% of my $500K addition to maintain their pro-rata. That ends up subsidizing remodels which tend to pay back less than $1 for $1.

acjohnson55• 7 years ago

Why does this require cryptocurrency?

m-i-l• 7 years ago

Art is very different from physical property, given it tends not to have any intrinsic value, generate income etc.

Fractional ownership of residential property is already possible in the UK, without cryptocurrency:

- Set up a Declaration of Trust which defines the fraction of ownership of each of the Tenants in Common, along with other details such as what to do if one wants to sell. This is typically used by owner-occupiers.

- Purchase via a Public Limited Company, and issue shares in that company. This is typically used by investors.

- There are also fractional property ownership schemes run by housing associations.

There was even a startup attempting to streamline this process, without cryptocurrency, although it has folded already[0]. Adding cryptocurrency is only going to add new risks such as key management, exchange failure, etc. and doesn't provide any clear benefit(s) to those who don't already have a vested interest in the chosen cryptocurrency platform. Unless the idea is to use cryptocurrency to bypass the existing legal system, but that is going to expose you to the legal (not to mention moral) ramifications of it being used for tax evasion, money laundering, theft, etc.

[0] https://news.ycombinator.com/item?id=19319363

loso• 7 years ago

Welcome to my world right now. I work for a company building a mortgage product and the biggest hold up has been dealing with 3rd party apis. Some mandated, some not. Mostly all using outdated tech and obscure mortgage codes. A product that should have taken a few months has ended up taken days mainly because of delays dealing with 3rd party vendors.

tw10103• 7 years ago

Please please could someone recommend two or three books to get a more in-depth understanding of the history of mortgages, similar to what this (awesome!) video only briefly touched on.

bpatel576• 7 years ago

You're not going got be able to find that type of knowledge in a couple of books. I used to work as an analyst programming mortgage prospectus documents and the one thing I learned is the system is purposely obfuscating and there are several incentive systems to keep this information private.

tw10103• 7 years ago

Could you give a few hints on how to find the information though? I'd also love to hear more on the specifics of the incentives.

I've been thinking recently about just building businesses on reducing information asymmetry. Feels like you can't really go wrong there if all you want to do is make a few bucks. (Who wouldn't want to buy that?)

mooreds2• 7 years ago

I can definitely recommend this list of posts by Tanta, who worked in the mortgage industry for years:

https://www.calculatedriskblog.com/2008/12/compendium-of-tan...

I looked at turning these into an ebook (with permission from the family) but never got it published.

tw10103• 7 years ago

I would love you if you sent me that ebook (email in bio).

JackFr2• 7 years ago

Tanta was an amazing resource during the run up to the crisis. I only ever interacted with her in comments to her blog but she was kind and so knowledgeable about the topic - “The Ubernerd’s Guide to Mortgage Servicing”

eof• 7 years ago

Having the talent standing in front of a whiteboard with a marker and never writing anything was an odd choice by the director.

skellera• 7 years ago

The animation style is drawn. Probably just to get you thinking like you’re watching someone draw it out.

They also could’ve played with the idea that he did draw or drew afterwards and edited in the animations instead. Might make more sense since he’s holding the marker.

jasode• 7 years ago

Another way of summarizing Alex Rampell's video: The mortgage industry is ripe for disruption.

Yes, there are massive economic inefficiencies in the whole mortgage lending business and since a16z's motto is, "software is eating the world", there are opportunities for tech startups to disrupt all of that.

To spur discussion, I'd categorize "disrupting mortgage industry" into 2 general buckets:

(1) disrupting the procedural aspects of a mortgage : lowering the cost of moving the transaction from the "loan application" all the way to "closing". The worfklow aspects.

In terms of disrupting people, this means disrupting the loan officers at banks, appraisers, title searchers, surveyors, etc. In terms of disrupting "fees", this means reducing/eliminating "loan origination fee", "title insurance", and "survey costs". (A lot of these administrative overhead costs are basically a bunch of "checks & balances" to ensure the loan transaction is not fraudulent or has undocumented liabilities ... e.g. verify loan applicant's paychecks to make sure he/she really has a job with $x income, and the property's recent newly installed fence doesn't encroach on others' property lines creating a potential lawsuit.)

(2) disrupting the loan underwriting : This means lowering the cost of money. Today, we see that a 30-year mortgage in America is about 3.7%. Maybe there's a market inefficiency and a clever entrepreneur can lower it to 2.5%.

The vastly different problem-solving aspects of (1) and (2) will attract very different skill sets. E.g. entrepreneurs interested in (1) might think of reducing costs of surveys with robots/drones/satellites while startups interested in (2) might try to lower the "cost of money" by creating financial packages such as "500 co-signers on a mortgage that also receive a portion of the profits from the house's sale."

In the video, he mentions FNMA and FHMLC are the ones that buy home loans. Basically, it means that banks like Wells Fargo and JP Morgan Chase are glorified order takers. They charge a $1000 "loan origination fee" to sell your loan to the the government sponsored agencies. If the loan ultimately ends up at FNMA anyway, maybe there's a much cheaper way to accomplish that. (Although I doubt the FNMA website will ever have a landing page that says "Skip the banks and apply for a loan directly with us!")

bradleyjg2• 7 years ago

As to number one and the last paragraph you write as if it is a one sided market—-as if anyone can come along and offer to fill out the paperwork cheaper than JPM. But it’s a two sided market. And the second side is a government monopsony. Companies in that space will need to compete to become a dominant government contractor. That’s a very different business than signing up the masses.

Regarding number two, you’d be competing against a currently near monopoly lender that has zero cost of capital, sets the rules of the game, and has no compunction about manipulating the underlying asset class. Good luck.

tonetheman• 7 years ago

As a recent consumer of a mortgage. I read your comment and really the fact that this comes from a VC... I am filled with skepticism.

I think it would be better to say that mortgage industry is another place where a VC can insert itself to make more money.

I am not sure as a consumer I will ever see anything from this "disruption" ... I am certain though I see a VC sucking more money out of the system.

Or even worse some sort of subscription based horror of a startup that will let me monitor mortgage something or others.

PretzelFisch• 7 years ago

The disruption everyone talks about in this industry is much like self driving cars so far off into the future. Can the process be streamlined yes, can you get rid of some of the players not really. You will always need a title check you will always have to handle servicing( some banks and lenders do it in house depends on the cost) you will always need someone to buy a pool of loans and sell it to other investors.

nugget• 7 years ago

You don’t always need a title check - you just need a party willing to bear the risk of problems with title, which are rare. There is plenty of margin to play with there.

celestialcheese• 7 years ago

Title companies or title insurance is one piece I've never fully understood.

Are title companies basically just insurance companies that do a lookup in public / private records on that property to make sure the person selling the property is actually owned by them. And if they did poor research or the records were wrong, they'll pay for fees. Is that accurate or am I missing something?

nintendo1889• 7 years ago

This is true.

What about group ownership? There's a building in the new york city area that is mainly owned by the tenants. So that by paying the mortgage, they are really buying more shares in the corporate entity that owns the building. Then they never lose that equity in the property.

JackFr2• 7 years ago

Video glosses over an important aspect of balloon mortgages. No one ever really expected you to pay the full balloon. The expectation was that you’ll pay some portion and roll the rest into a new balloon. The problem during the Great Depression wasn’t that the people couldn’t make their balloon payments (they never could) it was that the banks had no money to lend, and they couldn’t roll the balloons.

(An interesting aside, is that during the run up to the crisis, banks reinvented balloons in the form of the teaser adjustable rate. These had a low fixed rate for 2,3 or 5 years, and then would turn into 28,27 or 25 year adjustable rate loans, with they rate much, much higher. The thing is, no one was ever supposed to pay that rate. When the teaser period ran out, the borrower was expected to refi. And of course we know what happened next....)

apo• 7 years ago

The takeaway appears to be that the modern mortgage in the US places several intermediaries between borrower and lender.

The opportunity would be to develop the software that can replace the unnecessary entities, driving down costs and profiting the innovators.

We can take this idea to its extreme and possibly learn something. Imagine a world in which home buyer and seller transact directly using software. In a world eaten by software, we might expect this to be the norm.

Impossible? Find the one player who can't be removed under any circumstances. Add them back in, and try again.

Continue until only the minimum roster of players remain. Assume all laws remain in their current form.

I suspect a16z, along with many other fintech startups have run this analysis already and have come to a depressing conclusion: the players in place now are essential given the current regulatory framework. They may not have automated as much as they could have, but they're reluctant to go further given their regulatory burden.

That's where an organization such as a16z can come in. With software startups increasingly requiring nothing from venture capital, the last bastion of relevance will lie in the twilight zone between technology and regulation. Companies who need to get laws changed for their business models to work will need deep pockets.

The history and opportunity of the modern mortgage [video]

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