Mortgages are a manufactured product (2022)

https://www.bitsaboutmoney.com/archive/mortgages-are-a-manufactured-product/

by Anon84 • 2 years ago

127 119 2 years ago

bitsaboutmoney.com

gnabgib• 2 years ago

Previously on HN (199 points, 2 years ago, 222 comments)

[0] https://news.ycombinator.com/item?id=29937545

mvkel2• 2 years ago

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

beezlewax• 2 years ago

Yep that was the last thing I read. Absolute gibberish

abrichr2• 2 years ago

The second half of the following sentence clears it up:

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.”

bryanrasmussen2• 2 years ago

argument clearer if it just said "it's a flow meter for money" then you can analyze that and see if it makes any sense. Can't say it makes sense for me. Maybe it makes sense for the banks, but not the person with the mortgage.

toxik2• 2 years ago

But even then, a flow meter exists and works by physical laws. The device and the contract are separate. A mortgage is an abstract agreement that works because we simulate its dynamics (well the bank does). The device and the contract are one and the same.

yareal3• 2 years ago

It's a terrible analogy, and does nothing to simplify or abstract in plain terms. And it pervades the rest of the article in a confounding way.

jjmarr• 2 years ago

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.

hkt4• 2 years ago

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.

RandomLensman• 2 years ago

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.

maxerickson3• 2 years ago

They are a financial product that banks sell to institutional investors

*Originators.

mvc• 2 years ago

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.

jjav4• 2 years ago

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).

Joel_Mckay16• 2 years ago

The securitization of mortgages, health care, and education.

All were simply fund-managers monetizing other peoples misery, and now many are realizing every party line is the same BS. People are angry, but often for the wrong reasons since wall-street washes accountability by design.

Unfortunately, ridiculous wealth and miserable populations seem a desirable trade in some cultures.

Thank god it is not my task to try and fix it =)

abrichr2• 2 years ago

FTA:

A widespread misconception about mortgage securitization is that it was created to make Wall Street rich. …
Mortgage securitization, and secondary sales of loans, and other mechanisms cause mortgages to migrate from the banking sector to pools of capital which are more structurally insulated against the interest rate cycle.

yareal3• 2 years ago

Which has the effect of....?

At the end of the day, the reasons these choices exist is to make someone rich. The mechanism (shielding from interest rate cycles) is just an implementation detail.

Joel_Mckay16• 2 years ago

Michael Milken is the man that popularized mortgage securitization on wall-street.

Eventually convicted, then pardoned by #45..

Exactly how is this not dodging accountability son?

o11c• 2 years ago

People are angry, but often for the wrong reasons since wall-street washes accountability by design.

Counterpoint: just as we treat everyone involved in money-laundering as criminal, it is morally obligatory to treat everyone involved in responsibility-laundering as blameworthy.

"Remember the human" is a critical feature of every good social construct, but fundamentally impossible for some of the laundering business constructs that are considered ideologically mandatory today.

Joel_Mckay16• 2 years ago

Counterpoint: unless the value siphon effectively steals opportunity cost options from you 25 years before you are born.

It takes real ignorant psychopathy to blame victims of the greatest crime in history.

refurb5• 2 years ago

All were simply fund-managers monetizing other peoples misery

No, mortgage securitization simply provides a simple, consistent product that you can sell to investors. Securitization was created by the government, not by a banker.

It allows homeowners to access capital that they otherwise couldn't - it's a pretty limited pool of investors willing to buy individual, non-conforming mortgages.

If mortgages weren't securitized, then the government would need to provide the funds for all the mortgages - which means a lot less mortgages.

And I have no idea what "securitization" of healthcare and education means. It sounds like you learned a new word and just use it to replace "bad things I don't like".

Joel_Mckay16• 2 years ago

Prior to Michael Milken, there were legal standards in place mitigating adopting risks others would bear unnecessary liability to cover.

Profit at any price as they say... =3

20240519• 2 years ago

I thought the weird thing about mortgages is it is new money that expands the money supply.

Scarblac• 2 years ago

Not necessarily, that's only if it's financed by bank accounts that continue being money themselves. If they're financed by large investors, it's not new money.

(it's money if its extremely liquid - the bank account holders can still do things with their invested money)

hkt4• 2 years ago

That's not correct: cash that is not in circulation is not part of "broad money" in the same way, so it is still right to say that money is created when a mortgage is issued if that mortgage is backed by large investors. At least as I understand it, investments in financial instruments are not usefully regarded as money.

xnx• 2 years ago

Every interest loan does this.

rwmj• 2 years ago

A mortgage has a quirky little subcomponent called a Mortgage Servicing Right (MSR). Every month, it needs to collect money from the borrower and send that money… somewhere. This implies, minimally, a mailbox where you can send checks, someone to open the mail, and a phone number with a CS representative who can answer questions like “What is my current balance?” and “Did you get the last check I sent you?”

Like, seriously? Sending bits of paper through the post to make payment? Having to call someone up instead of logging in to your mortgage account online?

dpe82• 2 years ago

Yes, some people in this world still prefer to operate with paper checks and use the telephone.

SomeCollegeBro• 2 years ago

The majority of people pay online. Obviously the mail and phone options need to be available too though.

to11mtm• 2 years ago

There's the other part of the servicing bit they are leaving out.

- Giving a Payoff amount for whatever reason

- Reporting to agencies

- Trying to work with the client when payments are missed, ideally ethically.

- (Before COVID this was true, I know it was at least temporarily suspended, dont think still suspended but might be) If above fails, remitting payment to the owner of the loan during that period between 'first missed payment' and 'able to apply for and receive relief from Fannie/Freddie'

Those things cost, and depending on your originator, may or may not be baked into the price as to how well it works.

sanxiyn• 2 years ago

I know this post is about money, but I want to talk about electronic flow meters than money so I will. The description of "Japanese company making the best electronic flow meters" strongly suggests it is Keyence. They are the best indeed.

Keyence is the 3rd largest Japanese company by market capitalization, next to Toyota and Japan's largest bank (Mitsubishi). Larger than Sony, larger than Nintendo, larger than Honda, etc. Keyence does sensors and nothing but sensors.

If you want to learn about the science of flow meters, you can visit a site maintained by Keyence, Flow Knowledge. Where you read that electromagnetic flow meters (this is proper name for "electronic" flow meters, which may be used for lay audience) detect flow by using Faraday's Law of induction.

https://www.keyence.com/ss/products/process/flowknowledge/

EduardLev• 2 years ago

Wow, what a great website. I wish I had found that back when I was a chemical engineer.

bitschubser_• 2 years ago

Uhhh this highly depends on the industry… for industry grade flow meters Endress+Hauser or Emerson are actually the first that come into my mind

cushychicken• 2 years ago

They also make great digital microscopes.

ramchip• 2 years ago

Very tangential, but as a worker in Japan I find it depressing how Keyence's recruiting material proudly shows a software engineer's typical day that starts at 8:30AM and ends around 8:00PM. No wonder it's so hard to raise kids.

https://www.keyence.co.jp/jobs/software-engineer/

eddd-ddde• 2 years ago

Because we emphasize a clear distinction between work and private life, we strictly prohibit employees from taking their work home with them.

Wow thank you so much Keyence! I won't have to think about work in the 15 minutes of free time I get!

fomine3• 2 years ago

Keyence is known for one of the most very hard-work culture company.

davidgerard• 2 years ago

(2022)

somid3• 2 years ago

This article would make a great YouTube video -- reading it is painful, watching it will be delightful.

skybrian• 2 years ago

Recently, financial regulators have become concerned that nonbank mortgage originators and servicers would do poorly in a financial crisis. [1] They aren’t on the hook for the risk of nonpayment, but they are for other risks, it seems? Apparently they are worried about supply chain disruption resulting in fewer mortgages.

The risks section of Rocket Mortgage’s annual report has some possibly useful descriptions, but I don’t have the background to put them into context.

[1] https://www.cnn.com/2024/05/13/economy/mortgage-company-risk...

menzoic• 2 years ago

The electronic flow meter analogy is killing me

jcul• 2 years ago

I'm not sure they intended flow meters to be an analogy for mortgages. But rather flow meter factories to be an anology for banks that create mortgages.

Flow meters or any other widget are needed by many different industries but probably not by flow meter manufactories. Mortgages are useful products for pensions etc. but not so much for banks.

Otherwise I don't really understand the analogy either.

epolanski2• 2 years ago

In Europe (or at least Italy and Poland which I know a bit) mortgages are mostly instruments to get new clients.

Banks barely make any money at all from mortgages, but they can then upsell you other things.

Mortgages rates depend on lending rates published by the European Central Bank, and on top of that banks apply a small spread (generally below 1%).

But they don't love the instrument at all, it doesn't make much money if any.

Ylpertnodi• 2 years ago

My .it bank is making bundle off me.

grob-gambit• 2 years ago

In the US, mortgage banking is about 20% or so of a regional bank on up in terms of revenue generation.

Modern banking is an incredibly complex business so you could basically say no single division makes much money vs the other parts as a whole.

I think that would be a wrong way to view the business though. As if banks would not be in mortgage lending if they could. It is quite the opposite, any one bank would love for the other banks to get out of mortgage lending.

notfromhere• 2 years ago

Banks in the us usually just originate them then promptly sell them to Fannie May. Otherwise they just handle payments, etc.

mindvirus2• 2 years ago

This is a fascinating article, though I'm not sure I grok the analogy about flow meters.

Given they're so securitized, I wish I could buy back my own mortgage at a discount given how much interest rates have risen. It feels that given the notes about conforming mortgages being fungible, that product/service should exist.

taffer• 2 years ago

I wish I could buy back my own mortgage at a discount given how much interest rates have risen

But why would you want to do that? If you take out a fixed-rate loan and interest rates rise, you are already making a profit. Financially, there would be no further benefit from the buy-back of the loan.

mindvirus2• 2 years ago

Presumably I'd be able to buy it back at $0.60 on the dollar since that's what the market value of a low interest mortgage would be on today's market of 7% mortgage rates.

I'd want to do it so I could sell my place and move. No doubt if I sell my place now, the bank is just taking that money and lending it out again, making a profit on the difference in rates.

jjav4• 2 years ago

I wish I could buy back my own mortgage at a discount given how much interest rates have risen

You can! Even if not directly. Take the lump sum cash you'd have to use to buy off your mortgage today. Put it into an interest-bearing instrument of your choice that is paying these higher rates today (higher than your mortgage). Us that to pay the monthly mortgage and the different is profit.

scarface_744• 2 years ago

I understand how mortgages work and didn’t learn anything new from the articule. I am not criticizing the article for that.

But if I didn’t know how this all works, the article would have made me more confused.

laylower• 2 years ago

Talking about US mortgages without referring to the FDIC guarantees shows that the writer is not actually knowledgeable.

lotsofpulp• 2 years ago

What does the FDIC have to do with mortgages?

Isn’t almost all mortgage debt immediately sold to the government (Fannie Mae/freddie Mac/ginnie Mae)?

evolve2k• 2 years ago

Can someone here help me unpack social impact financing or what is also called a social loan in the context of this article.

Social impact financing is a range of approaches that help fund social causes by bringing new financial products beyond just giving donations and hoping for the best.

A social loan essentially provides a low interest loan to say a social enterprise that explicitly seeks to produce a measurable social outcome in addition to meeting basic financial obligations.

An example is a social housing trust that exists to provide more disability housing.

My question is what’s the dynamic with the various players? I can see on one end is a “social investor” who is willing to provide/invest capital for a below market earning rate (in exchange for knowing the social outcomes are occurring).

And at the other is the social enterprise obtaining the funds. But what’s the dynamic in the middle?

I’m trying to access these sorts of funds so trying to understand better the impact / neutrality or otherwise of various parties involved in manufacturing a fairly niche social loan product.

Mortgages are a manufactured product (2022)

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