Why would a bank lend on a mortgage? - Posted by Lee

import · January 31, 2011, 9:15am

Posted by Lee on February 14, 2011 at 19:14:11:

You are correct that the secondary market has raised it’s
requirements. After all the secondary lenders that were burned with
mortgage backed securities that were rated AAA but turned out to
be crap. Many lenders that provide the capital have decided to
instead buy 10 year treasuries. Treasuries will yield almost the
same rate as a mortgage backed security after management fees
are deducted. Treasuries are almost as good as cash on a lenders
balance sheet.

import · January 31, 2011, 9:15am

Posted by Lee on January 31, 2011 at 10:15:49:

Why would a bank want to lend on mortgages at 4.3% when they can buy
a 10 year treasury earning 3.3%?

Would you want to tie your money up for 30 years earning such a low rate
when you know that inflation is just around the corner?

I have done some research and talked with some presidents of some
community banks and they have told me that banks don’t want to lend
their money at such a low rate.

I was told that it is much better on bank balance sheets to hold treasury
bonds because they don’t default nor have to be serviced.

It seems that banks would rather use their money to buy up competitors,
invest in treasury bonds, and other higher yielding investments.

Back in the 80’s when mortgage rates went to 16% noone wanted to
borrow at that rate. I believe that we are on the opposite side where rates
are so low that lenders don’t want to lend.

Banks often “borrow short & lend long” which is very risky in an
inflationary environment. It is one of the reasons for the S&L crisis of the
80’s.

Today banks don’t want to get stuck lending on 30 year mortgages at
4.3% and then in a few years having to pay depositors higher interest
rates.

Several of the bank presidents told me that they are regulated by law on
how much interest that they can charge on mortgages and that is why they
can’t just charge higher rates right now.

I would like to get some opinions on this.

import · January 31, 2011, 2:00pm

Re: Why would a bank lend on a mortgage? - Posted by Frank Chin

Posted by Frank Chin on January 31, 2011 at 15:00:18:

Lee:

Banks lending money out for 30 years and holding on to the “paper” had gone the way of the “Model T”.

Banks originate loans, charge points, which is where they make the money, and sell them at a discount. Then organizations like Fannie Mae and Freddie Mac comes in, buys up the mortgages, syndicates them, and it’s sold off to investors.

These loan packages come with names like Ginnie Mae or Ginnie Mae unit trusts, and both I and some relatives have invested in them. The Ginnie Maes themselves sell in units of $25,000, and there are baby Ginnie Maes, called Ginnie Mae Unit trusts that breaks them down to $1.00 shares, and you can buy as many and as little as you want.

So if you were wondering who’s collecting the interest, it would be investors like myself.

Then, when the market was hot, NO DOC, NINA Loans that does not conform to Fannie Mae or Freddie Mac guidelines were sold to private syndicates. I got my NO DOC loans from Greenpoint when they were still around, and these loans were sold to private syndicates looking for riskier deals.

Finally, there are banks giving mortgages called portfolio loans, and they do keep them in their own portfolios. There could be a number of reasons. I bought a property at a real estate auction once, the bank who foreclosed on the property issued me a portfolio loan, the reason being they cannot to conform to FANNIE MAE guidelines. I mentioned to them at the time that banks gave me a hard time because they didn’t allow individual investors to have more than five mortgages each. They told me that was no problem as it’s a portfolio loan, and they set the guidelines, and the guideline was to upload the REO to credit worthy investors.

They eventually unloaded the loan when the market was hot, but that’s another story.

So, this in a nutshell is how the mortgage market operates, put in it’s simplest terms.

import · January 31, 2011, 11:09am

Re: Why would a bank lend on a mortgage? - Posted by WAREIA

Posted by WAREIA on January 31, 2011 at 12:09:34:

Why?

It’s my understanding that once the “Note” is signed, they can then sell that note for up to ten times it’s face value to other Investors and Banks.

Think about it. If you could generate a Note, using not one dime of cash, then sell that Note for up to ten times it’s value, wouldn’t You?

Oh Yeah, and also collect monthly payments on a Note you know longer own?

import · January 31, 2011, 2:42pm

Re: Why would a bank lend on a mortgage? - Posted by Lee

Posted by Lee on January 31, 2011 at 15:42:11:

I forgot that banks never loaned out money for 30 years and kept it
on their books. Mortgages used to require a 50% downpayment and
then would run for 5 years.

Later it was changed to 20% down and would run for 30 years and
since it was a conforming loan it could be sold on the secondary
market.

Many of the loan products that were created when the market was
booming are now gone and we won’t see them for a long time.
Products such as Ninja loans are dead.

This opens the door to creative deals and seller financed deals.

import · January 31, 2011, 2:26pm

Re: Why would a bank lend on a mortgage? - Posted by Lee

Posted by Lee on January 31, 2011 at 15:26:43:

So would you be willing to buy loans that were 30 yr mortgages that
was earning 4.3%? How about if it was a non-conforming loan?
Most likely you would not be willing to do this without getting a
discount on the note.

The secondary market froze when the crisis was at it’s worst and
the only loans that investors wanted had to be backed by the
government.

In 2005 & 2006 about 25% of homes sold were non owner
occupied loans to investors. When the market froze these loans
disappeared as well as loans that didn’t conform to Fannie &
Freddie guidelines.

Can you think of any market that wouldn’t be affected by a loss of
25% of their customers.

What is happening is that capital that once flowed into the mortgage
market has been redirected to other more profitable places.

import · January 31, 2011, 2:41pm

What?? - Posted by Kristine-CA

Posted by Kristine-CA on January 31, 2011 at 15:41:53:

What note gets sold for ten times face value? Where did you get that
“understanding”? And do you have an example?

import · January 31, 2011, 1:31pm

Re: Why would a bank lend on a mortgage? - Posted by Lee

Posted by Lee on January 31, 2011 at 14:31:59:

I know that you are joking because banks sell portfolio on the
secondary market for around face value.

I point this out to sellers that think that it is easy for buyers to get
loans. I like to point out that lenders have raised their requirements
because they are reluctant to lend at such low rates.

import · January 31, 2011, 5:16pm

Re: Why would a bank lend on a mortgage? - Posted by Frank Chin

Posted by Frank Chin on January 31, 2011 at 18:16:48:

Lee:

Investors in Ginnie Maes and Ginnie Mae unit trusts collect market rates on the instruments based on the term and risk.

If a loan was made at 4.3%, the mortgages are then aggregated into a syndication, and if interest rates rise, then a Ginnie Mae sold at par of $25,000 would fall in value. Conversely, if interest rate goes down, the par value would go up.

In other words, you’ll always be collecting interest at the market rate, at the time of purchase.

It is true if you bought the paper at par, held it for the entire 30 years, yes, you’ll be collecting 4.3%. However, the mantra these days is trading, so these instruments are actually bought and sold out on the open market, where money is actually made on trading, and not on holding.

One of the myths of these mortgage instruments is because they are backed by semi-governmental organizations such as Fannie Mae, and then these mortgage packages are further “insured” by organizations such as AIG, nothing can’t go wrong with it.

In actuality, that is far from the truth.

But you saw Fannie Mae, Freddie Mac, and AIG all about to go down the drain before the government came in, with it’s ability to print money and pulled their butts out of the fire.

I agree with you, in the zeal to promote home ownership, with little or no down mortgages, even bad credit risks are showered with loans, and with exotic credit instruments created to mask over the risks, it’s almost like trying creating something out of nothing.

I was reading about Ireland recently where excessive capital flows to “property development” created a nation of ghost towns.

import · February 11, 2011, 7:37pm

Re: Why would a bank lend on a mortgage? - Posted by Dave T

Posted by Dave T on February 11, 2011 at 20:37:50:

Banks have raised their requirements because the secondary market buyers have raised their standards for a loan they will purchase.