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I think it's important to note here that this is only applying to refinancing, not all new mortgage loans..
Nice misinforming title, op.
Yeah, talking about "new mortgages" and putting quotes around "adverse market fee" while leaving out the word "refinance" is extremely misleading.
@dang please fix the title.
We've changed it now.
Submitters: please follow the site guideline about titles: "_Please use the original title, unless it is misleading or linkbait; don't editorialize._"
(Submitted title was "New US mortgages will include 0.5% “adverse market fee” starting Dec first")
Thank goodness, that actually makes some sense, as opposed to taxing all new US mortgages
At some point younger and poorer people are going to reach a braking point and stop respecting property law.
This has already started in some of the most overinflated areas. When this becomes widespread owning property will be a liability. Owing debt with property as collateral will be financially ruining for most of the middle class.
The sooner we can decommodify housing, the better. Eliminating speculation in the housing market and instead pricing things by how effectively they house people would go a long way for a lot of families.
The focus should be upon the dirt, the real estate, not the improvements on top. Look at fire insurance valuations of the improvements, and those have not appreciably inflated compared to the dirt.
It is interesting that Bezos' "your margin is my opportunity" nor Andreessen's "software eats the world" has yet to discount real estate valuations.
The rational emergent response from young generations is to reject conventions surrounding real estate, as that entire ecosystem is completely unsustainable for the majority of the population. The young generations have been completely shafted on real estate.
Even when people get land what's built on it tends to be very inefficient if anything is built at all. Even in very dense areas most of the land is 1-2 story buildings or parking lots. If there is any housing it's almost always detached single family buildings.
Yeah. I strongly support things like removing minimum parking requirements and taxing based on land rather than the improvement, incentivizing building housing rather than flat parking lots.
That's a complex, very locally-driven matter. A lot of NIMBY'ism drives these types of regulations and policies. Younger generations will have think way outside the box at a very locally-granular scale if they choose to live within those constraints.
Generally, the younger generations are completely screwed if they try to fit within the SFH model. To just survive, they'll probably need to start thinking in terms like "individual/single-family model of living is monetizing my distrust of peers", finding like-minded to group together and re-capture cost-efficiencies of scale for themselves.
I've long wanted to find a tract of 16 ha / 40 acre to experiment with integrating a number of ideas I've seen floating around the net. Lstiburek-grade building envelopes, combined package/people PRT, centralized laundry and food services, on-site food forest production, waste stream co-generation, _etc._ All to work out the details of answering the question, "what is the absolute minimum number of people, minimum de-centralized organization, minimum processes and minimum automated tech tree needed to replace 80-90% of what we normally pay retail for, with wholesale/distributor costs?"
I'd like to see for example, what would happen if people with less financially-remunerative prospects but with a good work ethic were made a contractual promise: you put in your time helping those with better financially-remunerative prospects with tasks that we can't automate yet, like housekeeping and grounds maintenance, and you'll get treated with respect and dignity, have the same educational and medical services for your children as theirs, won't get taxed out of your living quarters in your old age, and be cared for within the same community in your old age (mixing it up with the toddlers and kids at first, then receiving hospice care for example by trained teenagers in later stages when warranted).
In general, I've long thought it really weird that the incentive structures nominally put in place and heavily promoted to us drive us apart where we're easy financial pickings for large, organized institutions, instead of driving us together and funnel compounding interest valuations of the group's network effects into the group's benefit instead of shipping it outside of the group. I strongly suspect dominant cultural factors obscure the recognition of those emergent network effects, and the drive to assign monetary valuations upon many factors is leading to bad abstractions from lossy information transfer. But realistically, maybe I'm just doomed to figure out via defeat in detail why _homo sapiens sapiens_ in general cannot be trusted, as this is all too hand-wavy at this time for my taste.
I think it's more likely that younger people eventually just stop buying property, massively reducing current property owners ability to sell their homes, and as we know, an asset is only worth what someone will pay and if no one will pay, it's worth nothing. Young people might just live in studio housing projects funded by the governments. Young people used to come of age then many would work in factories, there are no longer enough factories for a significant portion of young people to be fully employed. Trump may lose this election due to his personality and inability to work with other people and take advice but many of us really respect him calling out the trade deficit and import tax disparities with our trading partners as a solution to part of the underemployment problem. There was a point in history when we were happy to trade with the developing world at a loss in order to raise their standard of living, but now that most of those countries are capable of being self sufficient we should no longer import foreign manufactured goods tax free, we should block those imports or tax them to the point it makes sense for these companies to open factories in the US.
What are suggesting, that squatting is going to make a comeback? Without the same legal protections it has in Europe, I don't see it becoming widespread.
Depends on state, arizona just has the squatter produce a utility bill for the past two years, and any title or deed by another party is null and void.
Does the squatter have to assume the mortgage of a place, or is it literally 'free and clear', if they produce a utility bill for the property?
Literally free and clear if they can prove residency for 2 years
> Owing debt with property as collateral will be financially ruining for most of the middle class.
What's the mechanism you're thinking will cause this? Based on what you've said, I can imagine you're thinking either a crash in property values that leaves people underwater on their debt or widespread property damage by people that have 'stopped respecting property law'.
Regarding theft/violence/vandalism, it can happen just as easily to a home you rent as to a home you "own". Regarding property value declines, any decline that's financially ruinous is going to ruin _someone_, and the debate then becomes who's left holding the bag when it happens and how that negative impact propagates outward through the broader economy.
(But I'd be interested to hear more of your point of view.)
People out of work due to covid are refinancing and rolling their late payments into their refi to keep from losing their houses. Basically, Fan & Fred are charging you for letting you refi instead of foreclosing. They're charging those without money again.
As far as I know, providing proof of income is part of the requirements for issuing a conforming loan, i.e. coming from the government (Fanny/Freddie/Ginnie).
I would be surprised if out of work people can refinance a home mortgage loan without proof of income.
Yup, just closed. Had to provide pay stubs at the start of the process, and then again at the end to prove I was _still_ employed. They made it very clear that we would not have closed without that, and this wasn't even a gov backed loan.
Yes as someone who has worked in the industry. We will call to verify your employment days before closing. You'd be surprised how many people decide to make stupid career decisions in the middle of loan financing. One guy I had quit his flooring job to become his own contractor. Another lost her job cause their restaurant burned down. I also had one lady get laid off literally the week of our closing (which was awful cause their employer didn't even mention anything to us when we requested her pay information weeks earlier).
What we'd always tell the borrowers is "don't make any life changing decisions while your in this process. Do it AFTER we give you the money!"
>(which was awful cause their employer didn't even mention anything to us when we requested her pay information weeks earlier).
Why would an employer ever reveal this? Seems like all liability for no gain.
They have to do this because the legislature isn't providing stimulus or protection or funding Fannie directly.
Yep. They assume these folks are high risk for eventual default, so they are squeezing the lemon while they can.
A lender giving someone hundreds of thousands of dollars that the lender is predicting they won't get back in exchange for 50 basis points in the near future does not make sense to me.
Fannie Mae and Freddie Mac package up the loans and sell them to other entities. They don't often end up holding the bag.
Seems like this is only refinancing? And is this just for Fanny/Freddie-backed mortgages, or will all banks be charging this?
Fannie/Freddie backing it means it applies to all "conforming" or conventional mortgages. Unless it is a boutique or small portfolio lender making loans against its own assets, it's basically "all banks" as they make mortgages conform to the GSE's criteria so the loan can be packaged and sold on the secondary market.
It doesn't apply to mortgages for purchasing a home. Just refinancing.
Correct, I was just speaking to the fact that all conforming, conventional loans means it applies to pretty much everyone in the business of making mortgages. This new fee is only on refinance transactions.
>> And is this just for Fannie/Freddie-backed mortgages
Since 2008, the market for "Non-Agency loans -- i.e., not Fannie and not Freddie" has dwindled. Almost all loans originated at banks end up and Fannie/Freddie.
Banks are just the originator.
This may be true as a nationwide trend, but in places like the Bay Area the median housing price is well above the cutoff for jumbo loans, so the majority of people taking out a 20% down loan will not have it backed by Fannie/Freddy.
Non-mobile link:
https://www.fhfa.gov/Media/PublicAffairs/Pages/Adverse-Marke...
(if a mod wants to change this)
Looks like this was announced 25 August?
Looks like this is only refinancing?
I don’t see any mention of specific amounts such as 0.5% in the linked FHFA site. Is there somewhere else where this amount has been stated?
https://singlefamily.fanniemae.com/media/23726/display
How is that going to help?
It's going to benefit lenders and bondholders that have seen an insane amount of churn in the market in the last 12-18 months.
I refinanced my own mortgage three times in the last year and a half. Three times! I started 2018 at 4.5% and now I'm at 3.0% (30Y Fixed). And I'd do it again if we got to 2.5%.
But that also means all those bonds that were expecting 30 years of 4.5, 4.0, and 3.5% interest are going to perform lower than promised because my interest money isn't going into those anymore. And we can't have that now, can we?
3 times? Dang, RIP your hand. I refi'd in September at 2.25% and the stack of papers I had to sign... not fun. Also I have literally never had to sign my middle name but I had to do it for each signature. I was really hoping they weren't going to hassle me about my signature since it degraded over the course of everything I signed.
It's been way more streamlined than it used to be. And a purchase is always more paperwork than a refi.
Because of COVID I was able to do it in the parking lot of the title company with my dog in the backseat. Done in 20 minutes.
Dang, mine took 45 minutes minimum and we did it in masks in my house. I swear I signed less when I bought the house but there is a chance I'm mis-remembering.
I recall we also did a huge bunch of signatures electronically (like the disclosures) ahead of time.
Tax the middle class, lovely idea - they have all the money, after all. /s
(the wealthy escape this fee by paying with a mix of cash and non-conforming "jumbo" loans)
The really wealthy can:
1. ...use a margin loan collateralized by their stock to purchase the property for cash, paying a 0.8% (variable) interest rate on the outstanding balance (potentially avoiding 5% in real estate broker fees)
2. ...deduct 100% of the interest - regardless of the amount - as an investment expense.
3. ...then borrow the same amount, buy a nice, conservative 20+ year bond fund like TLT, and use the 1.6% dividend to pay off the interest on the margin loan for both the property and the bond fund :o
Margin is a wonderful thing, if you've got the collateral.
Happy I plan to close my re-fi on 11/20, though.
Your first two steps were right, but most of the really wealthy aren't bothering with stuff like TLT. If you want something super safe, there are safer options, and if you want return then you can mix those safe things with something offering better returns.
Also, it's possible to borrow against your securities even for the non ultra wealthy. I know IBKR offers reasonable rates, does anyone else know of any others?
> ... does anyone else know of any others?
If you have a substantial portfolio, you can just reach out to the customer support line at your brokerage of choice and ask them to match IBKR. They may not get you all the way but they'll get you close.
Ameritrade Institutional offers clients ~1.5% at the moment so that's probably a reasonable proxy for a lower bound at Ameritrade.
IBKR (interactive brokers) is the only one I know with the lowest margin interest rates. However, no one should be using portfolio margin unless they know what a margin call is.
Just took a brief look at the landscape and it seems like M1 Finance gets close with 2% margin rates for access to cash - if you pay for their premium subscription. So, not as cheap as IBKR, but seems to be second best.
Schwab Pledged Asset Line appears to be in third place for most amounts, but really only makes sense if you want to loan over 2.5MM (then the rate is 1.75%.) They won't even let you loan less than 100k. So Schwab barely makes sense, and only if you don't mind the bad rate -and- have over 5MM there, which is a shame, because I otherwise like Schwab.
DeGiro is an excellent option in Europe, with rates rivaling IBKR.
SPX box spreads are another option, but that gets a bit more complicated.
And you're absolutely correct, nobody should use margin unless they know what a margin call is. I would personally only lend some 10-20% of my portfolio max to help with liquidity.
A short explanation of margin, for those who don't know: Normally, the initial margin requirement is 50%, with a 25% maintenance requirement. AKA (assets)/(assets + margin) has to be more than 0.5 to start, but if the value of the assets in the account drop, this is allowed until (assets)/(assets + margin) < 0.25, upon which you face a margin call and must add cash or sell assets. So, with $100 in stock you can loan $100; if the value of the stock goes below $50, you're under the 25% maintenance requirement and you get a margin call. Worth noting that while some brokers give you a few days, IBKR simply auto liquidates, giving you no chance to add cash. (More details here:
https://www.elitetrader.com/et/threads/your-experiences-with...
) The reason why a margin call/auto liquidation is bad is that this generally happens during a market dip, meaning you are forced to sell your positions at a serious loss, locking that loss in.
There are other risks to borrowing a serious percentage of your assets, however. A margin loan is a unique type of loan where payment in full can be demanded at any time. While this is somewhat rare, brokers do sometimes get spooked for various reasons (external market movements, your own investor profile etc) and will rapidly increase your margin requirements. For example, IBKR recently increased requirements across the board by 35% due to the election. While your bank will always be satisfied with regular mortgage payments and never demand sudden payments, in theory your brokerage could demand the full amount of your margin whenever they wished. That's another good reason to limit your margin to 10% or 20% of your portfolio: if this happened, you would only have to sell that smaller portion.
That said, margin loans are the cheapest form of capital available to most people who own securities AFAIK. So there's that massive advantage. Another advantage is that it can help with taxes: while selling securities is a taxable event, getting a loan on them is not. Keep in mind that if you spend your margin cash on more investments, you can deduct the interest, but you can not deduct margin interest on margin used for personal expenses.
Thanks for sharing your knowledge, it's really interesting! Do you know if margin lending is profitable for the brokers if the borrowed money isn't re-invested? I'm thinking that the 2% is not a lot compared to the cost of providing the service.
You're very welcome! I'm glad someone found it interesting :)
The cost of providing the service isn't huge: there are already systems in place to provide you with money at a broker - the main cost is the systems to automatically sell securities when the value goes down. But that's not _too_ crazy complex.
And it makes a hell of a lot of money. IBKR reported _hundreds_ of millions of dollars of net interest income on customer margin loans in 2019. Those hundreds of millions were made on a net interest margin around 1.7% (an even lower ~1% in 2020!) Traditional loans, people default all the time. But margin loans are collateralized by the securities in the account. For example, you hold 100 shares of Apple in the account, which is the collateral for the margin loan. You can't default: if you try to run away with the cash, well, they have your Apple shares. Really, the only time they lose money is when the value of those securities drops significantly faster than they can sell them, and the borrower racks up a large debt and can't pay it back. But that happens so rarely that the overall program remains very, very profitable.
If you're curious about reading about the times it goes wrong, here's an interesting link [0] describing how users with options lost a lot of money IBKR had to cover - keep in mind that 88MM was what they had to initially cover, and they undoubtedly recovered a lot of that back over time from the borrowing users.
[0]
https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3...
It's not the most profitable way to make money as a financial institution. But it is a very safe way since there are basically collateral assets on hand that don't have to be repossessed like a car or home.
This creates a mixed, more diverse portfolio with lower risk.
On the contrary, it is enormously profitable. If a brokerage charges you 3%, their profit is 3% - cost to borrow money for them - any losses. Losses are rare, they occur once in a blue moon when a major market crash happens. The cost to lend money is currently extremely low (fed funds rate is nearly 0), so yes, they're absolutely printing money with their margin loans. To the tune of several hundred million dollars a year for IBKR, actually!
What are safer options out of curiosity?
I don’t believe risk-free returns exist for long in the investing world anymore with fed rates at near zero. However lower-risk and safer options than a pure TLT portfolio are The Ray Dalio All Weather Portfolio, the Rick Ferri Core 4 Portfolio, the Harry Brown Permanent Portfolio, and the ETFs SWAN or SHV.
thanks for the pointers from you both
Well, naturally there are the short duration Treasuries, which are a solid bit safer than 20 year Treasuries. But it of course depends what you consider your risk tolerance to be, and what risks do you want to protect against. For example, a US Govt default is very unlikely, but possible, and while you can hedge against it, that'll cost you money. If you want to get into the really unlikely events, like hyperinflation, gold can play a part of a hedge against that.
>3. ...then borrow the same amount, buy a nice, conservative 20+ year bond fund like TLT, and use the 1.6% dividend to pay off the interest on the margin loan for both the property and the bond fund :o
This is not a free lunch as you make it out to be. You're essentially borrowing short and lending long. It works so long as the short term interest rate stays below the long term interest rate, which is far from guaranteed. Wework tried doing the same thing with office space, and they were thoroughly criticized for how risky it is.
This is a variation of the old lend-long-borrow-short strategy that blew up spectacularly in 2007:
https://en.wikipedia.org/wiki/Structured_investment_vehicle#...
The safety here is within a context where housing is an incremental and relatively uncorrelated expenditure compared to the rest of your assets. It's one thing to lever to 1.2x your net worth with a highly diversified portfolio, versus using a specific kind of bet to lever 2x, 4x, + to maximize returns.
In a low interest rate but potentially high inflation environment, modest leverage is probably more responsible then underlevering by holding a lot of cash-like assets.
Paying cash (and financing in general) has 0 relationship to whether you pay real estate broker fees.
I suppose that's true, I was thinking more a private sale being an additional optimization but to your point that's not linked to wealth at all.
You can only deduct the margin interest if you're buying property for investment purposes, not for personal use.
He's describing "tax aware borrowing." JP Morgan explains this to their clients here:
https://www.jpmorgan.com/jpmpdf/1320698073211.pdf
; the example on the bottom of page 2 walks through the mechanics.
At no point will the client directly use the borrowed money to purchase a home. They will use the borrowed money to purchase securities, which are (by definition) for investment purposes, and for which 100% of margin expense is deductible.
Coincidentally, they will also have sold some securities at some other time in the year, and used the proceeds of that sale to buy a home (with cash).
As a neat optimization you don't have to make your entire home purchase on margin. If you want to buy a modest 1 bedroom in SF for $1M (lol) you can make a $250,000 down-payment via margin loan and take the other $750,000 as a mortgage, so you get the full deductibility of both the mortgage and the downpayment, and you can still see future appreciation in your equity position. YMMV, of course, and subject to your personal risk tolerance.
>subject to your personal risk tolerance
GUH
Can you reborrow against the property at 100%? Most places I’ve seen will only lend on business owned or investment properties at 50% LTV
If you already have a ton of stock, the property is irrelevant.
Let's say you have $10M in stock that you're fairly confident will retain its value. The regulation T initial margin is 50% and maintenance margin is 25%. If you wanted to buy a $1M property, there's no reason you can't borrow $1M against your stock and buy a house with the cash and borrow another $1M to buy TLT with. Except for, you know, your personal risk tolerance.
InteractiveBrokers will charge you only about 1% these days, less if you borrow more, as low as 0.75% [1].
[1]
https://www1.interactivebrokers.com/en/index.php?f=44427&gcl...
Margin is also a dangerous thing that poses extinction risk. People learn that every crash.
Providing subsidized loans to people is a tax on the "middle class" - or more accurately, the set of people who rely on income from wages and do not have sufficient investments to benefit from devaluation of the USD and appreciation of equities.
The government providing a lower interest rate increases house prices, and therefore the amount people have to borrow in the first place. But if you're a wage earner, house prices will appreciate faster than your wages depending how low interest rates are driven and how long they are kept there. This results in a greater portion of one's income over their lifetime going towards paying for their property.
It's the same thing with student loans.
The interest rate environment will, net of this one-time fee, still make purchasing a home this December much cheaper than it was last year at the same time. (3.1% versus 3.9% for a 30 year fixed.)
Credit quality has declined because some borrowers in the population have unobservable risks due to the coronavirus impact on the economy. Someone has to pay for that. Borrowers are the obvious choice. To the extent that borrowers have visible risk characteristics, they pay directly; you can (incredibly) still sell Fannie Mae loans which are in covid-related forbearance, but they'll want a 5 to 7% discount on these. (For a full table of Loan Level Price Adjustments:
https://singlefamily.fanniemae.com/media/9391/display
)
The wealthy generally do have many options on what to do with their money, which presumably includes hiring a financial advisor who could tell them that the interest spread between a conforming loan and a non-conforming loan is far higher than the impact of ~0.5 _points._
(A "point" in mortgage parlance is a one-time fee due at loan signing; the primary use of them is "Pay points to buy down your interest rate." Fannie Mae decreasing the amount they'll pay your mortgage provider for the mortgage sold to them implies that the same mortgage available post the fee would cost you Fannie Mae's fee in points.)
You forgot the part where you frame is as "taxing the rich" but silently move the goalposts when you realize that their billions don't actually go that far on a national level.
Not sure what your sarcasm is supposed to mean. The middle class _do_ have most of the money, and raising taxes on the ultra-wealthy wouldn’t make a meaningful difference in revenue.
>A September 2017 study by the Federal Reserve reported that the top 1% owned 38.5% of the country's wealth in 2016. According to a June 2017 report by the Boston Consulting Group, around 70% of the nation's wealth will be in the hands of millionaires and billionaires by 2021.
If we hit over 50% as predicted (and the last 12 months have been very beneficial to the upper classes), no, the middle class doesn't have the majority of the money.
>CBO Chart, U.S. Holdings of Family Wealth 1989 to 2013. The top 10% of families held 76% of the wealth in 2013, while the bottom 50% of families held 1%. Inequality worsened from 1989 to 2013.[1]
https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...
People with a net worth of 1M are definitely (upper-) middle class, unless we’re using that term in two totally different ways. I’d be curious what fraction of the total wealth is held by them as opposed to by the super-rich.
Where do you live that a net worth of 1MM is just upper middle class?
Anywhere where returns on $1 million is not enough to indefinitely sustain a lifestyle significantly above poverty level, so... anywhere in the US. Someone who is obligated to work to sustain their lifestyle is middle-class.
The USA. People with 1MM in net worth typically have professional-class jobs like doctor, lawyer, engineer, etc., and still need to work for a living.
A wealth tax would raise tens or hundreds of billions a year, which is a pretty meaningful amount of revenue...
> which is a pretty meaningful amount of revenue...
It really isn’t. The US federal budget is trillions of dollars.
I disagree. In both relative and absolute terms an increase of tens or hundreds of billions of meaningful.
That could provide free education, health care, subsidized housing, improved transit, high speed rail, or any number of tangible and meaningful benefits.
Whole integer percent increases in tax revenue are absolutely meaningful as well. Even if the integer is a small integer.
Please qualify the scoping or share the basis for your assertion "The middle class _do_ have most of the money...", as this pie chart [1] shows US middle class net worth is about 4%, not what I interpret as "most of the money". Either your scoping of your assertion is for a different nation (in which case it isn't pertain to this discussion thread of a US-centric news story), the scoping of the "most of the money" term is different than what I use, our scoping of "middle" is different, or there is something else I'm misunderstanding about your assertion. I don't consider the bottom 95% of households as "middle", and you'd have to get there to even approach rough parity with the remaining 5%, and by then that 95% is not much of a "middle" any longer, so I'm not clear what you consider "middle".
[1]
https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...
Tl dr; they are charging a small fee on Fannie and Freddie refinance loans. Loans originated elsewhere do not have this fee.
Title is misleading.
This trend will only continue. Until middle class will be driven into the ground and the whole thing collapses.
Let's also not forget that this is another way to subsidize housing security for current (boomer) homeowners at the expense of putting homeownership farther out of reach for the young.
This is a fee on refinancing. It effects current homeowners who want to refinance, not people who are looking to secure a mortgage for a new home.
Missed that, which makes my comment pretty dumb. I stand corrected!
To be fair, the title does say "New US mortgages". Way to own it ;-)
The rich get richer by taxing the poor and using the government as their personal socialist piggybank.
Sure, the rich might be getting richer, and the poor might be getting poorer, though for all intents and purposes this change seems to affect the middle class, or what is left of it.
What I don't understand is how that ties in with socialism. In modern times, in developed countries, socialism generally pulls the poor up and the rich down (e.g. scandinavia, northern europe, canada-sort-of). How did you reach the conclusion that a relatively right-wing government is socialist?
For the record, inequality is on the rise in the Nordics too.
It's socialism for the wealthy.
Okay, fair enough, I guess what I'm getting at is that I find it hard to call that socialism of any kind: it's just corrupt government via bribery (probably).
This comes down to the right in the US boiling "socialism" down to mean "the government gave you something", ie any sort of government based handout.
They of course omit this opinion when it's rich people getting government handouts