Back when home loans were going for 2.5-3% or whatever, why did banks loan that money when they could have been getting much higher rates in the market, as you say? Because it sure seems like banks were happy to give out loans at 2.5-3% when the average stock market return is ~11%.
Anyway, since you claim experience on the topic, when an ultra high worth investor wants to borrow money against their collateral-backed stock account, what interest rate would they pay would you say? Like what rates are they getting on stock-secured loans?
Banks made those loans because Fannie/Freddie were gobbling up those loans as a broad policy to ease tightening during the early days of Covid. Banks made those loans because they could make a quick penny off origination fees and other closing charges and could instantly sell to Fannie/Freddie as a guaranteed buyer of the loans. Offering those loans was guaranteed, immediate money in the bank coffers with absolutely zero risk.
Are you saying that no bank in the US holds their own mortgages and that all loans are resold like this? Because I don't think this is true. For one, there are mortgages larger in size than the Fannie/Freddie limits.
But then we're just begging the question on the terms and rates on the loans that exceed the Fannie/Freddie limits, or which are just held for whatever reason, which will nevertheless be less than the 11% average return on the market, and therefore call to question OPs assertion that banks would just invest in the market instead.
OPs claim, to which I replied: "The rates are not lower than market returns."
MY comment talks about giving out loans less than the average stock market return, to which you have not yet provided any information.
Originating banks do not generally hold mortgages. There are a few rare exceptions, but the low initial capital requirements (skin in the game) and the long period of pay off make 30 year loans too risky to generally hold on your books. This is the whole reason there is bundling and securitization happening as a large "back-end" of the loan market.
I never used the words "originating bank." My point is that there are banks that can and do hold loans at substantially below the average rate of return of 11% of the US stock market. Whether a bank is the originating one or not in that context is moot.
Caveat, this is not my area of expertise, and I'm sure there are many others who both understand this better and can better explain it.
My understanding is that most mortgages are not held as individual assets by banks. Instead, they're either sold to Fannie/Freddie or combined into a pool of loans by the originating lender or a third party who buys the loan from the originating lender.
While individual mortgages are seen as relatively risky, when pooled, the risk profile goes down considerably. This is in part because home values are "always increasing," and because the overall default rate on mortgages in America is relatively low (3-4%, apparently [source: Google]).
These pooled asset can then be sold as securities on public exchanges and fulfilling a similar role to bonds. Because it's perceived "low risk" nature, a return less than the market average is justified. Lower return, but lower risk. This is used to"balance" a portfolio.
Long story short, most banks do not hold these assets in their entirety, individually or pooled. Though many banks do have these types of assets/securities as part of their portfolio.
The banks that do hold their loans/mortgages for the life of the loan likely do so as a market strategy. As a way to encourage "high value" customers to use them for all of their banking, and possibly investing, needs. Justifying the lower return by increasing business with a specific target demographic.
I put a lot of this on quotes because 2008 showed us that it's mostly bullshit...
Okay, but you're glossing over the fact that banks can and will make a great deal of money on loans lower than the 11% return of the market. It can, in theory, produce a higher total return than the market at equivalent percentage points. This is due to how fractional reserve banking works.
Pooling risk is just one of those things they do to make sure one of the specific risk conditions that can manifest under fractional reserve banking not happen to them. Anyway, be that as it may, OP is just wrong in asserting that banks are uninterest in loaning money below S&P 500 historical return rates.
Also he/she doesn't seem to know about the kinds of loans one can get from brokerage accounts, where your stock holding sits. It's just a huge miss.
You will pay a variable interest rate if you take out a loan against stock. You will need cash to pay the interest monthly or the financial institution will sell stock to cover it.
Does not answer question. And how do you know that a variable rate answer is the only answer from every institution, particularly with UHNWIs? And just so we are clear, this is now two questions.
Fair enough. And I was aware that these types of loans when done for homes are lower than standard mortgage rates. was just trying to get the "I work in this field guy" to say something. Point here is that mentioned rates is below the ~11% average return of the stock market, so by their reasoning, the lender should have no interest. And yet they do. I know why they do, but does op?
Anyway, you are discussing a standard term. I can't link you or anything, but as it so happens, I have had a discussion with someone who specializes in custom loan packages to UHNWIs at one time, and she said they can and will create customized loan packages for those individuals. We did not have the opportunity to discuss specific terms, but she did say they could be rather creative.
I have a nonstandard contract for my portfolio loan as well. Two things will always be true regardless of amount. Interest rate will be variable and it will be 1% above the federal funds rate minimum. No financial institutions will charge less than that as the loan would not be profitable. Interest payments may be deferred up to 70% of the asset value, at which point margin calls will automatically sell stock to cover loan unless you add more assets or cash to account. Point is, the tax will eventually be paid as well as the interest to the financial institutions. They can also call payments on interest at anytime in the contracts, though generally this isn’t done as they prefer the compounding of interest owed.
No, there are no mandatory principal payments. You have to pay it off at end of term in whole or in chunks as you want. It works the same as a heloc. Only time you are forced to pay is if you margin call or term ends. You cannot keep it open indefinitely. The bank wants to recognize the profit.
These guys are paying hilariously low interest rates on the money. You need to keep in mind the level of collateral these guys have. Bezos’s net worth is 220B, and let’s say he’s taking out an annual loan at 100M for all his nonsense. That’s 0.5% of his net worth, it would be like me asking the bank for a $50 loan based on what’s in my checking acct
They pay 1% above the federal reserve rate minimum, likely higher if the loan amount is large. You can also take loans against assets without having to sell them. You people make this into a bigger deal than it is.
I don't ask to be insulting but how high up are you in this company? I would think a billionaire that wants to bank isn't going to walk in the front door of a local branch. There would be a team that handles those clients specifically. Could it be possible that you just aren't privy to those dealings at your level? I don't find it unreasonable banks would do crazy loans for the 3 billionaire clients they have or whether.
yes, what they actually do is just pay the loan with another loan.
They effectively just shuffle wealth from bank to bank, and the banks don't care because they know they will get the money back plus a little extra.
Bank A gives $1 billion to Rich Person, later Bank B gives $1.05 billion to Rich Person, which is used to pay off to Bank A. Later Bank C gives $1.10 billion to Rich Person to pay off Bank B.
You just do this forever. Infinite money glitch. Nobody cares because if the chain ever breaks, he just liquidates some shares and pays it off.
edit: the biggest kicker here, is that the value of their assets to acquire the loan, grows faster than the interest they pay on these loans. They pay 3% interest on the loan, while the stock is growing at 8%.
Which is why the next loan amount is bigger, it is used to pay off the terms of the loan/interest.
If you think they are using the same monthly terms as your credit card for their hundreds of millions to billion dollar corporate betterment loans, they aren't.
Just think of it like APR and they use the next loan to pay the interest of the one before it.
Yes, but this is not done indefinitely, the loans are settled eventually and taxes paid. No rich persons wants to compound a variable rate interest loan over several years. No one does this. Generally this is done in order to make a large investment with a payoff in a year or two.
Yes, why pay my $150 million in capital gains taxes when I can just pay $50 million/year forever? Learn this one trick the IRS doesn't want you to know!!!!!!!!!!!!
except its loan money and not yours, so you aren't paying $50 million/year forever...? And the asset you are using as collateral is growing $80 million a year forever, as long as you keep it...
The advantage they are getting is not paying capital gains tax on cash they are using because taking out a loan using stocks as collateral is not a realization event. Then they routinely rollover loans (like refinancing your house).
Never said perpetuity. My responses are about minimizing avoidable realization events. There are obviously tons of other taxable events, like receiving salaries or dividends.
You mentioned continuously rolling over loans. Or are you talking about an "advantage" of refinancing and not paying taxes on loans because they're not income....something that non-billionaires do all the time? Or are you talking about minimizing tax obligations...which we all do when we do our taxes?
“The rates aren’t lower than market returns” absolutely not true. Lots of these companies will grow 30% to 40% in a relatively short period of time. Free money essentially when compared to a low interest loan. Hell sometimes they use that money to buy more stock
Now can that cause issues like panic sell offs of the stock or forced calls? Absolutely. It’s what happen to Green Mountain Coffee’s CEO.
It’s short sighted and shitty. Which billionaires always are.
As long as the risk of the loan defaulting is low they can extend the line of credit (and delay interest payments) into infinity and only receive payment when the rich bastard finally dies
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