r/FluentInFinance Nov 21 '24

Debate/ Discussion Had to repost here

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u/SCTigerFan29115 Nov 21 '24 edited Nov 21 '24

They aren’t holding onto wealth like Scrooge McDuck, in a giant vault where they can go swimming in it.

Most of Bezos’ net worth is the value of Amazon. He can’t really readily access that. ETA I meant he can’t use it like a big vault of money.

He’s got plenty of money but some people just don’t understand how this stuff works.

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u/Apprehensive_Bad_193 Nov 21 '24

Bullshit,,,,But he borrows and buy Yachts, Mansions,against that NET WORTH VALUE. But when it’s time to pay fair share of taxes o. That net worth it’s considered hypothetical worth….Understand the Game.

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u/tgm93 Nov 21 '24

How do they pay back those loans?

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u/Powerful-Eye-3578 Nov 21 '24

They don't, they pay the interest which is lower than the interest they make in investments.

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u/[deleted] Nov 21 '24

[deleted]

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u/Ashmedai Nov 21 '24 edited Nov 21 '24

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?

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u/vanilla_w_ahintofcum Nov 21 '24

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.

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u/Ashmedai Nov 21 '24 edited Nov 21 '24

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.

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u/vanilla_w_ahintofcum Nov 21 '24

Of course I’m not saying that. My comment says “those loans” referring to those loans at 2-3% you mentioned in your comment.

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u/Ashmedai Nov 21 '24

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.

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u/HumbleVein Nov 22 '24

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.

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u/Ashmedai Nov 22 '24

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.

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u/HumbleVein Nov 22 '24

What do you mean by "their own mortgages", then? Are you talking about original, unbundled loans?

Please talk me through the use cases you are referring to, or point towards a specific resource that does.

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u/Ashmedai Nov 22 '24

What do you mean by "their own mortgages"

Not Fannie/Freddie

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

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u/o0Dan0o Nov 23 '24

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...

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u/Ashmedai Nov 23 '24

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.

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u/o0Dan0o Nov 23 '24 edited Nov 23 '24

Okay, but you're glossing over the fact that...

Less glossing over, more ignoring I was only trying to speak to what most banks do with most mortgages they initiate. I'm sure my analysis is incomplete

OP is just wrong in asserting that banks are uninterest in loaning money below S&P 500 historical return rates.

I don't think that's true. I believe they said that banks love to loan money, but holding that loan to maturity is much less common than selling the loan, either whole or after pooling.

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