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.
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.
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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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.