Let me first state I'm not a finance guy and just trying to get a better understanding of debt. All my life I've heard is that "the bank loans you money to buy your house" but that doesn't exactly seem to be the case. Every mortgage I've ever had or any more I know anyone else that has gets the initial mortgage from a bank but that mortgage is then sold to Fannie Mae/Freddie Mac.
But Freddie Mac is government sponsored (what does that even mean?) that buys mortgages and sells mortgage backed securities. It's market cap is only $450mil but holds $2Trillion in assets. Apparently the federal reserve buys these Mortgage backed securities to the tune of owning ~98% of residential morgates. Is the Fed introducing currency into the market through inflated values of housing?
In other words, my understanding is you go to buy a house and you need a mortgage. The debt flow goes Bank --> Freddie Mac --> Federal Reserve at the same time the federal reserve is printing record amounts of money. Is the housing market how they are distributing the printed money to the masses causing the record levels of inflations we're seeing?
Not sure how it all works, but currently....the BIG GUY gets 15%.
hmmm was 10%......inflation kickin in?
Only around 10% of any bank or institution is physical money. Bank loans, mortgages and a whole host of things are merely numbers inputed into an accountancy/computer program, it doesn't actually exist in real life.
The mortgages are bundled together and sold to investors as Mortgage Backed Securities. The process of bundling large numbers of mortgages reduces the risk of default. Traditionally Mortgage Backed Securities have a very low risk factor. They pay low rates of return but offer safety for things such as retirement funds.
I could write a book on this stuff so if you have a particular question I will answer. FANNIE and Freddie are offered a Gov't guarantee but it is a unique relationship just to keep things from crashing and burning as they did in 2008 and the follow up of that crisis.
That was my general understanding of it as well without knowing the specifics. I guess in terms of specific questions would be:
Assuming in an environment where your fighting inflation and when there is risk of forclosure. I.E. If I wanted to make money by loaning out money, wouldn't I be losing money with rates that low from other risks.
I keep thinking back to Brewsters Millions and how hard it is to spend large amounts of money, if the fed was trying to cause inflation to initiate "The Great Reset" I feel like the backing of inflated mortgages exacerbated by all cash buyers (Blackrock & such) act as an defacto printing press by creating a distrubution of cash to the population without making it look obvious.
Investors choose the level of risk they are willing to take. Mortgage interest rates are typically pegged to the 10 Year Treasury rate. You will find that Mortgage rates run about 1.5% - 1.75% above the 10 Year Treasury note. 30 Fixed Mortgage rate was above 4.5% last week haven't noticed what it is this week.
So investors know the 10 Year Treasury note is the safest place to park long term cash for things like retirement funds but the low rate of returns requires them to find higher yields in safe investments as well. Park a portion in Treasuries then park another portion in Mortgage Backed securities. Finally they will choose more risky investments to generate higher returns and that is how they create a safe fund with decent returns by diversifying investments.
Financial institutions can use the Fed Discount funds for short term funding to create liquidity which means they have funds to lend. The Fed Discount Rate has been near Zero since the housing crisis. The Discount Rate is also referred to as the Overnight Rate since these are very temporary funds.
A lender Originates a mortgage and sells in into the Secondary Market immediately and the lender keeps Origination Fees and Yield Spread Premiums. Yield Spread Premium is a fee paid for selling a loan generating a higher returns than otherwise available in a wholesale environment. Loans must meet specific requirements to be sold on the secondary market.
In normal times the Fed does not have to hold large amounts of Mortgage Backed Securities since the secondary or private market has a large appetite for these safe investments. During the housing crash the Fed had to rush in and but up Mortgage Backed Securities to prevent every lender in the world from going under.
In the Secondary Market a large number of mortgages are bundled together to create a single fund. We'll use all round numbers for a simple explanation. Bundle all 30 year fixed rate loans together for a total fund of 10 billion dollars. These are all conventional loans with credit scores above 700 and have either 20% down payments or have mortgage insurance equivalent to those with 20% down. Every loan is guaranteed to meet strict underwriting guidelines. Any loan that defaults will be bought back or replaced by the seller of the mortgage with an equivalent loan of equal values.
This fund will pay a very low rate of return but is a no brainer safe long term investment for investors looking for long term safety. Funds can be built around combinations that are also so mind boggling that if something goes wrong you get the housing crisis.
So how come it didn’t stop things from crashing and burning in 2008 then?. Fannie and Freddie have been around much longer?
There is only one Bank. The government has nothing to do with any of it. Putting the government in the way through a "conservatorship" of those private mortgage agencies only puts more burden on the public, like a refuge for bad debts that the Bank makes. It is still all ultimately controlled by MegaBank (there is only one Bank in the world, all banks, including the Fed are just different doors to the same bank).
I don't know what justification they used (in the details) for the Brrrr process, and it's a good question, but it doesn't really matter. There are multiple paths, but all roads lead to the BIS (the biggest door for Megabank).
Here are a couple of articles to help answer your questions:
https://www.ictsd.org/residential-mortgage-pass-through-securities-short-term-liabilities/
This article talks about the housing crisis, but these types of derivatives are still being created today: https://www.thebalance.com/role-of-derivatives-in-creating-mortgage-crisis-3970477
This seems appropriate for this discussion. https://youtu.be/8NBSwDEf8a8
This is a rather complicated, but the really dumbed down version is, banks (in 95% of cases) do in fact originate the Mortgage loan (Meaning they put up the money originally). They rarely ever hold onto them though. What they'll do is sell them on the secondary mortgage market (Kind of like a stock market for mortgages) by bundling them into Mortgage Backed Securities (MBS). Yes Fannie Mae/Freddie Mac do in fact buy quite a lot of mortgages and sell a lot of MBS's as well. But the overwhelming majority are sold to mutual funds and other exchange traded funds, or insurance companies and retirement funds.
So basically this is the lifecycle of a Mortgage:
You-->Bank-->Mortgage Packer (Fannie Mae/Freddie Mac)--> Various institutional Investors (Insurance Companies, Retirement Funds, Mutual Funds, The Fed, etc.)
A collaborated effort for Americans to default on their mortgages would end the FED.
Edit: This is the way
My point is that the people have the power. Downvote confirms people don't understand this.
Those mortages (not all mortgages) are backed (guaranteed) by the government, so when your neighbor doesn't make payments and is foreclosed on, the bank that lent the money is paid by the government (via the US Taxpayer) and the house is left to rot for about a year or more. Then the government makes an attempt to sell it at a far reduced price than what was owed on the mortgage (and therefore, paid by the government to the bank). And if they're lucky, some shmuck (usually a flipper type) comes along and buys the broken down house at a huge discount and then puts in granite counter tops and sells it for 4-6 times what it really ought to sell for, thereby driving up prices in the neighborhood and making the local economy such that people who were 5-6 generations (or more) deep in the community can no longer afford to buy a house in their own hometown. Move to another red state, rinse and repeat.
Yep, that’s what I do. I am the “schmuck”. What, did you expect me to work an hourly clock-in job for shit wages?
If you're driving up house prices to the point local people can't even afford to own a home in their own hometown, then ya, you're a shmuck AND an asshole.
Buying a fixer and investing $150-$200 grand to rebuild and resell a property is not for weak, timid or socialist leaning. The houses I buy are cheap, but not fit to live in until I fix n sell them. You might want to stick to your hourly job.
You're such a jerk.