
Mortgages Are About Math - pskotarczak
http://toddwschneider.com/posts/mortgages-are-about-math-open-source-loan-level-analysis-of-fannie-and-freddie/?imm_mid=0d3fda&cmp=em-data-na-na-newsltr_20150624
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kjhughes
See also earlier discussion (16 days ago) under title _Open-Source Loan-Level
Analysis of Fannie and Freddie_ :

[https://news.ycombinator.com/item?id=9685534](https://news.ycombinator.com/item?id=9685534)

(The full title of the article is _Mortgages Are About Math: Open-Source Loan-
Level Analysis of Fannie and Freddie_ )

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LordKano
In 2008, I was house shopping. I was pre approved for a mortgage by the bank
that I was using at the time.

A couple of weeks later, I found the house that I wanted and went to the bank
headquarters to get started on finalizing the deal. The bank VP brought me
papers that showed an interest rate that was 1% higher than the rate for which
I had been pre approved, less than two weeks before.

When I pointed this out, he gave me a line about how mortgage rates fluctuate
daily. I responded that I had been checking mortgage rates on bankrate every
day for months and no one else's rates had increased by 1% in the last two
weeks. Me paying that higher rate was simply not going to happen.

He thought I was bluffing and said "This comes out to only about $40 per month
on your payment, are you really willing to not buy the house over $40?". I did
the math in my head, roughly $500 per year, $5000 per decade, $15000 over 30
years. I told him "I'm buying the house. The real question is if you're
willing to miss out on hundreds of thousands of dollars in interest over $40
per month?". He said that there was nothing he could do. I gathered up my
documents, closed my briefcase, got up and walked out of his office.

I contacted a mortgage broker and got a new pre approval from another lender.
I ended up getting a rate that was right between my original pre approved rate
and the rate that S&T Bank tried to get me to take.

I think that a lot of people get overwhelmed by the jargon. Rate, points, APR,
APY, closing costs, PMI, overpayment penalties and everything else that goes
along with it and just want the whole process to be over. I think that a lot
of people just sign the papers to be done with the process because they don't
want to deal with the process anymore.

Get past the jargon and industry terms and the math isn't difficult.
Additionally, it's worth it to know the numbers and what implications are
attached.

~~~
nostromo
I saved a lot of money using a broker.

I'm actually not sure why people go directly to banks -- brokers are there to
do all the work for you and to save you money.

The key to mortgage brokers is using several. Contact two or three and see
which one finds the bank with the best deal.

~~~
cpwright
As a counterpoint, I'm not sure why anyone would use a broker when it is clear
they also need to get paid; and you can call a dozen banks to get their
interest rates for whatever kind of loan you're trying to get yourself. When
you're talking about hundreds of thousands of dollars (or maybe even over a
million), doing a bit of work yourself seems like a good idea.

~~~
jholman
Well, in theory the broker is getting paid by the lender, not by me (the
borrower). Of course, we all know that in a rational market, that cost has to
be passed on to me. And yet strangely, I get a better offer when I ask the
broker than when I straight up tell the bank "I'm going to go to a broker now,
and so this is your last chance to beat whatever offer they're going to give
me".

Conclusion: lenders are irrational. Surprise!

~~~
LordKano
I suspect that this has something to do with the fact that a portion of the
administrative work is offloaded to the broker.

I never met anyone from the lender when I got my mortgage. All of the
background investigation, income/employment verification and paperwork was
completed with the broker.

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lewis500
"The inland cities, with more land available to allow expansion, experienced
the most overbuilding, the most aggressive lenders, the highest levels of
speculators looking to get rich quick by flipping houses, and so perhaps it’s
not that surprising that when the housing market turned south, they also
experienced the highest default rates."

This is a pretty strong theory: more land ==> all these things, including
overbuilding. What is "overbuilding" even supposed to mean? "Over" relative to
what?

These studies indicate that the problem is slow permitting and high regulation
in places that do have lots of land:
[http://blogs.wsj.com/moneybeat/2014/02/27/why-las-vegas-
got-...](http://blogs.wsj.com/moneybeat/2014/02/27/why-las-vegas-got-bubbly/)

Texas and Atlanta have lots of land around them, but they did not have nearly
the default problem of vegas and florida and california because they built a
lot very quickly, so prices never rose dramatically.

In short, there was not overbuilding. There was underbuilding, and building
that happened too late.

~~~
totalrobe
I don't understand why everyone thinks that higher home prices are
automatically good? High home prices only benefit real estate brokers, banks,
local government, and a few landowners that got in early.

Very few of my peers <30 yrs old (or older) are able to afford homes.

~~~
mikeash
Rising prices seem good superficially because a lot of people own houses and
that means everyone is getting rich! The harm on people who don't already own
a house is harder to see.

~~~
thaumasiotes
> Rising prices seem good superficially because a lot of people own houses and
> that means everyone is getting rich!

But this only helps people who own multiple houses, or don't plan to live in
one. If you need a house, the gain you get from selling your existing house
after appreciation is necessarily offset by the loss you take buying an
appreciated replacement house.

You can't get rich, or benefit at all, from a nominal appreciation in the
"price" of something you can't sell.

~~~
steve-howard
Sure you can benefit! You can take out a home equity line of credit and cross
your fingers that it doesn't come back to bite you.

~~~
thaumasiotes
An outstanding loan secured by something that _you can 't lose_ makes your
situation worse, not better. Taking out a line of credit is not fundamentally
different from selling the security. :p

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lukeschlather
Prepayment seems like a pretty straightforward way to reduce risk. It feels
like this article starts by claiming that prepayment adds unnecessary
complexity to loans, moves on to show that default happens for precisely the
reasons you would expect, and then says that we need to do more research on
prepayment without really suggesting why prepayment might be a problem here.

~~~
bradleyjg
Prepayment is a problem for the lender, not the borrower. Instead of just
having to account for default risk, you also need to worry about the borrower
repaying early. While that doesn't seem like it a big deal, it can be. If the
bank expects to get twenty five more years worth of interest payments at 5%,
the prevailing rate has now fallen to 3%, and you pay off the loan early, it
has lost a lot of income it was expecting.

In many other countries fixed rate mortgages typically contain a prepayment
penalty to compensate banks for this risk, but US mortgages almost never
contain such provisions.

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danielweber
What other countries on Earth have prepay-100%-at-will as a standard feature
of their housing markets?

~~~
zidel
Norway has prepayment of any amount without penalties (for variable interest
loans, the most common variant here) by law.

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acconrad
I'm not surprised the 2008-2009 collapse created much stricter lending
standards. I bought a condo last year and I was shocked (in a good way) at how
difficult and laborious the process was, even for someone with great credit
and a reasonable, stable income.

~~~
mixmastamyk
Strict sounds good, difficult and laborious not so good.

