
Wealthy mortgage borrowers face cold shoulder from lenders - aazaa
https://www.bloomberg.com/news/articles/2020-04-21/well-heeled-mortgage-borrowers-face-cold-shoulder-from-lenders
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1-6
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przemub
Do you know why does it work?

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criddell
It didn't work for me. Instead it said I'm in private mode and said I should
subscribe to keep reading.

I'm using Firefox FWIW.

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Hitton
This [https://pastebin.com/UiyghKpq](https://pastebin.com/UiyghKpq) userscript
should fix it. I found it few years ago somewhere on reddit. It works on
multiple media sites that don't like private mode.

And "Bypass Paywalls" firefox addon removes the need to insert the dot into
address.

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SilasX
Relevant points:

>Stanley Middleman, chief executive officer of Freedom Mortgage Corp., one of
the nation’s biggest home-lending companies[:]

>“Whether the assets are good or not good is irrelevant because there’s no
liquidity to buy them,”...

>Wealthier buyers are proving to be just as likely to stop paying their
mortgages. Approximately 5.5% of jumbo loans -- 131,000 borrowers -- have
asked to postpone payments due to a loss of income, compared with 6% of all
loans, according to Black Knight Inc.

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neltnerb
I think the bigger point is that the jumbo loans aren't backed by Fannie and
Freddie so if the risk of default is similar then it does make sense to prefer
to lend to people who need conforming (under the jumbo limit) loans.

Of course, if you consider "wealthier buyers" they may have quite a few
properties, and are more likely to have the resources legally to "go bankrupt"
without it impacting them personally. See our POTUS for an obvious example.

So they may be more likely to default by choice because it won't ruin their
lives and increase the relative risk of lending to them.

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bradleyjg
> I think the bigger point is that the jumbo loans aren't backed by Fannie and
> Freddie so if the risk of default is similar then it does make sense to
> prefer to lend to people who need conforming (under the jumbo limit) loans.

In the case of conforming mortgages the banks aren’t lending at all. They are
filing out paperwork and skimming off the top.

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tempsy
This is what the Fed has done for both recessions. It’s a bailout.

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supahfly_remix
I'm not sure what qualifies as wealthy, but most houses in the SF Bay Area
bought in the past few years are probably financed with jumbo mortgages. E.g,
20% down on a $1MM house leaves $800k to be financed, which is greater than
the $765k criteria stated in the article.

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alexhutcheson
The median sales price for a house in the US is $327,000[1].

People buying houses for $1 million are wealthy by any standard.

[1]
[https://fred.stlouisfed.org/series/MSPUS](https://fred.stlouisfed.org/series/MSPUS)

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gdubs
They’re not wealthy by the standard of the Bay Area, which is the point of the
comment you’re replying to. Wealth is relative. Otherwise you could say that
just about any American middle class family is wealthy — just look at the
entire world’s population, where anyone making over something like $40k a year
would be in the top 1%.

Just to underscore the point, Palo Alto declares not too long ago that anyone
making under $100k a year is considered “low income”.

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BoiledCabbage
> Otherwise you could say that just about any American middle class family is
> wealthy — just look at the entire world’s population

Any middle class American is wealthy by the world's standard. The quality of
life provided by middle class America is the life of the 1%. To not see this
is to not understand how most of the world lives, and the challenges people
face from being less lucky.

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borkt
I’ve spent time a lot of people that live much better than me in what are
considered third world countries, including overall quality of life, who make
far less than I do. There are countries where money goes much further and
family holds much greater value when compared to work than US culture (and
laws) generally produces. They see friends and family for meals many times a
week, their health care is affordable, and their jobs are more secure. It
would be thought of as a cultural taboo to value work over family, whereas the
majority of US employers see placing family over work as a fireable offense.
Yes we have more paper wealth, but if we have to work longer hours and are
spending it all on utilities, healthcare, and vastly overpriced housing, does
it really matter?

Edit: This applies to countries with relatively reasonable populations with
respect to their resources. This does not apply to places like China and India
where there is a huge population to support.

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CalRobert
Seriously. I sometimes cringe when I think what I could be making if I moved
back to California (I'm even _from_ norcal...) but I just can't handle US
workaholism (most of it performative) and the idea that even if I manage to
pull off 5+ weeks of PTO a year, my spouse certainly won't, and I like living
somewhere everyone gets a month off a year and even people under the median
wage can afford a decent holiday.

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jbb67
I two years I imagine the same lenders will be complaining that they drove
away all their most profitable, low risk customers because of a short term
risk issue.

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raziel2p
> Before the pandemic, lenders were falling over each other to welcome jumbo
> borrowers, who generated fat profits even though they were the least likely
> to default.

Even though? Implying loans that default are normally the most profitable? Am
I misreading this?

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magicsmoke
Loans that are likely to default have higher interest rates. However, jumbo
loans also have high interest rates due to the size of the principal. Although
they're supposed to be less likely to default, being held by high-income
individuals, if they do default then you lose more principal than a regular
loan. For a bank in good times, you get to charge high interest rates normally
reserved for risky borrowers on safe borrowers. More profit with less risk,
what's not to like? In bad times though, when those previously safe borrowers
start defaulting, even if only a few of them default they do so on larger
chunks of money. Instead of losing your money with many small cuts now you
could end up losing money in chunks.

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t0mas88
But in a well working market, why wouldn't bank X provide a lower rate than
bank Y if the loan is less risk and very profitable? And then bank Z sees a
potential profit and undercuts bank X. Repeat until you get a rate that
reflects the risk?

So the real question is: What is wrong in the high-end US mortgage market? Are
banks breaking anti-trust laws and setting price floors?

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magicsmoke
Because they aren't really low risk. There's two different kinds of risk being
referenced here.

Risk 1: High chance of default. This is the risk you take by lending to
borrowers with poor credit.

Risk 2: Low chance of default, but when defaults happen you take a big hit.
These are jumbo loans.

Banks recognize that Risk 2 has inherent costs that require a higher interest
rate. My previous wording of "More profit with less risk" was false. More
profit with less Risk 1, but that's because you're taking on Risk 2.

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aantix
Where’s the best place to shop for a mortgage?

Bankrate, Rocket Mortgage all claim to have the lowest rates but there’s
direct smaller lenders that definitely have them beat.

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gnopgnip
You want to check through different sources, direct to consumer, through a
mortgage broker, and through a bank you have an existing relationship with. It
is worth shopping around with the direct to consumer lending, there might be a
$10k difference in closing costs for the same rate between the best and worst
of 5 lenders. With a broker they will compare 10+ sources typically.

For instance Quicken/Rocket will have different rates going direct or going
through a broker. If you have a lot of money invested with Chase/BOA they
could give you a better rate than you would get elsewhere. The same can be
true of a credit union, or you could get a discount even if you do not have a
substantial amount of money invested with your bank.

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sys_64738
The bigger the mortgage then the larger their emergency fund. Right?

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joezydeco
Underwriters like to see six months of reserves on hand, but they don’t
monitor that after the closing.

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mgkimsal
was close to building a house earlier this year (early March) and was talking
to two lenders about construction loan. being self-employed was an extra small
bump for underwriting, and I asked about loss of income because the covid19
stuff was just starting to become big news.

Both indicated that their underwriters would likely check up after closing -
30 or 60 days after - to check on income at that point, to see if there were
problems, and that this was somewhat normal for them with self-employed folks,
but wasn't anything related to c19 (which... I suspect some changes may occur
to underwriting and loan processes in the aftermath of c19). They indicated
this was just something that happens to 'a moderate portion of self-employed
borrowers post-closing'.

I'm not sure what they could actually _do_ to you if they found your income
had gone down or away post-closing. I was going to ask in our next call, but
... we're probably putting that whole project on the shelf for now.

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joezydeco
Construction loans are a completely different animal. You're getting part of
the money up-front before a single board is nailed down. It makes sense that
they will monitor progress and costs.

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mgkimsal
monitoring after the close still struck me as a bit... odd, but not out of the
realm of possibilities, I'd guess.

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gist
Typical non rigorous find a few examples and write a story article. Not saying
not true either just that getting a few people to say something is not a trend
or show what is happening in most places (possibly).

That said we just did a refi which closed today. (My own single data point
anecdote).

It does make sense that the risk is greater for the mortgage companies now
than in typical times in the sense that traditional borrowers who were secure
and non risky in a regular economy could potentially be out of work and have a
greater chance of default with the security not being worth that much.

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ww520
That’s good. That means the banks are rational and exercising caution to avoid
risks.

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tempsy
Nope this isn’t a good phenomenon. Once again this is a result of Fed
intervention. The Fed is buying mortgage backed securities as part of the
stimulus package that exclude jumbo loans, so banks are being effectively
saved from bad conventional loans on their books because they can sell it to
the government but can’t sell jumbo loans that are usually taken by more
credit worthy and wealthier borrowers.

This is creating a distortion in the mortgage market that isn’t rational.

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justaguyhere
Why exactly should we care about wealthy borrowers at this point, when
millions of people are losing their jobs/health insurance...? So what if they
get told no - it is not like they are living in a 500 sq ft apartment anyway

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mimikatz
You should have empathy for everyone. You should have empathy for the pain
poor people experience and the pain the rich people experience. Someone's
income doesn't make them more or less human.

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justaguyhere
Not sure what this has got to do with empathy. If rich people don't get
favorable mortgage, it is at max an annoyance to them. They are not going to
be homeless or going to ask for food stamps. If a normal family with one home
and one mortgage is not able to refinance or not able to pay their mortgage
for a few months, their bank will go after them and they will end up on the
street.

Sure we can talk about it and feel sorry for their inconvenience, but our time
is better spent looking into much bigger problems of much bigger percentage of
our population.

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jfim
Keep in mind that in high cost of living areas, such as the Bay area, all
housing is essentially jumbo mortgages.

If jumbo loans are not available or hard to obtain, this means that people who
do lose their jobs face an illiquid market and don't have the option to sell
their house to avoid default, and thus end up on the street.

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_curious_
I wonder what % of those with jumbo loans are completely out of a job? And
further in such circumstances that they cannot afford to pay even a reduced or
deferred mortgage payment? Or move into a lower cost apartment in another
market? Going straight to the street tomorrow sounds like a stretch with
options along the way especially for someone who was in a jumbo in the first
place. Loans take a long time to default/evict and lenders are probably not in
a rush to put the liability on their books right now either.

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jfim
Good points.

I'm assuming the job market for non engineers in the Bay area right now is
pretty tight, so for them, and assuming they have a mortgage, they might be
caught between a rock and a hard place.

I don't know what percentage of the market that is though.

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_curious_
"I'm assuming the job market for non engineers in the Bay area right now is
pretty tight, so for them, and assuming they have a mortgage, they might be
caught between a rock and a hard place."

I'm not from/in the bay and not paying attention to it, so will go with your
assumptions here.

Zooming out a bit on the general topic of high COL markets though, it's
interesting talking with people around my high COL community who feel like
they deserve to live and stay here regardless of the changing economy.
Thinking out loud:

Maybe high COL markets are untenable in this economy for a certain percentage
of the population?

...if there were no welfare schemes going around wouldn't these high COL areas
rebalance faster to some equilibrium in line with broader affordability?

Are the handouts just further propagating an attitude of entitlement while
also artificially inflating high COL markets otherwise overdue for a reset?

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jfim
Well, high cost of living markets are basically propped up by the surrounding
economy. It's true that the high cost of living areas would rebalance, but
that can leave the current homeowners underwater.

As for the handouts part of your comment, what do you consider a handout? The
stimulus checks? Is QE considered a handout?

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_curious_
"high cost of living markets are basically propped up by the surrounding
economy."

Yes - to the extent that surrounding economy can support the general COL. So
if/when the surrounding economy can no longer support a relatively high COL
(in this example of mortage/rent = housing), why not just let the COL adjust
proportionately to the surrounding economy?

So in the event the surrounding economy is strong & growing, the COL is also
high and rising (as we've experiences over the past ~10 years). But when the
surrounding economy is bad and declining, the COL should lower to match, no?

"As for the handouts part of your comment, what do you consider a handout? The
stimulus checks? Is QE considered a handout? "

Yes, among others, these programs and others like it are only artificially
propping up high COL areas (housing, for example) that otherwise would
experience a correction (down) tied to their respective surrounding economies.

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onetimemanytime
They'll lend you, just at higher rates. This is banks doing what they do,
taking the umbrella now that it's raining.

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em500
> taking the umbrella now that it's raining

Always found this a very strange metaphore. Banks seem to always face
criticism for 1) when they _don 't_ lend to people who need it most and 2)
when they _do_ lend to people who are likely to default. It seems fairly
obvious that there is a very large overlap between those groups.

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wegs
The central friction is there are two conflicting views of banking:

1) Lending, insurance, and investment as a social service. People need homes.
Businesses sometimes need to weather crises without bankruptcy. Startups need
funding. People need educations.

2) Lending as a private investment. You want interest rate to reflect risk.

Evolving monetary theory means federal interest rates are set to reflect #1.
The underlying view is that financial system is a bunch of bits used for
accounting designed to keep businesses productive, people working, and the
economy running, much as you might have in a video game. You make and destroy
money as needed to support what needs to happen to make that work, much as a
game developer might engineering money sources and sinks into an MMORPG. It's
just bits on a computer.

Historical practice and the structure of banks is set around #2. This is a
really sound theory if your currency is either backed by gold, or even is fiat
currency, but running on the same principles.

Defaults aren't a problem with #1, unless they encourage bad behavior. If a
bunch of poor people buy homes, and later default on mortgages, it's really
not a big deal; bits on a computer appear and disappear. If 50% of those
people come out owning homes, you're still ahead if 100% were still renting.
But in #2, it's a financial crisis. Conversely, if a bunch of poor people
can't buy homes and have to rent, it's a crisis in #1. It's not a problem in
#2.

I'm not sure the mixture model works well -- indeed, I think that's the source
of our problems. I think if we killed the banking sector, and folded all of
this into the fed, it'd work great (that's what China does). I think if we had
the gold standard again, that'd work pretty well too. But when you mix the
two, things get a bit ugly.

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pishpash
There isn't some fundamental distinction between 1 and 2. For 1, there is
obviously some positive social utility in the end or else it wouldn't be good
policy. But such lending may require too much capital, too large a risk pool,
or too long a time horizon for an individual private bank to take on. Instead
a public or policy bank steps in.

It's good to have banks of different sizes serving different niches, as long
as they assess risk prudently and price rationally. What you don't want is
politicians micromanaging in domains in which they have no expertise,
especially when they are driven by short-term, personal political objectives.

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sandoooo
The fundamental difference is in incentives. If your incentive is to generate
profits, you don't want to lend to the high-risk needy because you'll lose
money. If your incentive is to provide another form of social security, you're
willing to subsidize.

The problem comes when you force a business that really wants to align to the
profit incentive (banks) to provide social subsidy by effectively charging
their profit-generating customer base a premium. 1. They're incentivized to do
the bare minimum necessary. 2. They're incentivized to stick to the letter and
not the spirit of the law. 3. The transfer of wealth from paying to subsidized
customers is opaque and nobody can do proper accounting.

This is a major source of corruption and inefficiency. It's the sort of
problem that's all over the place whenever the private sector is forced into
providing this sort of opaque cross-subsidy.

If I were to re-do this from scratch I'd privatize all the banks and let them
do just the profit-making part, and have social programs solely as a function
of the government, with a set yearly budget.

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nsfyn55
Wealthy Borrower: "Why can't I refi lower?"

Lender: "No, because your loan isn't secured by the government"

Wealthy Borrower: "I am just using logic here, you're telling me a riskier
borrower with lower credit than me can refi?"

Lender: "If their loan is secured by the government, yes"

Wealthy Borrower: "I don't understand"

Lender: "Well at least we agree on something"

Are you really using logic? Seems like a dubious claim to me. Capitalism is a
harsh mistress Mr.1%. Don't like it move to Denmark.

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yardie
Just a nitpick, your mortgage isn't secured by the government. It's actually
owned by the government, Fannie Mae. Your bank is just the middle man that
services it. If your bank doesn't want to service it or the government don't
think they are managing it correctly they will move it to another bank.

So I'm not surprised these banks don't want to touch jumbo loans right now.
That debt is their risk. They can't wash their hands of it if it goes tits up.

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oldsklgdfth
> your mortgage isn't secured by the government. It's actually owned by the
> government, Fannie Mae.

I'm confused what type of mortgages does this apply to? Is a conventional 20%
down mortgages owned by the government somehow?

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yardie
Conventional, FHA, and VA loans are owned by the government.

This came about after 2009 financial crisis, once regulators realized the
banks were playing fast and loose with mortgage lending. Unlike TARP, they
inherited that debt and have held onto ever since.

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oldsklgdfth
This is total news to me. So is the US housing industry owned by the US
government?

My impression was:

\- conventional is within risk margins of banks and they own that risk

\- fha requires pmi, that is insurance you buy to cover the extra bank risk

\- va, mortgages to veterans that the government own

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yardie
They don't own all of it, but they own the majority of what most people
consider mortgages. The high-priced homes in NYC, LA, SF are more commonly
jumbo loans. These are considered non-conforming and Fannie Mae can't touch
'em. The 3 you listed are conforming loans and will be absorbed by
FannieMae/FreddieMac.

In my case, 30 days after we closed on a conventional loan, the bank sent us a
letter stating the loan was transferred to Fannie Mae. They would continue to
do the servicing of taking payments, collections, and closing for the next 30
years, hopefully. But SOP is close on the loan and send it to FannieMae.

The old days when you would closed the loan the bank would immediately package
it and shop it around. Prior to the financial crisis your loan would
constantly be moving around as if it was being traded on Wall Street, which it
was. People were sending checks to banks that didn't even hold the loan.

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oldsklgdfth
> In my case, 30 days after we closed on a conventional loan, the bank sent us
> a letter stating the loan was transferred to Fannie Mae

I don't think that happened to me, the bank kept taking my money so I assumed
the owned the house that I was paying them back for.

> The old days when you would closed the loan the bank would immediately
> package it and shop it around

This is probably mortgages 101, but why was that the case? Is it, in general,
more favorable to sell off mortgage liabilities or where there conditions that
made that true?

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nitrogen
Your "servicing" and "note" on a mortgage are two different things. The
servicing right is who gets to interact with you and charge you money, but the
owner of the note actually gets the money in the end (minus servicing costs).
Those can be transferred independently, so you may keep sending checks to one
place, but the actual owner may change over time.

One reason to sell a mortgage is to get the money back. Instead of making
money slowly over 30 years, you get some fraction of that as a lump sum plus
your principal is returned. Some investors want the steady payout for more,
others want fast turnover for less.

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eikenberry
Jumbo loans were people wanting more than they could afford and the bank
hedging that they could actually afford it. Ends up that they can't.

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abofh
I don't think those words mean what you think they mean.

