
The 30-Year Mortgage Is an Intrinsically Toxic Product - rchaudhary
https://medium.com/@byrnehobart/the-30-year-mortgage-is-an-intrinsically-toxic-product-200c901746a
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snowwrestler
This article strikes me as a classic example of a smart person outthinking
themselves on something pretty basic. Sure, it makes for an interesting
analysis. But the measured reality is that home ownership is strongly
correlated with wealth, and the only way for someone who is not already
wealthy to own a home is to borrow a lot of money to buy one. And the only way
to get the monthly payments down is to extend the payback term. Hence: the 30
year mortgage.

~~~
crazygringo
But many people automatically assume home ownership is a good thing... and the
government officially promotes it as well (see mortgage interest deduction).

You're right this is why mortgages exist, but you're not explaining the
demand. It's also easy to imagine an alternate universe where most homes are
owned by institutional landlords, people rent, and invest what their interest
payments would have gone to in index funds instead, winding up with a more
reliable chunk of cash when they retire instead of a home whose value is hard
to predict.

~~~
jimmy1
Ownership beats the hell out of renting. The key is owning something you can
afford.

The problem is people buy homes automatically thinking they will rise in value
and they will make money off of it.

Buy a home to live in.

~~~
closeparen
People who buy as their financial situation improves will naturally experience
lower-quality rental housing and higher-quality ownership housing. That demand
pattern shapes the housing stock, so ownership units will be nicer than rental
units on average. But luxury apartments can be very pleasant, and price-
competitive with ownership. In San Francisco these are very popular, servicing
the legions of tech workers who have $3000+/mo to rent but not $5000+/mo to
own.

~~~
nradov
Real luxury apartments barely exist in San Francisco, and the few that are
available go for significantly more than $3000/mo.

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C4stor
It's really disappointing when people keep thinking of important life
decisions as purely economical ones. No, I didn't buy a house because it's an
"investment". I bought a house because I wanted the freedom to modify the
place I live, adapt it to my family needs. You know, feel at home !

When I rent, I'm simply not allowed to do the amount of modifications I want
to a place, and it just doesn't have the same feeling.

Thinking every single act of life in terms of economy is being blind, and
blaming people for doing non economically rational decisions bemuse me.
Because for me, the endgame is not hoarding money, it's spending it to live
the life I want. And just because one value economic rationality very much
doesn't mean we all have too. Which is why there are still some very silly
people donating to charities (the fools !).

Kudos to politicians to sometimes have policies which make it easier to live a
nice life, even if "the market" hates it.

So no, the 30 year mortgage is not a "toxic product", it's a good way to allow
a lot of people to go in a life path that is very appealing to a vast amount
of humans.

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nartz
One of the main values in a mortgage is that money is worth less in the future
due to inflation, so over time the mortgage payment actually gets cheaper.
Similarly, mortgages can often be cheaper than the alternative of paying rent,
and are incentivized by allowing interest deduction.

~~~
closeparen
The market is generally already aware of stuff like this, and builds it into
the price.

~~~
kgwgk
It’s included in this thingy called “interest” :-)

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jmspring
From the article: \- A mortgage is a bet on the value of a specific home \-
It’s a bet on local real-estate prices \- A mortgage is a bet on interest
rates, but it’s an esoteric one

All three make massive assumptions (read the article). For me, there is
something much simpler:

\- the thirty year mortgage was to lock in housing at a fixed price (barring
property taxes and utilities/etc) at a fixed price where I am paying into
eventual ownership

The article also ignores the fact that during a period of lowering rates
(assuming equity in the house), one can often refi to those lower rates. If
the market craters or rates go up, unless one is speculating, it doesn't
matter - the rate is locked.

This article spends too much time attacking a mortgage product that applies to
pretty much any other mortgage, but those (like X/1 ARM mortgages) have bigger
risks.

In reality - one must guage their intent (flip/keep for period of time/never
sell) and choose the product accordingly.

~~~
Gibbon1
I read some of it, he implies blame against 30 year mortgages for the 2008
financial crisis. When the reality is blame lies with exotic and adjustable
rate mortgages, collateralization, corruption of the rating and underwriting
industries, and political failure[1]

And you are correct, the vast number of 30 year mortgages don't last ten years
much less 30. The author also skips over that 5 year mortgages that existed
previously were interest only and could be called in at any time. Worse the
lender could require payment in gold or cash, whichever was higher. You want
toxic, that's toxic.

[1] Banks which are purely virtual organizations were 'saved' while families
were physically thrown onto the street.

~~~
jmspring
I read through more of it after my comment. The real issue / culprit was the
creative ways to get people into homes that could not afford them
realistically - be it ARMs or X-year fixed loans.

~~~
Gibbon1
Not being able to afford a home has everything to do with stagnant wages and
asset inflation. That's a policy choice our society has made. Exotic mortgages
and corrupt underwriting was just trying to paper over that.

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sys_64738
Renting V owning can be summarized by the following points

1) you have an asset at the end of the mortgage you can sell

2) after the mortgage is ended you have a place to live rent free in your old
age

Contrast to renting where you never own the place you rent and you will have
to rent in your old age.

Sure, you might default on the mortgage but it’s a long processed to be
foreclosed. Contrast to being evicted from rent not being paid. Both have
issues on default but your chances of staying put are better for mortgaged
house.

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pxeboot
Cheap, easy credit is one of the reasons housing prices have been able to
climb so high. I wouldn't be surprised if 40-year loans become more common in
the future to allow for further increases.

~~~
akvadrako
Why not infinite year loans like in some countries?

Basically you just cover the interest and gamble that by the time you sell it
the price has increased.

~~~
mertd
If you're in a rent controlled market like SF, there is no reason to take on
that risk. Just rent.

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walrus01
One of the interesting things about the Canadian mortgage market is that there
is no such thing as a 20, 25 or 30 year fixed mortgage. The longest term ever
offered is 5 years. Amortization periods can be 10, 15, 20 or 25 years, but
you need to renegotiate at maximum every 5 years.

In general the interest rates are highest for fixed 5-year mortgages, 1 and 2
years are lowest.

There is _absolutely no practical way_ in Canada to lock in a mortgage for
long term fixed interest rates beyond 5 years. This has previously had
interesting effects, such as in the early 1980s when people who owned their
homes, had existing mortgages come up for renewal and encountered the new 18%
interest rates. Either resulting in serious financial hardship or fire-sale
quick sales because they could no longer afford to service the mortgage.

Some people are currently getting mortgages which are fully ARM and hoping
things maintain the status quo.

The CMHC, federal agency which sells mandatory mortgage insurance for high-
ratio loans, recently implemented a new stress test.

[https://jacquiebushell.ca/2017-mortgage-rules-changes-
explai...](https://jacquiebushell.ca/2017-mortgage-rules-changes-explained/)

Not to say that Canada wasn't significantly affected by the 2008-2009
financial crisis. But much stronger and stricter banking regulations meant
that the domestic big-5 banks' exposure to low-quality American mortgage
products was lower. And there were much fewer no-doc/no-income/poor-quality
mortgages created for Canadian properties. There was definitely no domestic
equivalent to Countrywide or Washington Mutual's massive tranches of shit
mortgages and mortgage backed securities.

~~~
rootusrootus
Forced adjustable rate mortgages? That's seriously unfriendly to consumers.
Wow, Canada.

~~~
arkem
It's the same in Australia, New Zealand, UK and probably other places too. 30
year fixed rate mortgages are probably the exception rather than the rule in
most places.

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matthewaveryusa
After you pay your loan off you no longer need to pay rent, and while you're
paying your loan you don't pay rent. Author completely missed that point. You
need significant income and housing depreciation to come out behind when you
factor those two in.

In fact for my situation, even if my house depreciates to 1/3rd what I paid
I'll still be coming out ahead due to paying less than I ever did for rent.

~~~
closeparen
After investing in equities for 30 years with the savings from renting vs.
buying, you will also be sitting on a huge chunk of value.

~~~
kuhhk
If I read that correctly, it sounds like you’re assuming that rent is lower
than buying, which is not true in many places (including my own city). Many
people buy rental properties because they can charge hundreds more dollars...

~~~
closeparen
Sure, that can happen, but probably encodes a pessimistic view about the
area's future prospects. If my neighbors highly valued the option to flee, I'd
want to be very careful about putting down roots.

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ProfessorLayton
There’s too many assumptions made in this article. Not all mortgages are
speculative, many just want a place to live where they’re not subject to a
landlord and all the rules that come with it, even if they don’t stay for the
full 30y term.

For those that are willing or able to stay the full 30y, the nominal mortgage
payment will be the same, while the value of the dollar will not — inflation
will work in your favor.

The tax laws have also been recently doubled to ~24k for couples, and most
home purchasers will not be running into the mortgage interest deduction
judging by the median home value in the US.

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jfoutz
This is a great article worth reading. I found myself walking around my
apartment having a conversation with my imaginary version of the author. There
are at least four points that i would quibble over.

That said, i like the analysis. In spite of (imho) flawed foundations it's a
solid argument. Does it capture the whole truth? I'd say no. Does it highlight
a significant set of factors? absolutely.

Spend the 15 minutes, charitably read the article, decide if it's worth
spending another hour picking apart the argument and the analysis. This is one
that probably isn't right, but points in the direction of truth. I think the
foundations are shakey, but the structure is pretty good. Fun read.

~~~
sjg007
What is shaky about the foundations? He seems like he covered all the bases
here.

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AdamM12
> "If anything, our policy should do the opposite of what the GSEs promote: if
> you have a low income, and you try to borrow money to buy a house near where
> you work, there should be a surtax to discourage this bad diversification.
> There are other savings vehicles that don’t closely correlate with your
> income; buy those instead!"

I think this is my favorite line. Let's tax the poor more for living close to
where they work.

~~~
closeparen
When the last employers pack up and leave the industrial heartland, all those
mortgages are going to be deep underwater, and all those workers are going to
be locked in places with no work. Many already are (see: Flint, MI). I hope
you are prepared to pay their living expenses in perpetuity.

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nobodyandproud
Home ownership was a way to stabilize finances, by providing a way to create a
known cost for the average person over the long term.

Banks made stable money through interest, and to offset the risks of
foreclosure the banks quantified the risk based on income, etc.

It worked very, very well. As an added benefit to the average person: The
interest paid on the mortgage is tax deductible, and the 30 year mortgage
offers the biggest benefit.

More in this in a moment.

The article then goes into 2008's crisis, but this a bad example. he barriers
that prevented investment banks from commercial-bank activities (Glass
Steagall) were completely wiped out.

It took only 9 years (really, just 7) for that mistake to completely up-end
our economy.

Now back to the interest deduction: There is now a movement to remove this
benefit. Both Republicans and Democrats see this as a windfall for more tax
money.

This is another article trying in a round-about way to sabotage the middle-
class' only real tax deduction.

~~~
rootusrootus
At this point the interest deduction is largely gone, at least to my
understanding. The majority of homeowners will now find that the standard
deduction is better than deducting mortgage interest. Especially married
couples.

~~~
nobodyandproud
It depends on the value of the house, how much in charitable donations you
gave, etc.

A married couple at the upper-end of the mortgage interest cap who also
provides donations can still exceed the $24,000 cap.

Finally, I believe the boosted standard deduction expires in 2025.

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lucas_membrane
Isn't the focus on the 30-year fixed rate mortgage at least a little bit
narrow in analyzing what happened during last decade's financial crisis? There
were all kinds of negative amortization and adjustable interest loans being
pushed, and I recall reading that high-leverage mortgages, not sub-prime, were
where the defaults were greatest.

My idea is that local governments should play a role in regulating mortgages
because defaults, foreclosures, and abandoned property have serious
consequences for neighborhoods and municipalities. Counties should have and
exercise a right to refuse to register liens attributable to pathological
lending likely to cause local economic hardship.

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evancox100
"You don’t see financial advisors telling bacon lovers to hedge their next
thirty years of breakfast consumption with a rolling long position in lean
hogs."

No, but don't let them read this or they might start!

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anonu
The mortgage concept in the US is the ticket to the American dream. It is
designed to give you essentially free money over the life of the mortgage by
leveraging yourself with a loan that very few people would give you for any
other investment decision.

Not taking advantage of buying a house in America is a big mistake. Sure,
there are plenty of pitfalls along the way, market timing can be important,
location matters, etc.. but on average you are way way better off after ten
years, ceteris paribus, versus someone who did not buy.

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andreygrehov
Don't people want to own a place when they are 60?

~~~
closeparen
Probably not the same place as when they're 30. When you're no longer working
and the kids are grown, school system and job market become irrelevant. It
becomes physically harder to care for each sqft, and with a smaller household
you need fewer of them. As you lose the ability to drive safely, walkability
becomes much more important.

When I'm 60 I want to have the wealth to meet my new housing needs. That
_could_ be a previous house to sell. It could also be stock portfolio to
liquidate or passive income sufficient to cover rent.

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nateburke
Does anyone on this thread currently know what the current industry S.O.P. for
calculating the option-adjusted spread (OAS) on agency MBS? Back when I was
doing it in 2012, Monte Carlo simulation was still the gold standard, as far
as I could tell.

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Simulacra
We own two rental houses and our townhouse on 30 year fixed. We are interested
in building a property portfolio so for us it’s a perfect fit.

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epx
One of the 10 best articles ever published here.

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purplezooey
Screw mortgages, I hate them too, but what are you going to do.

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faissaloo
The duration of the mortage is irrelevent, mortages themselves are
intrinsically toxic.

