
The history and opportunity of the modern mortgage [video] - notlukesky
https://a16z.com/2019/05/31/why-your-mortgage-is-so-complicated-the-history-and-opportunity-of-the-modern-mortgage/
======
tomglynch
Every time they say "Fannie Mae and Freddie Mac" they've got some weird
double-speak thing going on. Happens at 2:36 and 3:41 if you want to have a
listen. Very odd and sounds exactly the same both times. Is this to prevent
voice-to-text from working?

Links to video at those times:

[1] [https://youtu.be/z3vdcrI7xak?t=156](https://youtu.be/z3vdcrI7xak?t=156)

[2] [https://youtu.be/z3vdcrI7xak?t=221](https://youtu.be/z3vdcrI7xak?t=221)

~~~
notlukesky
Think it happened when they did the editing and merged voice with background
music/sound.

------
echopom
This is really great content by A16Z.

It shows how complex building a Fintech in US actually is , often due to how
many different partners you will actually need to depend on.

In this specific case , you would need to have each partners offer an API that
you could call to automate the mortgage workflow.

Obviously , due to the nature of the financial sector it's very likely those
partners don't have those APIs and don't want to build them because they are
sitting on a very profitable business and have no plan to change that anytime
soon.

I can draw a comparison to Airbnb , where most of their jobs wasn't so much to
build "disruptive tech" but to lobby local administration to let people rent
their appartement to individuals , while hotel industry was lobbying the other
way around.

It becomes even more complex when you realize you'll have to do this at global
scale to build a unicorn.

~~~
sarah_k
Myself and a few others woulc like to use cryptocurrency to enable fractional
ownership of property where anyone in the world can buy and sell 'shares' or
just own them as an investment. This is happening with art too.

~~~
m-i-l
Art is very different from physical property, given it tends not to have any
intrinsic value, generate income etc.

Fractional ownership of residential property is already possible in the UK,
without cryptocurrency:

\- Set up a Declaration of Trust which defines the fraction of ownership of
each of the Tenants in Common, along with other details such as what to do if
one wants to sell. This is typically used by owner-occupiers.

\- Purchase via a Public Limited Company, and issue shares in that company.
This is typically used by investors.

\- There are also fractional property ownership schemes run by housing
associations.

There was even a startup attempting to streamline this process, without
cryptocurrency, although it has folded already[0]. Adding cryptocurrency is
only going to add new risks such as key management, exchange failure, etc. and
doesn't provide any clear benefit(s) to those who don't already have a vested
interest in the chosen cryptocurrency platform. Unless the idea is to use
cryptocurrency to bypass the existing legal system, but that is going to
expose you to the legal (not to mention moral) ramifications of it being used
for tax evasion, money laundering, theft, etc.

[0]
[https://news.ycombinator.com/item?id=19319363](https://news.ycombinator.com/item?id=19319363)

------
jasode
Another way of summarizing Alex Rampell's video: _The mortgage industry is
ripe for disruption._

Yes, there are massive economic inefficiencies in the whole mortgage lending
business and since a16z's motto is, _" software is eating the world"_, there
are opportunities for tech startups to disrupt all of that.

To spur discussion, I'd categorize "disrupting mortgage industry" into 2
general buckets:

(1) disrupting the _procedural_ aspects of a mortgage : lowering the cost of
moving the transaction from the "loan application" all the way to "closing".
The _worfklow_ aspects.

In terms of disrupting _people_ , this means disrupting the loan officers at
banks, appraisers, title searchers, surveyors, etc. In terms of disrupting
"fees", this means reducing/eliminating "loan origination fee", "title
insurance", and "survey costs". (A lot of these administrative overhead costs
are basically a bunch of "checks & balances" to ensure the loan transaction is
not fraudulent or has undocumented liabilities ... e.g. verify loan
applicant's paychecks to make sure he/she really has a job with $x income, and
the property's recent newly installed fence doesn't encroach on others'
property lines creating a potential lawsuit.)

(2) disrupting the loan _underwriting_ : This means lowering the _cost of
money_. Today, we see that a 30-year mortgage in America is about 3.7%. Maybe
there's a market inefficiency and a clever entrepreneur can lower it to 2.5%.

The vastly different problem-solving aspects of (1) and (2) will attract very
different skill sets. E.g. entrepreneurs interested in (1) might think of
reducing costs of surveys with robots/drones/satellites while startups
interested in (2) might try to lower the "cost of money" by creating financial
packages such as _" 500 co-signers on a mortgage that also receive a portion
of the profits from the house's sale."_

In the video, he mentions FNMA and FHMLC are the ones that buy home loans.
Basically, it means that banks like Wells Fargo and JP Morgan Chase are
glorified order takers. They charge a $1000 "loan origination fee" to sell
your loan to the the government sponsored agencies. If the loan ultimately
ends up at FNMA anyway, maybe there's a much cheaper way to accomplish that.
(Although I doubt the FNMA website will ever have a landing page that says _"
Skip the banks and apply for a loan directly with us!"_)

~~~
PretzelFisch
The disruption everyone talks about in this industry is much like self driving
cars so far off into the future. Can the process be streamlined yes, can you
get rid of some of the players not really. You will always need a title check
you will always have to handle servicing( some banks and lenders do it in
house depends on the cost) you will always need someone to buy a pool of loans
and sell it to other investors.

~~~
celestialcheese
Title companies or title insurance is one piece I've never fully understood.

Are title companies basically just insurance companies that do a lookup in
public / private records on that property to make sure the person selling the
property is actually owned by them. And if they did poor research or the
records were wrong, they'll pay for fees. Is that accurate or am I missing
something?

~~~
cullenking
You got it. They sell a couple different depths of products, the more
guaranteed it is the more cost. They do the research to make sure there arent
any valid competing claims or partial claims to any property. They bundle that
all up with an insurance package for if they are wrong.

------
flurdy
There are a few startups disrupting the mortgage industry. In the UK, Habito
[1] is doing pretty well.

Though I mostly know of Habito because I have had friends work for them as
they have at least some of their systems have been written in Haskell [2].

[1] [https://www.habito.com](https://www.habito.com)

[2] [https://www.infoq.com/presentations/habito-mortgage-
broker](https://www.infoq.com/presentations/habito-mortgage-broker)

~~~
monkeydust
I used Habito recently to get a quote on remortgage. I don't get the
disruption tag, they are simply a mortgage broker with some nice forms.
Trussle is another one in the UK.

In the end found a cheaper deal through my own research. A broker is only as
good as the percentage of market they cover.

------
apo
The takeaway appears to be that the modern mortgage in the US places several
intermediaries between borrower and lender.

The opportunity would be to develop the software that can replace the
unnecessary entities, driving down costs and profiting the innovators.

We can take this idea to its extreme and possibly learn something. Imagine a
world in which home buyer and seller transact directly using software. In a
world eaten by software, we might expect this to be the norm.

Impossible? Find the one player who can't be removed under any circumstances.
Add them back in, and try again.

Continue until only the minimum roster of players remain. Assume all laws
remain in their current form.

I suspect a16z, along with many other fintech startups have run this analysis
already and have come to a depressing conclusion: the players in place now are
essential given the current regulatory framework. They may not have automated
as much as they could have, but they're reluctant to go further given their
regulatory burden.

That's where an organization such as a16z can come in. With software startups
increasingly requiring nothing from venture capital, the last bastion of
relevance will lie in the twilight zone between technology and regulation.
Companies who need to get laws changed for their business models to work will
need deep pockets.

------
tomglynch
The video is very American centric - is this the case in other countries ie
Australia?

~~~
Narkov
Yes and no. Australia has mortgage brokers and financial institutions that
collateralise or group loans for resale. We don't have equivalents for the
government run Fannie Mae/Freddie Mac though.

------
JackFr
Video glosses over an important aspect of balloon mortgages. No one ever
really expected you to pay the full balloon. The expectation was that you’ll
pay some portion and roll the rest into a new balloon. The problem during the
Great Depression wasn’t that the people couldn’t make their balloon payments
(they never could) it was that the banks had no money to lend, and they
couldn’t roll the balloons.

(An interesting aside, is that during the run up to the crisis, banks
reinvented balloons in the form of the teaser adjustable rate. These had a low
fixed rate for 2,3 or 5 years, and then would turn into 28,27 or 25 year
adjustable rate loans, with they rate much, much higher. The thing is, no one
was ever supposed to pay that rate. When the teaser period ran out, the
borrower was expected to refi. And of course we know what happened next....)

------
walrus01
If you really want to go down a rabbit hole of real estate weirdness, research
why title insurance is required, and read up on some examples of fuckups that
have occurred with land ownership records and scams...

~~~
dredmorbius
Any particular instances come to mind?

------
tw1010
Please please could someone recommend two or three books to get a more in-
depth understanding of the history of mortgages, similar to what this
(awesome!) video only briefly touched on.

~~~
mooreds
I can definitely recommend this list of posts by Tanta, who worked in the
mortgage industry for years:

[https://www.calculatedriskblog.com/2008/12/compendium-of-
tan...](https://www.calculatedriskblog.com/2008/12/compendium-of-tantas-
posts.html)

I looked at turning these into an ebook (with permission from the family) but
never got it published.

~~~
tw1010
I would love you if you sent me that ebook (email in bio).

~~~
mooreds
Thanks for asking. It's not available for public consumption, unfortunately.

------
nintendo1889
This is true.

What about group ownership? There's a building in the new york city area that
is mainly owned by the tenants. So that by paying the mortgage, they are
really buying more shares in the corporate entity that owns the building. Then
they never lose that equity in the property.

------
eof
Having the talent standing in front of a whiteboard with a marker and never
writing anything was an odd choice by the director.

~~~
skellera
The animation style is drawn. Probably just to get you thinking like you’re
watching someone draw it out.

They also could’ve played with the idea that he did draw or drew afterwards
and edited in the animations instead. Might make more sense since he’s holding
the marker.

------
baybal2
Moral of the story, do not be in debt, do not get into debt

~~~
bko
How is that the moral of the story? If anything, the government sponsored
entities are artificially lowering interest rates which you can use to borrow,
so it makes sense to take advantage of that cheap credit.

~~~
baybal2
America, a supposedly a capitalist society. I expected Americans to be at
least more finally literate than people from the bloc.

Artificially low interest rates may well benefit you to some tiny extent, but
imagine just how much more benefit is given to a bank. You still take an
enormous risk, staking all your livelihood, and the bank get a near free way
to make money. That's not equitable.

The prime majority of people have no genuine need to own a home, yet the 100+
years of state+banks instilling the mortgage culture managed to make it look
so. It hurts me to see that even intellectuals on HN don't seem to see through
that.

Every time I raise that, somebody jumps with a calculator to show me "how much
I miss out." I am not missing out anything of that, unlike near 2 millions of
once well off, middle class Americans who got screwed by "a low risk mortgage"

~~~
cheerlessbog
> The prime majority of people have no genuine need to own a home

Many people, including me, value being able to do anything they want to the
property, live in it as long as they want, know how much it will be costing
them years into the future, and never have someone enter without their
permission even (landlords can legally do this if there's an urgent
maintenance problem). In my last rental I could not even paint the living
room. They may also appreciate the opportunity to participate in any
appreciation.

~~~
ghaff
Those are really the key things. Buying a condo vs. renting a similar place?
Sure, you can run financial calculations--and should--but a lot of factors
that go into whether one or the other is the optimum _financial_ decision are
unknowable to a greater or lesser degree. Will housing prices go up or down?
What will interest rates do? Will you have to turn around and sell the
property quickly for reasons? Will maintenance expenses be more than you
anticipated?

Much bigger are things like stability vs. mobility, being able to change
aspects of the property to your liking, and whether you can even rent the sort
of property you would like for an extended period.

Also "need" is an odd word in this context. I own and do a lot of things that
I don't "genuinely need." But I'm happy for them anyway.

