Category: Reddit Post

Mortgage _ part 2 | Trading Academy

It’s all cyclical. And far, far away in California, the unemployed people thought that home prices would only go up, and banks somehow thought the same – they gave out loans without any collateral. An unemployed person “bought” a house for $150,000 with no down payment, paying $700 a month. After six months, it turned out that the house was now worth $180,000. They sold it, bought a $200,000 house, using the virtual appreciation as the down payment. The bank was happy, the client was happy, and the real estate agent was even happier. It was only when every other borrower stopped making payments after a year, and the banks tried to sell the mortgaged houses, that they found out all the houses on that street were already on the market, and no one wanted to buy them for $180,000, $150,000, or even $100,000. And all because a couple of years earlier, banks had accumulated so much money that they stopped verifying the reliability of borrowers – why bother? Real estate was always appreciating! If they didn’t pay, we’d quickly foreclose at a round price. But mortgage banks weren’t satisfied with just getting clients. They wanted to earn more, and more importantly – faster. So, they started pooling mortgagees and selling them to investment banks. These are the banks that don’t operate on the classic “gather deposits – grant loans” model, but try to make money in more cunning ways. The mortgage bank sells thousands of loans to the investment bank upfront and immediately receives hundreds of oil or some trendy, but little-understood, commitments in return. submitted by /u/FXgram_ [link] [comments]

Mortgage _ part 1 | Trading Academy

It’s all cyclical. Before the depression, mortgage lending was on the rise. The typical loan term ranged from 2 to 5 years, with the principal repayment due at the end. What does this mean? If you were buying a house in 1920, you would go to the bank, and they would grant you a loan. Typically, they would provide half the funds. So, for a house worth $10,000 (equivalent to about $200,000 today, a modest home), the bank would loan you $5,000. You would pay interest monthly, and at the end – after two or five years – you would pay back the $5,000. Then you could try to get another mortgage. You’d go back to the bank, and they’d give you another $5,000. This was the scheme; banks offered it to everyone, and it became widespread. You’d pay only interest each month, and suddenly you’d have to pay back the entire five grand after two years. But people thought nothing of it – after two years, they’d just go back to the bank, and if they refused, they’d try another bank. I mean, who couldn’t find another $5,000 somewhere? And it all worked without major issues. What happened during the Great Depression? Two things: unemployment soared to 25%, and home prices plummeted by more than half. For instance, if you borrowed $5,000 for a $10,000 home, and it dropped in value to just $4,000, after two years you’d go to the bank to refinance the loan. You’d say, “Well, I’m unemployed, and my house is now worth $4,000.” The bank would respond, “Sorry, we won’t lend to you anymore.” What happens next? You have to sell the house, you go bankrupt, everything is lost. You’ve already lost the initial down payment of $5,000, and you still owe money. submitted by /u/FXgram_ [link] [comments]