this post was submitted on 20 Aug 2023
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The mortgage.
Yep. Totally insidious. Everyone accepts it like fish in water. But the banks don't own the money they are lending into existence it's created out of this air. If a bank has 1 dollar savings they can leverage that to create 30 dollars for a mortgage. As in almost no minimum liquidity reservation requirement.
It artificial drives up the cost of housing. It consolidates wealth upward and it should be illegal.
I don't quite understand. Doesn't the bank have to pay someone for the house? So the money has to exist before they can lend it to you.
The best part is the money does not exist they are literally lending it into existence. Click of a keyboard. Now you have debt, they have assets, the cost of housing goes up because everyone is doing the same thing
I know it sounds insane. And that's because it is. Study it, mind will be blown I guarantee
Iirc correctly mortgages work like this.
The bank ik a place for people to store their money, and I have 15K on my account. The chance that I'll need that in full is pretty low and like me are 99 other people.
What the bank does is give someone else part of that stored money as a loan. If someone else loans 30K, they get that money out of the banks reserves (made with the 100x15K). However, I still see 15K on my account, and not 14.7K. So essentially making money out of thin air.
This is also why bank runs are so dangerous to the bank, because if everyone start funneling out their savings eventually the bank doesn't have enough money in stock to pay everyone causing them to fall.
The bank makes money on the mortgage through the interest rate, so while 30K was loaned, 40K has to be paid back.
Also please correct me if I'm wrong.
Look for the movie Zeitgeist (free on YouTube) to understand how banks are able to lend money even if they don't have it.
In a nutshell, they are able to lend multiple times the money they hold from depositing clients.
So for example. If a bank has $100m (clients deposits) they may be allowed, by law, to lend 10 times that amount... Even if they don't have the money anywhere, the central bank in their country will facilitate that money to the bank. There is much more to this mechanic but this is the core of how the banks work all around the world.
You're describing "Fractional Reserve Banking" if anyone wants to look it up.
Those money are numbers on computers. I guess this is what OC referred to as making money out of thin air.
How is mortgage a scam? It's a loan, why is it worse from other money loans?
Study 2008 a bit more. You will understand.
Buying a good house in good location is probably the best investment one can make with loaned money.
Not OP, but the normalization of something necessary requiring to borrow a lump sum and take 20-30+ years to pay off plus interest. Even the valuation of homes is ridiculous in itself, since those numbers are somewhat based on subjective values or "how much can I get away with charging?". Sure, you have a baseline of materials and labor but the subjective part is just what's around that property. Even if you lived in a shed and someone builds a mansion next door, now your value magically goes up? It's a gimmick that only further drives inflation with fluff being added to demand. The shift of practically all US housing markets from the pandemic (people changing employment, vacancies created from those who died) went into a boom because companies or those with extra money started buying the excess supply so fast that it inflated demand. I'll stop ranting but I think it's all ridiculous and unsustainable and would like to mention that renting is just a subscription of residence.
But what's the alternative? Houses are going to be expensive no matter what. I only paid 100k for mine which is relatively cheap for a house but I still couldn't have afforded to buy it without taking a loan. My friends are now paying higher rent than I pay off my mortage every month. After 15 years or so I no longer need to pay the mortage AND I have a house I can sell but my friends are still paying rent and have nothing to show for it.
This is unfortunately a fallacy. Those paying rent donβt have nothing to show for it β they pay for a roof over their head. So do you with your mortgage. At the end of your mortgage term, yes, you have an asset that those paying rent donβt, but you also had to drop a large sum of money upfront that they didnβt. Theoretically they were able to invest that money you paid into other assets that may or may not have appreciated more over that same period of time. Additionally, renters are often much more able to move should their living circumstances change.
At the end, you both pay for shelter for a period of time. And yes the argument is largely theoretical and vastly dependent on external factors, but itβs not true that owning is always better than renting.
(I say this all as a homeowner as well, FWIW).
The alternative would've been where banks don't own half of everything, but here we are. Next best thing would be that government would've kept prices in check, but instead are incentivized for prices to go up because even after it's paid off the owner is still responsible to pay property taxes. If those taxes went toward preventing homelessness, I think would make more sense.
A mortgage where, for instance, 90% of each payment goes to repaying the capital of the mortgage, and 10% to the interest. There's no way it's fair that you should need to pay 2x the value of your house over 25 years.
But why would anyone lend you money for free? What's in it for them?
That's not free. That's just a less predatory rate of return.
I would further suggest that there is a hard cap on the interest which can be charged on any borrowing.
But if I'm a lender and I have spare money to invest I can always just put it into the stock market where I'm on average getting a 7% yearly return. It only makes sense to lend that money to an individual if I'm getting a better rate. Otherwise I'm just losing money.
Then someone else will take that lender's place. Mortgage lending will, at whatever percentage, produce a stable rate of return. If anything, preventing exorbitant interest rates mitigates much of the risk involved in lending.
Why would anyone do that when they get better return for their money elsewhere? You're basically expecting people to do charity or simply just be incompetent and make bad financial decisions thus effectively making you the scammer.
Hardly. The market still exists, and lenders can still make a profit, just maybe not as much. It's not rocket science.
That's merely a desire for a more "fair" system or frankly just something that benefits you rather than someone else. The discussion here is about scams and my argument is that mortage is not one.
You asked for an alternative and I gave you one. You just aren't happy at the idea that massive lenders can afford to make less.
And of course I'm motivated that it benefits me, and millions of ordinary people, what sort of psychopath wouldn't be?
Mortgages are not a scam, I'll give you that. But I'm pretty sure that anyone with a functional moral compass would recognise that usury is immoral.
I asked for an alternative way to finance a house. You either save up yourself or you borrow from someone who has the assets. I don't see a third option.
Yeah ofcourse it would be nice if my mortage didn't have interest or had really low one like it did up untill about a year ago. I'm not against that if my bank decides to offer me such option but that's just fantasy and in no way relevant to the discussion. Ofcourse it would be beneficial to the vast majority of people if the wealthiest ones would settle for less. That's unfortunelately just not the case.
I totally agree with you. What I want is pie in the sky. Without regulation, nothing will change.
I'll take buying over renting any day. I paid $68k for my house. My loan payment is $460/month. While other I know have had their rents double and have been forced to move to smaller places, my house payment hasn't changed.
That's cool, but we all didn't have the ability buy something when it was affordable...
I paid twice as much as my neighbor with the same house, who bought his 18 years before I did, and he paid twice as much as the neighbors acress the street that bought theirs 20 years before he did. Heck, my mom bought a 3 bedroom house with a 3 car garage on 3.5 acres for $18,000 in 1974. She had to have the house replaced about 10 years ago after it was destroyed and it was $140,000 just for the house. Her neighbors that had the same amount of land have sold theirs to developers who built apartments and multiple homes on what used to be a single home plot. The land is worth over 10 times what she paid for it with the house on it.
So, if you bought the same house the same as mine, it would probably be twice what I paid for it. You would still have the benefit of not having your rent hiked every year or two.
House prices will always go up, baring some unforseen disaster, war, or political turmoil. That's the way it's always been.