Re: Who holds SL Mortgages?
Posted on 16 Mar 1994 at 01:00:17 by Uriacc Mailer (002033) Who holds SL Mortgages? Date: Tue, 15 Mar 1994 21:58:16 -0800 Reply-To: [EMAIL PROTECTED] From: [EMAIL PROTECTED] Here's a question about SL Balance Sheets: I was lecturing the other night to my adult-ed class at Baruch and was trying to talk about "disintermediation" and how all the nice homely local SL's got stuck with 5% mortgages when interest rates skyed to 16% in the early 1980's. Now one of my student's insisted that in today's "financially innovative" environment SL's would never get burned again because they can get rid of the inherent interest rate risk of home mortgages through "swap" and other hedging strategies. I responded that though they can diversify some of the risk, the asset base of the local SL is still comprised mainly of home mortg's. Moreover, New York State banking laws restrict how active an SL can manage their loan portfolio - otherwise they would all become arbitrageurs and leave their nice safe offices out in Queens and get a plush corner office on Wall street. So, who out there in Pen-L land can help me with a useful response to this nice student (yes, he is visting from mainland China, and yes we had an interesting discussion about planning) before next Monday's class? Thanks Jason Hecht -- Jason Hecht [EMAIL PROTECTED] 48 West 68th Street, Apt. 3A New York, New York 10023-6015 Well, I'm not sure what the student means by "swap", etc., but here goes. Many housing lenders sell mortgages on secondary markets and only collect fees for servicing the loans. This, however, is one-sided. SL deposits are liquid, and depositers can withdraw their funds on short notice. Thus, if the rate paid on deposits fall below market rates, deposits are withdrawn and new deposits are not made. So, why can't the SL simply invest in a portfolio with a higher rate of return? Under old regulations, the simple answer was the bank is not allowed to. With deregulation, SL's have more freedom, but someone, somewhere must be holding the original low-interest mortgages. Since the latter are typically 30-year, fixed rate, they reflect an interest rate gap between market rates and their own rates. To the extent that a bank holds such paper in its portfolio, it can either sell below-market-rate paper at a deep discount or continue to hold the paper. Either way, the SL's role of lending long and depositing short creates a precondition for disintermediation. The key point is not the SL's increase liquidity under deregulation, but rather its RELATIVE liquidity compared to other financial institutions. With rapid inflation, it's like a game of musical chairs, with the institutions having the lowest relative liquidity left holding the low-interest notes. Marsh Feldman Community Planning Phone: 401/792-2248 204 Rodman Hall FAX: 401/792-4395 University of Rhode Island Internet: [EMAIL PROTECTED] Kingston, RI 02881-0815
Re: Who holds SL Mortgages?
Posted on 16 Mar 1994 at 01:00:17 by Uriacc Mailer (002033) Who holds SL Mortgages? Date: Tue, 15 Mar 1994 21:58:16 -0800 Reply-To: [EMAIL PROTECTED] From: [EMAIL PROTECTED] Here's a question about SL Balance Sheets: I was lecturing the other night to my adult-ed class at Baruch and was trying to talk about "disintermediation" and how all the nice homely local SL's got stuck with 5% mortgages when interest rates skyed to 16% in the early 1980's. Now one of my student's insisted that in today's "financially innovative" environment SL's would never get burned again because they can get rid of the inherent interest rate risk of home mortgages through "swap" and other hedging strategies. I responded that though they can diversify some of the risk, the asset base of the local SL is still comprised mainly of home mortg's. Moreover, New York State banking laws restrict how active an SL can manage their loan portfolio - otherwise they would all become arbitrageurs and leave their nice safe offices out in Queens and get a plush corner office on Wall street. So, who out there in Pen-L land can help me with a useful response to this nice student (yes, he is visting from mainland China, and yes we had an interesting discussion about planning) before next Monday's class? Thanks Jason Hecht -- Jason Hecht [EMAIL PROTECTED] 48 West 68th Street, Apt. 3A New York, New York 10023-6015 Well, I'm not sure what the student means by "swap", etc., but here goes. Many housing lenders sell mortgages on secondary markets and only collect fees for servicing the loans. This, however, is one-sided. SL deposits are liquid, and depositers can withdraw their funds on short notice. Thus, if the rate paid on deposits fall below market rates, deposits are withdrawn and new deposits are not made. So, why can't the SL simply invest in a portfolio with a higher rate of return? Under old regulations, the simple answer was the bank is not allowed to. With deregulation, SL's have more freedom, but someone, somewhere must be holding the original low-interest mortgages. Since the latter are typically 30-year, fixed rate, they reflect an interest rate gap between market rates and their own rates. To the extent that a bank holds such paper in its portfolio, it can either sell below-market-rate paper at a deep discount or continue to hold the paper. Either way, the SL's role of lending long and depositing short creates a precondition for disintermediation. The key point is not the SL's increase liquidity under deregulation, but rather its RELATIVE liquidity compared to other financial institutions. With rapid inflation, it's like a game of musical chairs, with the institutions having the lowest relative liquidity left holding the low-interest notes. Marsh Feldman Community Planning Phone: 401/792-2248 204 Rodman Hall FAX: 401/792-4395 University of Rhode Island Internet: [EMAIL PROTECTED] Kingston, RI 02881-0815
Who holds SL Mortgages?
Here's a question about SL Balance Sheets: I was lecturing the other night to my adult-ed class at Baruch and was trying to talk about "disintermediation" and how all the nice homely local SL's got stuck with 5% mortgages when interest rates skyed to 16% in the early 1980's. Now one of my student's insisted that in today's "financially innovative" environment SL's would never get burned again because they can get rid of the inherent interest rate risk of home mortgages through "swap" and other hedging strategies. I responded that though they can diversify some of the risk, the asset base of the local SL is still comprised mainly of home mortg's. Moreover, New York State banking laws restrict how active an SL can manage their loan portfolio - otherwise they would all become arbitrageurs and leave their nice safe offices out in Queens and get a plush corner office on Wall street. So, who out there in Pen-L land can help me with a useful response to this nice student (yes, he is visting from mainland China, and yes we had an interesting discussion about planning) before next Monday's class? Thanks Jason Hecht -- Jason Hecht [EMAIL PROTECTED] 48 West 68th Street, Apt. 3A New York, New York 10023-6015
Who holds SL Mortgages?
Here's a question about SL Balance Sheets: I was lecturing the other night to my adult-ed class at Baruch and was trying to talk about "disintermediation" and how all the nice homely local SL's got stuck with 5% mortgages when interest rates skyed to 16% in the early 1980's. Now one of my student's insisted that in today's "financially innovative" environment SL's would never get burned again because they can get rid of the inherent interest rate risk of home mortgages through "swap" and other hedging strategies. I responded that though they can diversify some of the risk, the asset base of the local SL is still comprised mainly of home mortg's. Moreover, New York State banking laws restrict how active an SL can manage their loan portfolio - otherwise they would all become arbitrageurs and leave their nice safe offices out in Queens and get a plush corner office on Wall street. So, who out there in Pen-L land can help me with a useful response to this nice student (yes, he is visting from mainland China, and yes we had an interesting discussion about planning) before next Monday's class? Thanks Jason Hecht -- Jason Hecht [EMAIL PROTECTED] 48 West 68th Street, Apt. 3A New York, New York 10023-6015
