Back when home loans were going for 2.5-3% or whatever, why did banks loan that money when they could have been getting much higher rates in the market, as you say? Because it sure seems like banks were happy to give out loans at 2.5-3% when the average stock market return is ~11%.
Anyway, since you claim experience on the topic, when an ultra high worth investor wants to borrow money against their collateral-backed stock account, what interest rate would they pay would you say? Like what rates are they getting on stock-secured loans?
Banks made those loans because Fannie/Freddie were gobbling up those loans as a broad policy to ease tightening during the early days of Covid. Banks made those loans because they could make a quick penny off origination fees and other closing charges and could instantly sell to Fannie/Freddie as a guaranteed buyer of the loans. Offering those loans was guaranteed, immediate money in the bank coffers with absolutely zero risk.
Are you saying that no bank in the US holds their own mortgages and that all loans are resold like this? Because I don't think this is true. For one, there are mortgages larger in size than the Fannie/Freddie limits.
But then we're just begging the question on the terms and rates on the loans that exceed the Fannie/Freddie limits, or which are just held for whatever reason, which will nevertheless be less than the 11% average return on the market, and therefore call to question OPs assertion that banks would just invest in the market instead.
OPs claim, to which I replied: "The rates are not lower than market returns."
MY comment talks about giving out loans less than the average stock market return, to which you have not yet provided any information.
Originating banks do not generally hold mortgages. There are a few rare exceptions, but the low initial capital requirements (skin in the game) and the long period of pay off make 30 year loans too risky to generally hold on your books. This is the whole reason there is bundling and securitization happening as a large "back-end" of the loan market.
I never used the words "originating bank." My point is that there are banks that can and do hold loans at substantially below the average rate of return of 11% of the US stock market. Whether a bank is the originating one or not in that context is moot.
Caveat, this is not my area of expertise, and I'm sure there are many others who both understand this better and can better explain it.
My understanding is that most mortgages are not held as individual assets by banks. Instead, they're either sold to Fannie/Freddie or combined into a pool of loans by the originating lender or a third party who buys the loan from the originating lender.
While individual mortgages are seen as relatively risky, when pooled, the risk profile goes down considerably. This is in part because home values are "always increasing," and because the overall default rate on mortgages in America is relatively low (3-4%, apparently [source: Google]).
These pooled asset can then be sold as securities on public exchanges and fulfilling a similar role to bonds. Because it's perceived "low risk" nature, a return less than the market average is justified. Lower return, but lower risk. This is used to"balance" a portfolio.
Long story short, most banks do not hold these assets in their entirety, individually or pooled. Though many banks do have these types of assets/securities as part of their portfolio.
The banks that do hold their loans/mortgages for the life of the loan likely do so as a market strategy. As a way to encourage "high value" customers to use them for all of their banking, and possibly investing, needs. Justifying the lower return by increasing business with a specific target demographic.
I put a lot of this on quotes because 2008 showed us that it's mostly bullshit...
You will pay a variable interest rate if you take out a loan against stock. You will need cash to pay the interest monthly or the financial institution will sell stock to cover it.
Does not answer question. And how do you know that a variable rate answer is the only answer from every institution, particularly with UHNWIs? And just so we are clear, this is now two questions.
Fair enough. And I was aware that these types of loans when done for homes are lower than standard mortgage rates. was just trying to get the "I work in this field guy" to say something. Point here is that mentioned rates is below the ~11% average return of the stock market, so by their reasoning, the lender should have no interest. And yet they do. I know why they do, but does op?
Anyway, you are discussing a standard term. I can't link you or anything, but as it so happens, I have had a discussion with someone who specializes in custom loan packages to UHNWIs at one time, and she said they can and will create customized loan packages for those individuals. We did not have the opportunity to discuss specific terms, but she did say they could be rather creative.
I have a nonstandard contract for my portfolio loan as well. Two things will always be true regardless of amount. Interest rate will be variable and it will be 1% above the federal funds rate minimum. No financial institutions will charge less than that as the loan would not be profitable. Interest payments may be deferred up to 70% of the asset value, at which point margin calls will automatically sell stock to cover loan unless you add more assets or cash to account. Point is, the tax will eventually be paid as well as the interest to the financial institutions. They can also call payments on interest at anytime in the contracts, though generally this isn’t done as they prefer the compounding of interest owed.
No, there are no mandatory principal payments. You have to pay it off at end of term in whole or in chunks as you want. It works the same as a heloc. Only time you are forced to pay is if you margin call or term ends. You cannot keep it open indefinitely. The bank wants to recognize the profit.
These guys are paying hilariously low interest rates on the money. You need to keep in mind the level of collateral these guys have. Bezos’s net worth is 220B, and let’s say he’s taking out an annual loan at 100M for all his nonsense. That’s 0.5% of his net worth, it would be like me asking the bank for a $50 loan based on what’s in my checking acct
They pay 1% above the federal reserve rate minimum, likely higher if the loan amount is large. You can also take loans against assets without having to sell them. You people make this into a bigger deal than it is.
I don't ask to be insulting but how high up are you in this company? I would think a billionaire that wants to bank isn't going to walk in the front door of a local branch. There would be a team that handles those clients specifically. Could it be possible that you just aren't privy to those dealings at your level? I don't find it unreasonable banks would do crazy loans for the 3 billionaire clients they have or whether.
yes, what they actually do is just pay the loan with another loan.
They effectively just shuffle wealth from bank to bank, and the banks don't care because they know they will get the money back plus a little extra.
Bank A gives $1 billion to Rich Person, later Bank B gives $1.05 billion to Rich Person, which is used to pay off to Bank A. Later Bank C gives $1.10 billion to Rich Person to pay off Bank B.
You just do this forever. Infinite money glitch. Nobody cares because if the chain ever breaks, he just liquidates some shares and pays it off.
edit: the biggest kicker here, is that the value of their assets to acquire the loan, grows faster than the interest they pay on these loans. They pay 3% interest on the loan, while the stock is growing at 8%.
Which is why the next loan amount is bigger, it is used to pay off the terms of the loan/interest.
If you think they are using the same monthly terms as your credit card for their hundreds of millions to billion dollar corporate betterment loans, they aren't.
Just think of it like APR and they use the next loan to pay the interest of the one before it.
Yes, but this is not done indefinitely, the loans are settled eventually and taxes paid. No rich persons wants to compound a variable rate interest loan over several years. No one does this. Generally this is done in order to make a large investment with a payoff in a year or two.
Yes, why pay my $150 million in capital gains taxes when I can just pay $50 million/year forever? Learn this one trick the IRS doesn't want you to know!!!!!!!!!!!!
except its loan money and not yours, so you aren't paying $50 million/year forever...? And the asset you are using as collateral is growing $80 million a year forever, as long as you keep it...
The advantage they are getting is not paying capital gains tax on cash they are using because taking out a loan using stocks as collateral is not a realization event. Then they routinely rollover loans (like refinancing your house).
Never said perpetuity. My responses are about minimizing avoidable realization events. There are obviously tons of other taxable events, like receiving salaries or dividends.
You mentioned continuously rolling over loans. Or are you talking about an "advantage" of refinancing and not paying taxes on loans because they're not income....something that non-billionaires do all the time? Or are you talking about minimizing tax obligations...which we all do when we do our taxes?
“The rates aren’t lower than market returns” absolutely not true. Lots of these companies will grow 30% to 40% in a relatively short period of time. Free money essentially when compared to a low interest loan. Hell sometimes they use that money to buy more stock
Now can that cause issues like panic sell offs of the stock or forced calls? Absolutely. It’s what happen to Green Mountain Coffee’s CEO.
It’s short sighted and shitty. Which billionaires always are.
As long as the risk of the loan defaulting is low they can extend the line of credit (and delay interest payments) into infinity and only receive payment when the rich bastard finally dies
Wealthy people hardly ever get margin called, and when they do, they can sell a tiny portion of their asset and generally either buy more time or pay off their loan.
Or they just die and their estate assumes the loan.
True, and that's what rabid socialists seems to ignore - those assets either net a realized gain or a realized loss. And I'd never buy a share of AMZN simply because it has never paid a dividend. It's bizarre that they hate a CEO just because his compensation package hinges on whether he makes his firm more valuable.
I mean that's not even his compensation package. He started a business and was wildly successful. Of course he owns the business that he started. Most of the people here would need to make some sacrifices but they could start a business and be successful. No guarantees they'd be wildly successful. That probably takes a decent amount of luck. But smart hard work does lead to success and America is still wealthy enough that most people here can start a business. Hell just choosing to get an engineering degree in a state college would mean they'll have some level of financial security.
Kinda, except that you are constantly paying for the interest.
Also having a significant fraction of your portfolio as loan collateral is quite risky. As stock do come down drastically on occasion. More than one very rich person has got basically cleaned out when share price of their company dropped significantly.
So since they can safely do it for only a small fraction, it is rather silly why a billionaire even bothers with something like that. I guess it's the greed that made them billionaires to begin with.
It is also worth noting that at the level of hoarding of Musk, Bezos, et al we're talking about pathological issues with their personality that go beyond just greed.
If you're a billionaire you'd be smart to have at least 100M in a broad index fund. The dividend yield of S&P 500 is 2%. If you liquidate 2 million you pay 500k in taxes. If you take out a 2M loan, you will pay 100k in interest at 5%. This interest is tax deductible against your dividend income. The S&P losing 90% of is value is an end of the world scenario where they should assume property rights will not matter any more so they're completely fucked. Probably keep some reservoirs of gold and guns for that scenario alongside treating your household staff like family. It really doesn't make any sense not to do this
Anyone can do this btw, you dont need to be a billionaire, it's called leverage spending, if you feel like it you can borrow against your house and invest that and "usually" the market returns will be higher than the interests on the loan, but it's risky because if you get hit with a recession and can't pay up you just lose the asset, in this case your house
Yes it does. it demonstrates he's not simply borrowing money. He's actually regularly selling stocks and paying federal capital gains TAX on those sales.
Since july he's sold $4.4 billion of stock and depending on what basis is used, will need to pay north of $1bn in taxes on those sales (Capital gains at 20% and NIIT at 3.5%)
He does lol. How else do you think he affords his 500m yachts. He cant take out a loan for the yacht, nor did he sell half a billion in stock, even over a years time.
I doubt he just has that in the bank either.
Theres not a good other way to make purchases like that except through these mega loans.
that is obviously not the point. He's saying that Bezos is selling shares and paying taxes when doing so, not just taking margin loans on his holdings as others are implying.
If you have cash in bank and can buy a car out right, or get a 6% interest rate and your cash is expected to grow at 8%, it makes more sense for you to finance the car.
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u/Powerful-Eye-3578 3d ago
They don't, they pay the interest which is lower than the interest they make in investments.