Yes, I completely share your confusion that banks are still approving 30-year(!!) mortgages with South Florida homes as collateral. (Also - maybe even more so - that insurance companies are still writing homeowners' policies.) In addition to the scale of the changes underway being hard to fully internalize and the presence of enormous social pressure to keep making loans, the two big explanations I see are: 1) the banks that get paid to originate mortgages don't keep them on the books, then sell them to other financial institutions that slice them into mortgage-backed securities* (so the banks don't actually bear most of the risk); and 2) there's a timing mismatch in the risk and reward. Bank executives get rewarded for making profits THIS year, while the risk plays out a bit at a time year by year. Someday things will go south (no pun intended), but when it happens the executives in charge today may well be retired, and they won't have to give back the bonuses they earn making risky mortgages. It's this disconnect between the reward of issuing a mortgage and the risk borne over the 30-year payback period is a dynamic that will prop up home values in South Florida for longer than the fundamentals would suggest. It suggests that the entities that hold the leverage are the buyers of mortgage-backed securities (MBS). If those endowments and pension funds tell the financial institutions they won't buy MBS that include mortgages from South Florida and other highly vulnerable places, the collapse of those housing markets could happen quickly.
Hi Ethan:
Regarding those folks owning houses and condos on Miami Beach, I agree with you - they are crazy.
So are too many folks in Tampa, Ft. Myers, etc. etc.
I'm surprised that here in so many South Florida cities, the banks still provide 30-year mortgages for houses barely above sea level.
Regards,
P.Trombley
Hi Mr. Trombley (Peabody?),
Yes, I completely share your confusion that banks are still approving 30-year(!!) mortgages with South Florida homes as collateral. (Also - maybe even more so - that insurance companies are still writing homeowners' policies.) In addition to the scale of the changes underway being hard to fully internalize and the presence of enormous social pressure to keep making loans, the two big explanations I see are: 1) the banks that get paid to originate mortgages don't keep them on the books, then sell them to other financial institutions that slice them into mortgage-backed securities* (so the banks don't actually bear most of the risk); and 2) there's a timing mismatch in the risk and reward. Bank executives get rewarded for making profits THIS year, while the risk plays out a bit at a time year by year. Someday things will go south (no pun intended), but when it happens the executives in charge today may well be retired, and they won't have to give back the bonuses they earn making risky mortgages. It's this disconnect between the reward of issuing a mortgage and the risk borne over the 30-year payback period is a dynamic that will prop up home values in South Florida for longer than the fundamentals would suggest. It suggests that the entities that hold the leverage are the buyers of mortgage-backed securities (MBS). If those endowments and pension funds tell the financial institutions they won't buy MBS that include mortgages from South Florida and other highly vulnerable places, the collapse of those housing markets could happen quickly.
-Ethan
*https://www.investopedia.com/ask/answers/040915/why-do-mbs-mortgagebacked-securities-still-exist-if-they-created-so-much-trouble-2008.asp