I read an article a while back about the explosion of online mattress stores. For a while the Toronto subway cars where covered end to end with ads for companies like Casper trying to turn buying a mattress into a “digital experience”. It was kind of weird (although I used Casper and it was fine).
Anyway, I think the main reason that there are so many mattress stores is that a) mattresses are expensive and high margin so you don’t have to sell a lot of them to support the low cost of a basically empty bland retail space and b) people like to lay down on a mattress before they buy it, so you need a lot of “show rooms” scattered geographically so that people can go lay down on the product. If people have to drive 3 hours to try out the mattress then they’re probably not going to do that.
Does anyone have a good explainer or video on how exactly the qualified mortgage lending cycle works in the US? From origination to packaging into MBS, payments. etc.
I’m trying to understand what drives the spread between 30 year mortgage rates (~7.5%) and 30 year treasuries (~4%). I know that the mortgage can be refinanced when rates improve which makes the MBS relatively less attractive, but is there any difference in credit risk ?
If you’re looking at conforming loans backed by the GSEs, the spread shouldn’t reflect any significant credit risk. I would expect the prepayment risk to be huge right now, given the inverted yield curve (i.e., investors are anticipating a significant decline in interest rates, which should lead to a significant amount of prepayments). You also have servicing costs, which I would guesstimate to be in the 25-50 bps area.
On Wall Street, analysts had mostly expected vague promises on energy permits to be included in a bill to raise the US debt ceiling. Yet, options trading suggests something bigger may have been in the offing.
On May 24 — several days before an agreement was announced — a huge bullish bet was made on Equitrans Midstream Corp., data compiled by Bloomberg show. The company is deeply involved in the long-delayed Mountain Valley Pipeline. The wager involved snapping up 100,000 call options on the firm’s stock.
It proved prescient and wildly profitable within just a few days.
On May 27, White House and Republican lawmakers reached a deal that would give the long-delayed Mountain Valley Pipeline the final approvals needed to complete the project.
I don’t think that’s right, but I hadn’t really thought about the mechanics until you asked the question. So digging into this was an interesting waste/use of time for me this morning.
I think the paradox you raise is:
Outside investors are buying RMBSs at rates that do not imply any credit risk, but surely that can’t mean borrowers are borrowing at rates that imply no credit risk. So what’s happening in the middle that makes that true?
The steps are:
Bank originates a mortgage, and that mortgage rate assigned to the borrower definitely incorporates the borrower’s characteristics. (“However, be aware that conforming loan rates are heavily dependent on your personal finances; in particular, on your credit score and down payment. The better your score and the bigger your down payment, the lower your interest rate will be.”)
The originator sells the loans to the GSE.
The GSE packages the loans and sells them to investors at a rate that implies no credit risk.
So ultimately a borrower with worse financial characteristics is going to pay a higher rate to the lender, and the lender is going to be charged a higher g-fee to compensate for the higher risk.
Yes I agree that my statement isn’t right. Fannie Mae collects a spread on the borrower’s rate vs. the MBS rate that theoretically covers the rate of defaults.
