>The money that banks lend isn't their own, its investors.
The money that banks lend doesn't actually exist.
When Alice takes out a mortgage in order to buy a house from Bob, the bank doesn't go into its vault and find a bundle of cash and pull it out to give it to Bob. They just fiddle some bits in their computers so that it says they now owe Bob $500,000 (i.e. Bob now has $500,000 in his checking account) and Alice owes them $500,000 (i.e. they own Alice's mortgage for $500,000), and the two numbers cancel out which makes the accountants happy.
The bank is not required to actually have the $500,000, all they have to have is enough cash to satisfy the depositors who actually want to withdraw their funds as physical money, which is hardly anybody. (In reality there are a bunch of complicated rules about how much money banks have to have possession of in comparison to how many deposits they hold, but suffice it to say the amount is a small fraction of the total.)
And if Alice and Bob have different banks then the same thing happens except that now two banks fiddle bits in their computers so that the computers also record that one bank owes the other bank money in much the same way, which generally gets canceled out almost immediately when some other Alice and Bob engage in a different real estate transaction where the seller's bank and the buyer's bank are reversed.
>Sure they get a cut through interest rate differentials and origination fees, but most mortgages get purchased by investors.
Now you're talking about entirely different investors who invest in mortgage derivatives. But it isn't clear that they benefit from the interest rate subsidy. There is no obvious reason why the originating bank couldn't just increase the price of the mortgage by the value of the interest rate subsidy when selling it. Moreover, the purchasers of mortgages are often just other banks anyway.
The money that banks lend doesn't actually exist.
When Alice takes out a mortgage in order to buy a house from Bob, the bank doesn't go into its vault and find a bundle of cash and pull it out to give it to Bob. They just fiddle some bits in their computers so that it says they now owe Bob $500,000 (i.e. Bob now has $500,000 in his checking account) and Alice owes them $500,000 (i.e. they own Alice's mortgage for $500,000), and the two numbers cancel out which makes the accountants happy.
The bank is not required to actually have the $500,000, all they have to have is enough cash to satisfy the depositors who actually want to withdraw their funds as physical money, which is hardly anybody. (In reality there are a bunch of complicated rules about how much money banks have to have possession of in comparison to how many deposits they hold, but suffice it to say the amount is a small fraction of the total.)
And if Alice and Bob have different banks then the same thing happens except that now two banks fiddle bits in their computers so that the computers also record that one bank owes the other bank money in much the same way, which generally gets canceled out almost immediately when some other Alice and Bob engage in a different real estate transaction where the seller's bank and the buyer's bank are reversed.
>Sure they get a cut through interest rate differentials and origination fees, but most mortgages get purchased by investors.
Now you're talking about entirely different investors who invest in mortgage derivatives. But it isn't clear that they benefit from the interest rate subsidy. There is no obvious reason why the originating bank couldn't just increase the price of the mortgage by the value of the interest rate subsidy when selling it. Moreover, the purchasers of mortgages are often just other banks anyway.