[quote=SK in CV]
Yes, you are missing something. And so was I. The bank or whatever lender you used sold the debt to either one of the GSE, or in the private mortgage market. They, in turn, collateralized it, creating new debt. So both you and the buyer of your loan both owe the same money. Forty years ago, the bank loaned you the money and most often kept the loan. After thinking it through, its not that different. The bank mostly used depositors money, not equity, to make the loan. It’s slightly different, the bank did have some equity in the loan. But nowhere near 100%, so it partly resulted in doubling the amount of debt then too.[/quote]
There is certainly some aspect of a circular reference. For example say you have a defined benefit pension that is operated by CalPERS. Suppose also that you recently purchased a house and expect that sometime in the future you’ll use that pension to pay the mortgage each month. Suppose also that CalPRES holds loans issues by Freddie Mac which is the holder of your mortgage. In essence that mortgage payment you make each month is coming back around to pay you your pension. Of course that’s minus a bunch of fees and some interest spread.
There’s plenty of people that might hold a $500K mortgage at 3.5% and at the same time have $500K invested in corporate bonds at 6%. Obviously not everybody can win that arbitrage game but almost everybody tries to and for the most part it makes wall street rich and the few lucky ones. Everybody else would be better off paying down their debt as fast as possible but we’re all convinced that individually we’ll win at that game.