CMBS is often low rate 40 years terms with stiff penalties for early payoff. Insurance companies buy most of this paper. However, the deal has to be so solid that if the original borrower defaulted, a new qualified buyer would be able to step in without missing a beat.

Interest is supposed to make up for inflation, plus compensate the lender for the loss of use of the money during the repayment time. Now, I don't know about you, but MOST people would rather spend their money yesterday than maybe have something to spend 30 years from now (or not).

Too, loan amortization in the first 11 years results in only about 20% of the balance paid off, so the risk of default loss is high unless you get a nice chuck of down payment up front or have a low enough LTV to recoup your funds if the buyer fails to pay.

30 years loans weren't really a thing until post WW2 when Govt started backing them. Prior to that, the free market was typically 10 or 15 year loans... maybe 20. But they all had interest rate resets and balloon were common to ensure not only the property was still in good shape (i.e. a new appraisal), but also that the borrower was still in good shape (i.e. new refinance application).

And who can predict inflation? The folks who have 2% - 3% fixed notes today are making out like bandits over the past 3 years as inflation has destroy over 15% of the actual purchasing power of the dollars from their notes. It's like you borrow $1 today, and in 15 years you pay it off with $0.15. Great for the borrower: disaster for the lender... unless you are bottomless pockets Uncle Sam and don't care because when you want more money you just create it.

The banks don't care: they make their money on origination fees. That's why most loans get packaged into mortgage backed securities and sold to massive institutions like pension funds, insurance companies, and annuities where they just need to secure their principle from inflation and have enough to pay out anticipated benefits. For them, 1-3% is plenty, especially with Uncle Sugar guaranteeing those notes in case of default.

" Those 3% mortgages are actually a drag on the banks balance sheets right now."

Then why did they give them out?

Adding to what Sid said, those low interest mortgages get packaged into a bundle and sold to institutions at a discounted rate, similar to how bonds are bought and sold. The discount effectively increases the rate of return otherwise those institutions would not be interested in holding them either.

It wasn't until the 1970's that 20 years loans became normal (3 years for car loans), 10 or 15 years was standard prior to that. In fact prior to the 1930's having a loan was considered by most of society as nearly a sin. Today you can get a 40 year mortgage or 8 year car loan. Not sure where it goes from there because the next step would be multigenerational.

I am not sure why there is a market for these notes. I am thankful that there is though. If there were ever a log jam in that marketplace, a credit freeze would occur and you would have another 2008.

I think you are asking an incredibly valid question.

Just our years ago the spread between T Bills and mortgage rates was 1%. We printed up so much money that the spread has grown to about 2.25% and we have created golden shackles where the real estate market is sorta frozen where sellers don't want to sell and buyers can afford to buy what they want. Having rates drop that extra 1.25% would allow so many more buyers into the market place.

So what will it take for that to happen? I am thinking some type of sudden shock to the marketplace. The current administration might be disruptors, but a sudden shock would cascade.

6X6....Look up First Republic Bank failure in 2023. 130B of mortgage at low rates. Face value showed losses of 19B+ if they tried to sell the paper. People basically did a bank run and pulled cash out. they didn't have a way to increase their cash position.... bank failed. Sold to Chase....