Fixed rate mortgage really fixed no matter what inflation?

Question

With the recent inflation hike, I’ve been asking myself – will it be possible for banks to change the terms of existing fixed rate loans in the future if really high inflation hits (aka hyperinflation). I am questioning the long-term strategy of borrowing low-rate mortgage loans as a hedge against very high inflation. If the value of the dollar starts falling rapidly within a few short years to 50% compared to what it is now, the borrower wins big time since you still have the same nominal dollar value of the debt and monthly payment, but it’s now worth so much less in the inflated money. However, I assume banks will be losing big time in such a scenario. I just have trouble believing that the entire mortgage industry has not safeguarded itself from a hyperinflational scenario in some way…

Let me throw some possibilities here for discussion:

- Is there something buried deep down in the fixed loan terms that would allow the bank to change either the principal or interest payments of a fixed rate mortgage under certain circumstances, even if you pay it on time and never violate the terms on your end?
- Are there any “tricks” they can play to raise payments indirectly, for example: Is the escrow mandatory for the life of the loan, and if yes, can they somehow manipulate that to increase the payments they can benefit from?
- If all fails, what are the chances that the entire banking industry lobbies the government to enact laws that would allow them to change fixed rate contracts in response to high inflation? Or, have the government disproportionally raise property taxes specifically for houses that are mortgaged at low rates, and use the revenue to bail or compensate those banks that are failing due to their debt hyperinflation?

I don’t think there is any historical precedent in the modern economies for this, or is there? The 1970s double-digit inflation was relatively short lived to warrant such drastic actions.

Chris Mason · Answer

"- Is there something buried deep down in the fixed loan terms that would allow the bank to change either the principal or interest payments of a fixed rate mortgage under certain circumstances, even if you pay it on time and never violate the terms on your end?" I wouldn't be surprised if lenders started enforcing some of the provisions not commonly enforced now, especially if there's inflation, higher rates, and real estate values stop soaring. For example it's pretty well known that reverse mortgage lenders, once the home approaches being underwater, are very quick to enforce the provisions saying that property taxes must be kept current, and adequate homeowner's insurance must be maintained. You don't hear a lot about enforcement of that stuff on "forward" mortgages... but if rates jump, there's more inflation, AND if home values stop soaring, that might change. - Are there any “tricks” they can play to raise payments indirectly, for example: Is the escrow mandatory for the life of the loan, and if yes, can they somehow manipulate that to increase the payments they can benefit from? Escrow accounts are zero profit. They aren't allowed to profit from interest on the balance, for example, and they have to periodically audit the account, and refund you any surplus. These are watched pretty closely. I wouldn't worry about this. And, if you are worried, just waive impounds. - If all fails, what are the chances that the entire banking industry lobbies the government to enact laws that would allow them to change fixed rate contracts in response to high inflation? Or, have the government disproportionally raise property taxes specifically for houses that are mortgaged at low rates, and use the revenue to bail or compensate those banks that are failing due to their debt hyperinflation? California always has the specter of Prop 13 modifications, but those are populist rather than corporatist, and the revenue would sooner go to schools (etc) than banks. Modify that for whatever state you are in. But, yes, fixed rate mortgages are an excellent inflation hedge. That's why we're seeing a massive uptick in cash out refinances, even as rates tick up. People with free and clear multi million dollar homes, who have never had a mortgage before, are blowing up my phone. Hard to imagine legislation coming out that would harm these folks, especially since these are the very folks with (thanks in part to me and my ilk :P ) lots of money to donate to political campaigns. In general, MOST of the time, legislation tends to be biased towards people paying mortgages, rather than those on the collecting end. Even if you assume nothing is done and no laws change, inflation is great for the borrower, not so great for the lender.

Bill B. · Answer

Nope, fixed means fixed, it’s a contract.Nope, they don’t get the escrow funds, that goes to insurance and taxes and has to be adjusted yearly to keep your balance within a few percent (10?)Nope, they sell all the mortgages as MBS (mortgage backed securities) they’d run out of money if they held on to them all. You get anywhere near high inflation (10-12%) and the fed will jack up the rates crushing the economy and the inflation. We won’t get anywhere near hyperinflation.