Who May Get Hurt the Most?
A recent item about interest rates on the news really got to me. The reporter said something to the effect of “. . . and rising interest rates may hurt homeowners.”
I can’t tell you how many news articles and statements by experts I disagree with after I really think about them. They often get things exactly backwards. This is a good example.
The folks who can’t get a mortgage may be disappointed, and they may have their plans put on hold, but they aren’t really getting hurt financially.
The bigger risk of financial loss as I see it is the people who hold all those existing mortgages. That news quote should really have said “ . . . .and rising interest rates may hurt mortgage holders.”
As interest rates drop, mortgages tend to pay off more quickly (read: less risk). More people are selling and moving up, paying off the old mortgage as they do so. Others, like me, simply refinance to a lower rate by getting a new mortgage that pays off the old one. Mortgage holders aren’t usually happy when they get paid off, because “Murphy’s Law” of mortgage payoffs says they will happen when the investor has only low rate replacement options. But at least they are getting their money back and again have control over the principal (read: less risk)
In rising interest rate markets all of a sudden a mortgage holder may have a rate that is below what they might get with a new mortgage or other investment. If they want to pursue a new investment they can’t change! They have no control over their principal unless someone refinances or sells and pays off the mortgage. And in rising interest rate environments refinancings dry up and resales slow down. The net result is few mortgages get paid off to give investors back their principal (read: more risk).
If the mortgage holder wishes to sell they will find that the market for their mortgage will probably have gone down, too, because new, higher yielding mortgages are available. After all why should a new investor buy an old lower rate mortgage when they can just lend money to a new homebuyer at a higher rate. They won’t, unless the price of the mortgage is “discounted”. (read: another risk)
So the big losers when interest rates bottom and begin to rise are mortgage holders. And rates may have begun to rise already, with the yield of all the benchmark treasuries being higher than a month or so ago. Is the beginning of the long, sustained rise that investors should fear? I don’t really know.
But what I do know is that investors should know what they hold, and what the risks are. Increasingly, mortgages are packaged into other investments such as CMOs, mutual funds, variable annuities and the like, so they may not be immediately recognizable as mortgages, but they will still act like mortgages. If you are not absolutely sure what the underlying investments are in your portfolio, call the office for a review of your portfolio. Preferably before rates rise, not after. 778-4000.
Pokey Ol’ Savings Bonds?
Most times, I don’t pay much attention to US Savings Bonds. Being offered only through banks or directly from the government, we at Hepburn & Associates, can’t help you with them, but right now, for conservative investors, “I” bonds are worth looking at.
You may read about them at www.savingsbonds.gov or check with your bank about the I bonds. The current rate is 4.66% through October 2003, and they have to be held for 12 months before being sold. The maximum annual contribution is $30,000. They are non-securities and not marketable. Interest is adjusted twice a year and there is a base rate.
My guess is that I bond rates, like other rates will be trending down, but right now they look pretty good.
Prescott Center for Adaptive Market Strategies®
Coming August 20th
These are exciting times for me. Business is very good, primarily due to the popularity of my active style of investment management which strives to move clients into asset classes that are going up and out of asset classes that are going down. We call it Adapting to Changing Markets®.
Back I the 1990’s when I developed my first trading strategies that were systematized, The Primary Trend System® and Factor 92® (formerly Super Sectors), not many folks were interested in adaptive strategies. No one felt the need to adapt, because gains were coming along, just fine, thank you, so why should I change? Well, after 3 years of bear market losses the public’s thinking is coming around. Now people want to know how they, too, can have their investments Adapting to Changing Markets®. We have seen steady, significant increases in both the number of clients and the dollars we manage.
As a result of this success, we are moving to a new phase of business where I will no longer be affiliated with Hepburn & Associates, and will not be brokering investments through Cambridge Investment Research, Inc as I have been for many years. I will be working only on the fee based asset management accounts through The Prescott Center for Adaptive Market Strategies, which is a division of Hepburn Capital Management, LLC, a Registered Investment Advisor.
So if you’re not already a client of Hepburn Capital Management, give me a call. I would love to show you what people are talking about. 778-4000