Variable-rate note now harder to sell
Reuters reports that major banks including UBS AG and Citigroup are now making it harder to sell what used to be one of the safest alternatives to cash — so-called variable-rate demand notes — sources familiar with industry practices say. Major banks are now being more cautious due to their desire to reduce risk. The new procedure is costing sellers a loss in business and profit models are at an all time low.
“I heard everybody’s doing it,” one of the sources said on Monday.
Previously, investors who wanted to sell these floating- rate notes just had to contact the banks, which would either resell the debt or salt it away in their inventory.
But now, because banks are afraid of taking on any more risk, they are taking advantage of the slower and more cumbersome procedures spelled out in the debt’s legal papers, which oblige would-be sellers to go through the tender agents.
As a result, this $400 billion market is starting to freeze up — much like the market for auction-rate paper — as the banks put their need to save cash ahead of the investors’ desire for them to buy their debt to keep the market liquid.
One of the main culprits causing the market for variable-rate demand notes to seize up is the troubled bond insurers that guarantee them. This is the same factor that has caused the $330 billion auction-rate note market to get hit with billions of dollars of failed auctions every day since late January.
I’m surprised to see that these notes will no longer be treated as “safe”, but rather with a bright yellow “caution” sign written all over them. Although I can understand that banks don’t want to take on the higher risk along with the deadweight from these notes if would-be sellers do give them away, but making it harder for these notes to go back into the market will surely hurt the market in which these notes are sold and bought. Hopefully, this will only be temporary as within the near future, our market economy will become more stable. Variable rates are often one of the driving motivations behind mortgage acceleration decisions. Homeowners do not want to pay rates that they cannot control or predict, and thus budget for.
Fed Offers Huge Mortgage Bailout
The US Fed has bailed out several large investment firms, which has led to a wide array of criticism. According to the daily telegraph:
The Fed’s dramatic step came after an emergency conference call by governors on Monday night. It followed the melt-down of the US chartered agencies — Fannie Mae, Freddie Mac, and other lenders — which together guarantee 60pc of the entire US home loan market. Fannie Mae’s share price fell 19pc in panic trading on Monday after Barron’s magazine said it may need a rescue package.
“The agency crisis was a Tsunami event,” said Tim Bond, global strategist at Barclays Capital.
“The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington,” he said.
This means over $200 BILLION dollars worth or junk housing debt has been purchased, in a useless attempt to head off economic disaster.
Those working steadily on mortgage acceleration may find this latest even frustrating, as those who need assistance most are being ignored, while banks and investors are getting the real bailout.
Asian Markets Begin to Feel Strained
While many may recall the financial disasters narrowly averted in the nineties, it looks as if the Asian markets may yet again be affected negatively by the world’s downward market trend.
This will likely have a very negative effect on interest rates worldwide and result in increased interest rates on adjustable rate loans, something which would make mortgage acceleration significantly more difficult to accomplish.
Home Ownership Accelerator Calculations
Prior to purchasing any sort of home ownership accelerator, one should carefully examine their own ability with a calculator and decide whether the numbers work. The average American moves every seven years. As such one should always calculate with a long term savings as the primary goal. This is similar to the points situation. Often, if you’ve paid points to lock in a good rate, it can be beneficial to keep ones house and rent it out rather than selling when you move.
Use of a third party financial consultant can in the end pay off if you find yourself unable to reasonably budget or calculate for your own financial future.
Calculating for a second mortgage
Planning for a second mortgage loan can take some work.
When a lender gives you money and places a lien against your home for that amount, it is called a second mortgage. Because the lender uses your home as collateral for the loan, you will probably be given an amount that is much larger than any credit card’s limit and an interest rate that is much lower than any credit card’s rate (more money + a lower interest rate). Second mortgages generally offer fixed interest rates, so you’ll never have to worry about your rate going up.
Keeping that in mind, one may sometimes find it useful to utilize a second loan in order to obtain a bi weekly mortgage.