The mortgage markets and mortgage related market has seen a couple of trends in the recent weeks. The first and foremost is rising interest rates. Ultimately, in order for an economy to grow in a Fractional reserve capitalistic economy, you need some level of inflation. Short term inflation can be dangerous for sudden upticks in pricing of food, fuel (not included in the core inflationary index), borrowing, these sudden changes can make life very difficult for families on limited residual income.
Long Term Inflation And Mortgage Markets
Long term inflation is necessary, and can be reflected in higher long term borrowing such as 10-30 year bonds. What are bonds? They are debt instruments. Some investment firms use bonds to create capital by securitizing debt with a promise to pay full amount back at later date with semi-annual interest earned along the way. Bonds are used to create capital for corporations, for public projects, for government liquidity to pay current obligations, and for riskier ventures like technology, medical research, casinos, etc.
Risk Levels On Bonds
Bonds are all classified based on risk. The riskier the bond is to pay back, the higher the interest rate of return. Risk versus rewards concept. Governments are seen as the safest investment, especially on the federal side because they have the ability to both raise taxes, and print money. Bonds in general are more desirable as an investment because in case of bankruptcy of a corporation or just a dividend payout in general the bond investors will get their money back before stockholders do. What does this mean to the conversation of mortgages?
Bonds And Mortgage Markets
When interest rates rise, investors who own bonds see the underlying value of their investment lose face value. Inflation, or a rise in interest rates does exactly that. Rising rates will raise the value of the dollar, but hurt the purchasing power at the same time since the growth of businesses is largely based on their ability to borrow and leverage. When their cost of borrowing goes up, their cost of business goes up since they have to charge ore to recoup the interest they pay on loans. The government is the same way. For instance, when state like Illinois or California or Rhode Island get downgraded as an investment because of repayment risk, that is their debts re way higher than their income, just like a citizen, they must now pay a higher interest rate to investors when they borrow money to pay for things like pension obligations, which also go up. This causes a rise in taxes, and regulatory costs, since those municipalities must increase the cost of business to pay the higher cost of benefit.
This is one of the man reason cities are so expensive. Less space, less resources, and too many benefits to citizens raise the cost of living, as they attempt to raise the standard of living. Most businesses and cities that are insolvent don’t have a cash problem, they have a cash flow problem.
Mortgage Markets And Interest Rates
In closing, rates have been low in large part due to the inherent belief mortgages on the long term are safer now than they have ever been due to the credit criteria it takes to get one. Large institutions use that safe haven to earn guaranteed interest on both mortgage bonds, which are called Fannie Mae and Ginnie Mae Bonds, and servicing rights to take in the interest payments from you the citizen. Make no mistake, the economy and large businesses flourish because you the citizen chooses to pay his or her bills on time chooses to keep money in that bank, and chooses to show up at work on time. Without you, the system would collapse.
This article was written by Mr. Ron Granado. Ron Granado is a veteran title officer and an expert real estate professional with expertise in title, mortgages, appraisals, insurance, and law. Mr. Ron Granado is a guest financial writer for Gustan Cho Associates and is a consultant to many attorneys, realtors, homeowners, and mortgage industry professionals.