Today’s tragic news represents tremendous opportunity for mortgage borrowers
I’m sure that you have already read and heard about the unfortunate demise of Lehman Brothers and BoA’s purchase of Merill Lynch. Here is a little more detailed information as it pertains to the mortgage industry.
Let’s begin with more fallout in the financial sector. Lehman Brothers is done after 158 years, thanks to their exposure to sub-prime mortgages. And another casualty, that was narrowly avoided was Merrill Lynch, which is being acquired by Bank of America, again this is all due to their greed and exposure in the risky mortgage business. Also on the ropes is insurance giant, AIG, as they try to raise cash quickly to stay afloat.
So what do all these headlines mean to us in the mortgage business? It’s a time to look for opportunities. Pricing will be at its best level in some time, homes are at much more attractive prices, terms to purchase are far more favorable than they have been and the forecast could get even better. Prices should improve nicely today as money flows out of Stocks – but there is another story on the Bond side.
We know that Treasury Bonds offer the lowest yield with the lowest risk. Then Mortgage Bonds offer a higher yield and for an even greater yield, there are Corporate Bonds. But they do carry higher risk. With all the turmoil in the financial sector, the risk on Corporate Bonds has increased significantly. While this will translate to higher yields being offered, the risk on Corporate Bonds may be greater than the appetite or tolerance of investors. In fact, many funds will preclude investments in riskier Bonds.
As fund managers and investors seek alternatives they will notice that Mortgage Bonds offer a much higher yield than Treasuries with the same guarantee. This should help Mortgage Bond pricing down the road…especially, with some potential good news on inflation. The Dollar has made significant gains against other major currencies, which should help import prices. The Job market is weak and that should keep wage based inflation in check. The move in Oil lower has been dramatic. A $52 drop in two months puts Oil at $95…likely on its way to $85. All these positive inflationary factors spell good news for mortgage rates.
In other words, today’s tragic news represents tremendous opportunity for mortgage borrowers in the short term. Therefore, we should carefully float for now, and I will guide you on our timing for locking in possibly the best mortgage rates this year.
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