Monday, July 23, 2012

How To Chase Yield

Managing Risk & Being Careful While Doing Something Fundamentally Foolish

As old CDs, treasuries and similar very low risk investments continue to mature, one can hear the groans from investors and savers everywhere at the prospect of extremely low rates being offered on new bonds and CDs.  In many cases, investors and savers are finding that the rates offered are so low that they cannot accept such low rates and still meet their minimum return required.  This problem does not appear to be going away any time soon as central banks all over the world continue to do their utmost to keep rates on safe instruments very, very low.  Those who refuse to accept current rates offered on low risk bonds and CDs will continue to have the same quandary for the foreseeable future: what do you do with the money?  Many will choose to throw caution to the wind and adopt a strategy that has been the source of untold sums of lost money, chasing yield.  This is a dangerous environment in which to do so because lots of people are doing the same thing.  As a handy indicator, junk bond funds have been attracting enormous amounts of cash even as yields stay low and Vanguard recently decided to close its junk bond mutual fund to new money after being flooded with cash.  Yet many people will chase yield anyway since some are effectively forced to do so due to needing higher returns than they can get from safe instruments.  If you choose to chase yield, how can one manage the risk that inevitably arises from this strategy?  How does a sensible person add some yield in a judicious fashion?

Sunday, July 8, 2012

Fun With Housing Finance

The Mechanics of Refinancing In a Mortgage Market Gone Crazy

As should be obvious to anyone watching the markets, mortgage rates have fallen to record lows once again.  Turmoil in equity markets, sovereign debt fears and probably expectations about central bank actions have continued to drive interest rates lower on a wide variety of fixed income instruments including agency mortgage backed securities (MBS).  For conforming mortgage loans, yields on MBS drive pricing and rates on loans.  However, the mortgage market is a bit of a mess in the wake of the real estate crash and the dissolution of a large part of the mortgage origination machinery in the last several years.  The silly-low rates being dangled in front of would-be borrowers come with a bunch of strings attached and if you do not meet the many requirements to qualify for the advertised rate you are likely to pay far more in rate/fees or simply be unable to borrow at all.  Since the list of requirements moves around not infrequently, potential borrowers who are on the edge will have a tough time figuring out if they qualify until they actually commit time, money and hair-pulling to an application.

Late last week I locked a rate to refinance my current mortgage.  I will now explore the whys, hows, and what has changed over time in the mortgage process.  I am lucky enough to comfortably meet the current requirements for receiving the advertised rate, so my comments will largely be confined to the so-called "conforming" mortgage market.