Savings bonds are a cornerstone of conservative investing, offering a secure and reliable means to grow one’s wealth over time. Yet, many people remain unclear about the intricacies of this financial instrument.
In this article, we aim to demystify this valuable financial tool by delving into its core characteristics, advantages, and practical applications. Whether you’re an individual seeking to diversify your investment portfolio or a professional aiming to optimize your financial strategies, understanding the ins and outs of savings bonds can be a game-changer.
What is a savings bond?
Savings bonds are a low-risk, U.S. government-backed investment that you can buy to help raise funds over time. When you purchase one, you are loaning money to the government. In return, the government promises to repay the amount you invested with interest.
Electronic savings bonds are simple to buy, safe to invest in, and affordable. You receive interest payments, and the bonds purchased can go to many purposes later, such as qualified education expenses. The purchase amounts range from a minimum investment of $25 – $10,000. However, there are maximum purchase limits per calendar year depending on the type of bond you purchase.
How do savings bonds work?
Think of a savings bond as a loan to the government. While there are a few rules, the main idea is that the government promises to pay back your loan through interest payments.
The government sets the interest rate for the loan, which doesn’t change for the bond’s duration. You buy these bonds at face value.
Savings bonds offer fixed terms, meaning they mature at a specific date. Once they reach that state, you can redeem them for their total value – plus interest.
The type of bond you purchase determines the maturity date. Some can take up to 30 years, while others take much less time.
Different Types of Savings Bonds
There are two main types of savings bonds in the US today, both a fixed rate, while paper bonds are slowly being phased out.
The U.S. Government issues two main types at face value: Series I Bonds and Series EE Bonds. Below is an overview of what each entails.
Series I Bonds
A Series I U.S. Savings Bond is a type of bond that offers a fixed interest rate that adjusts for inflation. The bonds are sold at face value, meaning that the price you purchase savings bonds for is what it is worth once the bond reaches maturity. With I Bonds, you can protect your investment from the variable inflation rate.
The government sets the I Bond inflation rate twice annually, once for each upcoming six-month period.
The current interest rate is 5.27% for I Bonds issued between November 1, 2023 to April 30, 2024.
I Bonds can earn interest for up to 30 years, unless you decide to cash them out beforehand. You can buy them from the U.S. Treasury using a TreasuryDirect account, or purchase paper bonds using your IRS tax refund.
Series EE Bonds
Series EE Savings Bonds are savings bonds that earn interest regularly for up to 30 years. The government guarantees that the Series EE Bond doubles in value in 20 years, even if it needs to add money at 20 years to reach that number.
Series EE bonds differ from I bonds in multiple ways. Primarily, they are not inflation adjustable. The second is that new EE bonds are only available for electronic purchase.
The government applies the bond’s interest rate to a new principal every six months. A principal is the sum of the previous principal and the fixed rate of interest in the past six months.
As of 2005, new EE Bonds earn a fixed interest rate set on the day you buy a bond. After 20 years pass, the government may adjust the interest on it.
When should I consider a savings bond?
You can buy a savings bond anytime, depending on your finances and long-term investment goals. There are multiple reasons why buying bonds is a good idea for later, however, such as:
Their low-risk nature
They generate a stable and low-risk investment
The interest earned on them is exempt from state and local taxes
Any investor with $25 and above can buy them
Bonds pay back, helping you plan for the future
Enjoying the stability of a fixed rate of interest announced twice annually
Are savings bonds worth it?
Savings bonds are worth the investment if you are looking for a stable way to increase your money at a reliable, fixed rate. If you want faster and higher returns, saving bonds may not be your best option. Remember that you do have to pay federal taxes as the bonds accrue interest, but not state or local taxes.
Ultimately, the selling point for purchasing a savings bond is a stable and safe return on your investment. Not all investments you make come with a guarantee as solid as the one you can get from the government.
The TreasuryDirect website also lets you send an announcement to someone to let them know you purchased a savings bond for them as a gift.
How do I redeem my savings bonds?
Redeeming a savings bond is usually an uncomplicated and seamless process. If you purchased your bonds electronically, such as the Series EE or Series I bonds, you could cash them in through your online TreasuryDirect account. Once you do so, you will receive your money in a checking or savings account of your choice in a few business days.
If you purchased older paper savings bonds, you could redeem them at financial institutions where you have an account. The option to cash in a bond at a bank or credit union depends on how long you had an account with them.
For older series of savings bonds, like HH bonds, you can’t redeem them through banks or credit unions. The FAQ section will cover HH bonds, as the government no longer issues them.
For HH Bonds, you must complete a specific form called the FS Form 1522. Once completed, you must mail the bond with a certified signature and direct deposit information to the Treasury Retail Securities Services.
Early Withdrawal Penalty
Sometimes, a circumstance may force you to withdraw your savings bond early. Although not advisable as savings bonds are long-term investments, you still have options when something unexpected happens.
Series EE and Series I savings bonds have an early withdrawal penalty if you redeem them less than five years after their issue date.
So, if you cash in the bond before the five-year mark, you receive the principal amount plus the interest earned up to that point minus the interest accrued in the past three months.
After the five-year mark, there are no penalties for redeeming your savings bond. You can receive the total value of the principal and interest earned.
Savings Bonds vs. Savings Accounts vs. Certificates of Deposit (CDs)
A savings account and a CD are financial products that banks and credit unions offer. With a savings account, you can deposit money and earn interest on electronic bonds over time. A CD is when you keep a specific amount of money with the bank for a timeframe in exchange for fixed interest rates.
Although savings accounts and CDs are low-risk investment options, they are not backed by the government like savings bonds. And unlike savings bonds, you must pay federal, state, and local income taxes for CDs and savings accounts.
Benefits and Drawbacks of Investing in Savings Bonds
In terms of benefits, an electronic bond comes with low-risk, guaranteed returns backed by the government. You can use them as a future nest egg, for retirement, or to fund a child or grandchild’s education. Moreover, they come with tax benefits. The federal government allows exemptions on state and local taxes and are simple to buy and later redeem. Keep in mind that you do have to pay federal income tax on them in some cases.
One drawback to electronic bonds is the time it takes to make a solid amount of interest like a money market account. Additionally, they do not offer the potential for capital gains, only from the interest accrued over time. Finally, if you do not have a Series I bond, you do not have sufficient protection against inflation.
Bottom Line
Bottom line: Savings bonds are an excellent investment option if you are looking for guaranteed returns by the United States government. Although it takes time to get their full benefit, they are a reliable way to save money, helping you plan for the future or pay tuition for college. You don’t have to worry about a variable interest rate, and the interest payment is always stable.
Frequently Asked Questions
Where can I purchase savings bonds?
You can purchase savings bonds online from the U.S. Department of the Treasury through their online platform, www.treasurydirect.gov. Buying from the treasury guarantees safety and security. Paper bonds can only be purchased for Series I U.S. savings bonds. Additionally, you can only pay for a paper bond using a tax return.
What is an HH savings bond?
HH savings bonds offer semi-annual interest directly to the bondholder. They were only available as a paper bond by exchanging Series EE or Series E bonds. The government discontinued them in 2004, and they are no longer available for sale. However, some HH bonds are still redeemable depending on their year of purchase.
When can I redeem my savings bonds?
Savings bonds can be redeemed after a minimum holding period, which is typically one year. However, if you redeem the bond before it is five years old, you will lose the last three months of interest as a penalty. Bonds reach their full face value at maturity, which is usually 20 to 30 years from the issue date.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
The 30-year fixed-rate mortgage has stayed close to 7% for the last two weeks, according to data analyzed by MarketWatch Guides – but recent economic news could signal that rates will continue to fall. After hitting 8% in mid-October, the 30-year fixed-rate mortgage has dropped nearly a percentage point over two months.
In their last meeting of 2023, the Federal Reserve held interest rates steady, leaving the federal funds rate at a target range of 5.25% to 5.50%. The Fed also foreshadowed multiple rate cuts in 2024.
Mortgage rates do not always move in tandem with the federal funds rate, instead tending to track the yield on 10-year Treasury bonds. However, economists with the National Association of Realtors predict that mortgage rates will continue to fall in 2024 if the Fed sticks to its forecast and inflation cools.
In fact, November estimates from the Mortgage Banker Association predict that the 30-year fixed-rate mortgage will end next year at 6.1%, almost another full percentage point lower than where it stands today.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.08%
15-year fixed mortgage rate: 6.31%
5/6 ARM mortgage rate: 6.97%
Jumbo mortgage rate: 7.09%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.08%
7.42%
-0.34
15-Year Fixed Rate
6.31%
6.72%
-0.41
5/6 ARM
6.97%
7.27%
-0.30
7/6 ARM
7.09%
7.45%
-0.36
10/6 ARM
7.15%
7.50%
-0.35
30-Year Fixed Rate Jumbo
7.09%
7.32%
-0.23
30-Year Fixed Rate FHA
6.86%
7.08%
-0.22
30-Year Fixed Rate VA
6.85%
7.04%
-0.19
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Monday, December 18, 2023. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.34
The average 30-year fixed-mortgage rate is 7.08%. Since the same time last week, the rate is down, changing -0.34 percentage points.
At the current average rate, you’ll pay $670.68 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.42%.
15-year fixed-rate mortgages are down, -0.41
The average rate you’ll pay for a 15-year fixed-mortgage is 6.31%, a decrease of-0.41 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.31% will cost approximately $860.70 per $100,000 borrowed. With the rate of 6.72% last week, you would’ve paid $883.25 per month.
5/6 adjustable-rate mortgages are down,-0.30
The average rate on a 5/6 adjustable rate mortgage is 6.97%, a decrease of-0.30 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.97% will cost approximately $663.29 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.23
The average jumbo mortgage rate today is 7.09%, a decrease of-0.23 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$670.68
$693.74
-$23.06
15-Year Fixed Rate
$860.70
$883.25
-$22.55
5/6 ARM
$663.29
$683.53
-$20.24
7/6 ARM
$671.36
$695.79
-$24.43
10/6 ARM
$675.41
$699.21
-$23.80
30-Year Fixed Rate Jumbo
$671.36
$686.93
-$15.57
30-Year Fixed Rate FHA
$655.93
$670.68
-$14.75
30-Year Fixed Rate VA
$655.26
$667.99
-$12.73
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates are down over the past week, with the 30-year fixed rate mortgage at 7.34%.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.34%
15-year fixed mortgage rate: 6.71%
5/6 ARM mortgage rate: 7.29%
Jumbo mortgage rate: 7.31%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.34%
7.52%
-0.18
15-Year Fixed Rate
6.71%
6.74%
-0.03
5/6 ARM
7.29%
7.29%
0.00
7/6 ARM
7.40%
7.44%
-0.04
10/6 ARM
7.49%
7.57%
-0.08
30-Year Fixed Rate Jumbo
7.31%
7.40%
-0.09
30-Year Fixed Rate FHA
7.00%
7.18%
-0.18
30-Year Fixed Rate VA
6.99%
7.15%
-0.16
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Friday, December 8, 2023. Actual rates may vary.
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.18
The average 30-year fixed-mortgage rate is 7.34%. Since the same time last week, the rate is down, changing -0.18 percentage points.
At the current average rate, you’ll pay $688.29 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.52%.
15-year fixed-rate mortgages are down, -0.03
The average rate you’ll pay for a 15-year fixed-mortgage is 6.71%, a decrease of-0.03 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.71% will cost approximately $882.69 per $100,000 borrowed. With the rate of 6.74% last week, you would’ve paid $884.36 per month.
5/6 adjustable-rate mortgages are steady,0.00
The average rate on a 5/6 adjustable rate mortgage is 7.29%, flatover the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 7.29% will cost approximately $684.89 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.09
The average jumbo mortgage rate today is 7.31%, a decrease of-0.09 percentage pointsover the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$688.29
$700.58
-$12.29
15-Year Fixed Rate
$882.69
$884.36
-$1.67
5/6 ARM
$684.89
$684.89
$0.00
7/6 ARM
$692.38
$695.11
-$2.73
10/6 ARM
$698.53
$704.01
-$5.48
30-Year Fixed Rate Jumbo
$686.25
$692.38
-$6.13
30-Year Fixed Rate FHA
$665.30
$677.43
-$12.13
30-Year Fixed Rate VA
$664.63
$675.41
-$10.78
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Mortgage rates are down over the past week, with the 30-year fixed rate mortgage at 7.77%. The average rate on a 30-year fixed rate mortgage surpassed 8% in mid-October for the first time since 2000.
The Federal Reserve meetings are underway, but there has been no indication that it plans to change its key interest rate this month. However, many experts predict a rate increase before the end of the year. This, along with rising tensions in the Middle East and the recently ended autoworkers strike, are some of the possible key factors in the continued upward trajectory of the national average interest rate.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.77%
15-year fixed mortgage rate: 6.98%
5/6 ARM mortgage rate: 7.51%
Jumbo mortgage rate: 7.61%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.77%
8.16%
-0.39%
15-Year Fixed Rate
6.98%
7.34%
-0.36%
5/6 ARM
7.51%
7.58%
-0.07%
7/6 ARM
7.61%
7.78%
-0.17%
10/6 ARM
7.71%
7.88%
-0.17%
30-Year Fixed Rate Jumbo
7.61%
7.91%
-0.30%
30-Year Fixed Rate FHA
7.41%
7.78%
-0.37%
30-Year Fixed Rate VA
7.41%
7.77%
-0.36%
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Monday, November 06, 2023. Actual rates may vary.
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.39%
The average 30-year fixed-mortgage rate is 7.77%. Since the same time last week, the rate is down, changing -0.39%.
At the current average rate, you’ll pay $717.79 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 8.16%.
15-year fixed-rate mortgages are down, -0.36%
The average rate you’ll pay for a 15-year fixed-mortgage is 6.98%, a decrease of-0.36% compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.98% will cost approximately $897.71 per $100,000 borrowed. With the rate of 7.34% last week, you would’ve paid $917.94 per month.
5/6 adjustable-rate mortgages are down,-0.07%
The average rate on a 5/6 adjustable rate mortgage is 7.51%, a decrease of-0.07% over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 7.51% will cost approximately $699.90 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.30%
The average jumbo mortgage rate today is 7.61%, a decrease of-0.30% over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$717.79
$744.95
-$27.16
15-Year Fixed Rate
$897.71
$917.94
-$20.23
5/6 ARM
$699.90
$704.70
-$4.80
7/6 ARM
$706.76
$718.49
-$11.73
10/6 ARM
$713.65
$725.42
-$11.77
30-Year Fixed Rate Jumbo
$706.76
$727.50
-$20.74
30-Year Fixed Rate FHA
$693.06
$718.49
-$25.43
30-Year Fixed Rate VA
$693.06
$717.79
-$24.73
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions, and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several factors specific to the borrower will affect the mortgage interest rate. They include:
Your financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Where you live: Mortgage rates vary by where you are buying a home.
Whether you are a first-time homebuyer: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Your lender: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Shopping for a mortgage can be overwhelming, but it’s shown to be worth it. In a recent study by Freddie Mac, researchers found that homeowners may save between $600 and $1,200 annually by shopping around for the best rate. That’s why we put together steps on how to shop for your best mortgage rate.
1. Check your credit scores and credit report
Your credit situation will likely determine the type of mortgage you pursue and your rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be your best option if your FICO score is between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know your mortgage options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important to do your research and apply for the mortgage program that best fits your financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms range from 10 to 30 years, though most homeowners opt for a 15 or 30 year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see your “real” rate as figures listed online may not be representative of your particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow you to prequalify for a mortgage and receive a tentative loan offer with no impact to your credit score.
After gathering your loan documents – including proof of income, assets and credit – you may also apply for pre-approval. Pre-approval will let you know where you stand with lenders and may also improve your negotiating power with home sellers.
4. Review your Loan Estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the Loan Estimate provided by each lender. Your Loan Estimate will list not only the mortgage rate, but also your annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing Loan Estimates across lenders, you can see the full breakdown of costs. One lender may offer lower interest rates, but higher fees and vice versa. You can then decide whether you prefer saving over the lifetime of the mortgage or want to prioritize lower upfront costs with your home purchase.
5. Consider negotiating with lenders on rates
Mortgage lenders want your business. This means that you may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower your rate by much, but even a few basis points may save you more than you think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
Mortgage interest rates climbing steadily throughout the first half of 2023 and now exceeding 8%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Tomorrow morning, Get Rich Slowly will feature a guest post about how bonds work. Bonds don’t get a lot of press. They’re not as sexy as stocks, and many beginning investors simply ignore them. (I know that has certainly been true in my case.) Before tomorrow’s story, though, I wanted to take some time to review the basics of bonds.
When you buy stock, you are buying a piece a company, but when you buy a bond, you are loaning money to an organization. Governments and corporations issue bonds to borrow money from investors. (For more on this topic, please review the difference between debt and equity.)
A bond is generally issued with a $1000 face value (also known as “par value”). The first person to buy the bond pays some amount of money (not always $1000), and the issuer promises pay $1000 to repurchase the bond when it matures. (Bonds can be issued for nearly any length of time, though certain periods are more common than others.) After its initial purchase, the bond can be bought and sold on the open market — and may trade for more or less than the initial price.
A bond is issued with a particular interest rate. (The interest rate is also called its “coupon rate” because bondholders used to redeem physical coupons in order to collect the interest payments.) The bond issuer pays this interest rate at specified intervals. For example, if a $1000 bond is issued with a 5% coupon rate, it pays $50 interest each year, which might be paid in $25 installments every six months. (Here’s more on the relationship between prices, rates, and yields.)
Bonds are rated based on their quality, or the likelihood that they’ll be repaid. The highest-rated bonds are those with the least risk, and therefor the lowest yields. The lowest-rated bonds are the so-called “junk bonds”, which offer high returns but come with exceptional risk. “Investment-grade” bonds offer lower long-term returns than stocks.
Why would anyone buy bonds if they offer lower returns than stocks? Bonds offer less risk than stocks. As part of a diversified investment portfolio, they offer a safety net in times of a bear market. Bonds also appeal to those who require a regular income from their investments. Stocks may appreciate, but they don’t actually provide income until you sell them. (An exception, of course, is stocks that pay dividends. Unsurprisingly, bonds and dividend-producing stocks often appeal to the same sorts of investors.)
There’s much more to know about bonds, of course, but these are the basics. If you’re interested, I encourage you to read the Fidelity primer on bonds — and come back for tomorrow’s discussion of how bonds work! (You may also want to check out Treasury Direct, the U.S. government site devoted to bonds.)
New Year’s resolutions don’t have to be reserved for diets and exercise. Sometimes the area of your life that really needs attention is your finances. As 2022 ends and 2023 begins, this is your opportunity to reset and reevaluate.
The new year is the perfect time to give your finances a boost. Here are my top 15 financial New Year’s resolutions that can help improve your financial health.
I’m jumping in with the big ones first…
What’s Ahead:
1. Start investing
While it may not be the easiest resolution on this list, investing is one of the best ways to build your wealth. If you don’t think that you have time to start investing, I get it. Investing can take time to understand. We’ve done our best to lay out the different investing methods in our article: How To Invest: Essential Advice To Help You Start Investing.
While it’s totally possible to invest without the help of an advisor, many of us are choosing the advisor route because, let’s be honest, it’s just so much easier. Remember that advisors also includerobo-advisors, which can help you decide what to invest in including when to buy and sell.
Read more: The Best Robo-Advisors
2. Build your emergency fund
When emergencies happen, you don’t want to be stuck without anemergency fund. Emergency funds can be lifesavers when unexpected challenges make their way into your life, like losing your job or getting into an accident, or a global pandemic.
So, if your emergency fund is non-existent at the start of the new year, it is time to change that!
To start, decide how much money you need in your emergency fund by calculating your monthly expenses. This should include not only your rent or mortgage but also your utilities and your basic expenses. Many financial experts agree that this should be at least three to six months’ worth of expenses, but it can’t hurt to overestimate how much money you would need in times of emergency.
If you need help calculating how much money you should save in your emergency fund, check out MU30’s handyemergency fund calculator to help you find your perfect number.
My husband and I like to keep our emergency fund in ahigh-yield savings account. These accounts allow us to access our savings quickly. Even better, high-yield savings accounts accrue interest at a higher rate than a traditional savings account, letting our money grow while it lies in wait.
Read more: Best High Yield Savings Accounts Compared
3. Pay off your credit card debt
If credit card debt is bogging down your financial success, why not make it a goal to tackle it in the new year?
Paying off your credit card debt is an important step in becoming financially healthy. If you don’t pay it off, you are doing a serious disservice to your credit score.
When searching for ways to pay off your debt, I recommend opening abalance transfer credit card. While it may sound counterproductive on one hand, these cards can help you consolidate your debt and even stop it from collecting interest for some time. That’s a big incentive right there!
Read more: How To Pay Off Credit Card Debt Fast – The Smart Way
4. Start a budget and track your expenses
If you don’t already have one, you need a budget. Creating and sticking to one could be the single best thing that you do for your finances in the new year. Budgets force you to take a hard look at the money that you bring in, the money that you shell out, and the money that you may owe.
If you have never followed a budget before, the thought of starting one can be daunting. The truth is, budgets can be incredibly freeing. Once you get used to following your budget, you can begin finding ways to free up cash to put towards your future.
Read more: How To Make A Budget: Our Step-By-Step Guide To Managing Your Money
5. Pay off your student loans
Student loan debt is one of the nation’s largest consumer debts and if you have it, you know just how painful it can be. Wouldn’t it be nice if you could get rid of your student loan debt altogether? Well, depending on how much you have, 2023 could be the year that you make it possible!
Making a plan to pay off your student loans is all aboutgetting organized. Knowing who you owe, how much you owe, and how you will afford to pay off your loans should be your first priority.
If you are having trouble trying to fit your student loan payment into your budget, it’s worth it to give your lender a call. Often, you can work outincome-driven repayment plans or deferments that can lessen the financial blow of your current loan payments.
Read more: Income-Based Repayment: Should You Do It?
6. Open a retirement account or fine-tune your existing one
When you are young,saving for your retirement probably sounds like the least exciting thing that you can do with your money. The truth is, the sooner that you start, the more secure you will be when your retirement comes. Investing in your retirement means that you are investing in your future.
If you’re employed, a quick conversation with your boss or human resources department can help you find out if your employer offers retirement accounts like 401(k)s or 403(b)s. Often, employers who have them will match a percentage of your annual contributions. This match is like an extra bonus from your employer that you don’t collect until retirement.
If your employer does not offer retirement accounts or you’re self-employed, you still have options for saving for your retirement.IRAs, or Individual Retirement Accounts can be opened by anyone.
Read more: The Beginner’s Guide To Saving For Retirement
7. Build your credit
If you are going into 2023 without any credit, it’s time to start building some. The credit system was put in place as a way to give future lenders and creditors information about potential borrowers. This allows them to make an informed decision and weigh the risks of loaning money to you.
If you haven’t built your credit, you could find yourself regretting it when you want to finance a car or even buy a house. Most lenders will not give out loans to people with poor credit and if you’re lucky enough to find one that does, your interest rates are often through the roof!
Taking out a loan with acosigner or becoming anauthorized user on your parent’s credit card can help you get started. Personally, I began building my credit with asecured credit card. When you get a secured credit card, you’ll need to put down a deposit, which then becomes your line of credit.
The OpenSky® Secured Visa® Credit Card is unique among secured cards in that they won’t run your credit when you apply, giving even those with no credit the ability to qualify.
Read more: Best Secured Credit Cards
8. Create a will
Don’t be fooled into thinking that having a will is just for old people. If you don’t have a will already, making it one of your New Year’s resolutions could benefit you and your family. Without one, in the event of your death, yourstate’s laws will determine who takes ownership of your assets and property.
If you’re wondering if you really need a will, the answer is probably a resounding yes. Most importantly,wills are strongly recommended for those who have children, have a spouse, or have a positive net worth. Having a will protects your family and your assets, something that all of us can agree is important.
If you don’t have a will, don’t put it off!
Read more: Do I Need A Will? Who Needs A Will (And When)
9. Spend less money
Everyone wants to save money, right? One of the best ways to do that is toconsciously spend less of it. While it is easier said than done, spending less money in 2023 is doable with a few tweaks to your spending habits.
To begin spending less money, I recommend this: take a hard look at your budget and try to find spending categories that you can cut back on. Lessening, or even getting rid of, spending categories allocated towards things like coffee runs and eating out could save you a significant amount of money each month.
Here are a couple more of my favorite ways to save:
Find a better deal on cell phone service. Cell phone services can be expensive. If you haven’t shopped around lately, give it a try. Many cell phone service companies will work hard to beat their competitors and will often beat your current rate!
Learn how to clip coupons. Clipping coupons is an easy way to save money at the grocery store and beyond. Often found in local circulars and newspapers, using coupons can add up to some significant savings.
Make a grocery list. Grocery lists can keep you on track financially in the midst of temptation, saving you from overspending on snacks and unneeded ingredients.
Make coffee at home. Coffee runs add up quickly, but it would be hard to get through the workweek without it. Instead of running to the coffee shop, try making coffee at home and bringing it to work in an insulated thermos.
Bring lunch to work. If you areeating out for lunch every day, your finances are more than likely feeling the pressure. Why not try giving them a break and pack last night’s leftovers instead?
Have date nights at home. Date nights can be an important part of staying connected with your partner and you shouldn’t have to sacrifice them. Finding alternative date night ideas, like cooking dinner together at home, can help you rack in the savings.
Try a meal delivery service.Meal delivery services will deliver pre-portioned ingredients and easy-to-follow recipes straight to your door. Home Chef is just one option, offering meals that take as little as five minutes to prepare. Plus, whether you’re looking to cut back on meat, carbs, calories, or more, Home Chef has options for you.
Cut back on subscriptions – We live in a world overrun by subscription services. It can be easy to sign up for a bunch and then never use half of them.
10. Save money on insurance
Protecting the ones you love is always a priority. In 2023, why not make it a goal to do so, while also keeping more of your hard-earned money in your bank account? I’ve found that one of the best ways to do this is by saving money on insurance.
11. Define your long-term financial goals
Sometimes you get so caught up in your present financial situation that you forget to plan for the future. Setting long-termfinancial goals is an exciting way to keep yourself on track and to ensure that your money is working for you.
Long-term financial goals vary depending on the person and the state of their finances. These goals could include saving for retirement, a downpayment on your future home, or even saving for that trip that you have always wanted to take. After you have defined your financial goals, it is time to start planning for how and when you will reach them.
I like to organize my long-term financial goals into my monthly and yearly household budget. This allows me and my husband to aggressively work towards our goals.
12. Track your expenses
Implementing this habit in my household was easy. My husband and I decided to ask for receipts with every purchase, ensuring that we don’t miss any expenses. After making a purchase and returning home, we began recording the totals on our receipts into monthly spending categories. These include areas of spending like groceries, entertainment, and gas.
Knowing how much we spend each month allows us to not only make a more accurate budget but also plan for the future. Keeping track of your expenses gives you a reference to look back at when creating a budget, including utility bills that may change due to the seasons.
If you have a mortgage, chances are that you would like to get rid of it. Well,making extra principal mortgage payments in 2023 could help you be free from it faster!
Those who can afford to put extra money towards their mortgage, but don’t, are missing out on some major savings. If you pay your mortgage for the life of your original loan, you could end up paying nearly as much in interest as you do for your home itself.
For example:
A $150,000, 30-year mortgage with an interest rate of 4.5% will cost a total of $273,610 by the end of thirty years. This means that $123,610 of your payments have been made towards interest.
If you take the same mortgage, but pay an extra $100 monthly, you would save $29,723.18 and shorten your loan by six years and four months.
If you want to make paying down your mortgage a priority in 2023, simpleloan pay-off calculators can help you figure out how much extra money you would like to put towards your mortgage.
You could also consider refinancing your mortgage, which can provide you with a much better interest rate, which, in turn, can lower the total cost of your loan.
14. Save money with money-making and reward apps
What if I told you that you are throwing money out the window every time that you shop online? If you are shopping without a cash back app, this is most definitely true for you! And since most of us have resolved to online shopping, this extra money could be adding up quickly!
To remedy this, I like to use a cash back app. Not only do cash back apps help you save money, but they can help you make money, too!
If you are looking to save, or make, money, Swagbucks may be a great choice for you. In fact, it is the internet’s leading rewards site! For users who are hoping to save money, I recommend installing Swagbucks browser extension, the “SwagButton.”
15. Get your taxes done early
Tax season is coming and there is no need to stress about it. Getting yourtaxes done early in 2023 can help put your mind at ease and save you from taking an extra trip out of the house. You may even find yourself with your return in hand faster than if you wait until closer to the deadline!
Filing taxes can be complicated. Luckily, there are great tax preparation companies that can help make filing a breeze and answer many of your tax questions – you can find a list of our favorites here.
Summary
The end of 2021 is fast approaching and it’s time to start thinking about the resolutions that you’ll make for 2023. While many of us – myself included – typically resolve to follow a healthier lifestyle, we sometimes forget to think about our financial health.
As 2021 comes to a close, start thinking about what you can do to make your finances stronger, because we never know when a financially challenging year will hit again.
Major players in the household lending market are Bank of America Corporation, JPMorgan Chase and Co., Pentagon Federal Credit Union, Discover Bank, Member FDIC, LoanDepot, Spring EQ, A and A Dukaan Financial Services Private Limited, ABC Finance Limited, Australia and New Zealand Banking Group Limited, Barclays PLC.
New York, June 28, 2023 (GLOBE NEWSWIRE) — Reportlinker.com announces the release of the report “Household Lending Global Market Report 2023” – https://www.reportlinker.com/p04590164/?utm_source=GNW , Citizens Commerce Bancshares Inc., Commonwealth Bank of Australia, Flagstar Bancorp Inc., HSBC Holdings PLC., Morgan Stanley, Navy Federal Credit Union, Roostify, and Royal Bank of Canada.
The global household lending market is expected to grow from $4,048.14 billion in 2022 to $4,520.83 billion in 2023 at a compound annual growth rate (CAGR) of 11.7%. The Russia-Ukraine war disrupted the chances of global economic recovery from the COVID-19 pandemic, at least in the short term. The war between these two countries has led to economic sanctions on multiple countries, a surge in commodity prices, and supply chain disruptions, causing inflation across goods and services and affecting many markets across the globe. The household lending market is expected to reach $6,798.66 billion in 2027 at a CAGR of 10.7%.
The household lending market includes revenues earned by entities by providing conventional loans, secured and unsecured loans, and open-end and closed-end loans to borrowers for household lending.The market value includes the value of related goods sold by the service provider or included within the service offering.
Only goods and services traded between entities or sold to end consumers are included.
Household lending refers the act of loaning money to purchase a home or household.The debtor pays back the borrowed funds and interest according to the loan repayment plan.
Household lending can aid in raising the budget for a home purchase using the loan amount provided.
North America was the largest region in the household lending market in 2022. The regions covered in the household lending market report are Asia-Pacific, Western Europe, Eastern Europe, North America, South America, Middle East and Africa.
The main types of household lending are fixed-rate loans and home equity lines of credit, which are provided by banks, online lenders, credit unions, and others.A fixed-rate loan is one in which the interest rate is fixed throughout the loan or only a portion of it.
Various sources included are mortgage and credit unions, commercial banks, and others. The main types of interest rate are fixed-rate mortgage loans and adjustable-rate mortgage loans.
The huge spike in housing costs is expected to propel the growth of the household lending market in the coming future.Housing costs is rent and mortgage costs (principal repayment and mortgage interest); or a measure that is more inclusive and takes into account the costs of obligatory services and charges, routine maintenance and repairs, taxes, and utility bills.
The increased housing costs limit an individual’s capacity to buy a house by full cash payment and motivate them to apply for a loan.So, the increasing housing costs is boosting the household lending market.
For instance, in November 2022, according to the Federal Housing Finance Agency, a US-based autonomous federal body established as the Federal Housing Finance Board’s regulatory substitute, in the United States between the third quarters of 2021 and 2022, the price of homes increased by 12.4%. In contrast to the second quarter of 2022, home prices increased by 0.1 percent. Therefore, the huge spike in housing costs is driving the household lending market.
Technological advancements are the key trends gaining popularity in the household lending market.Major companies operating in the household lending market are focused on developing innovative technologies to strengthen their position in the market.
For instance, in October 2021, Roostify, a US-based developer of a digital lending platform for home loans, launched the ’first of many’ APIs (application programming interface) on its existing lending platform developed to automate data extraction from documents and document validation in the financing process.Roostify Document Intelligence (RDI) Service, the company’s newest technology, will employ AI (artificial intelligence) to identify, validate, and extract data from documents connected to mortgages.
Users can receive automatic feedback from the technology when they upload documents that are wrong or ineligible, and errors can be flagged before it cause a data input problem. As an API, this one may be integrated into any step of the lending process and serve a wide range of use cases that can take advantage of the automated identification and extraction of data from the mortgage document collection.
In March 2023, Barclays PLC, a UK-based multinational bank, acquired Kensington Mortgage Company Limited for an undisclosed amount.Through the acquisition, Barclays enhanced its current mortgage product portfolio by integrating a better-specialized mortgage lender with a solid reputation in the UK market, further strengthening its product capabilities, and aligning with Barclays’ strategic aim of delivering next-generation, digital consumer financial services.
Kensington Mortgage Company Limited is a UK-based mortgage lender for first-time purchasers, self-employed people, contractors, and others.
The countries covered in the household lending market report are Australia, Brazil, China, France, Germany, India, Indonesia, Japan, Russia, South Korea, UK, USA.
The market value is defined as the revenues that enterprises gain from the sale of goods and/or services within the specified market and geography through sales, grants, or donations in terms of the currency (in USD, unless otherwise specified).
The revenues for a specified geography are consumption values that are revenues generated by organizations in the specified geography within the market, irrespective of where they are produced. It does not include revenues from resales along the supply chain, either further along the supply chain or as part of other products.
The household lending market research report is one of a series of new reports that provides household lending market statistics, including household lending industry global market size, regional shares, competitors with a household lending market share, detailed household lending market segments, market trends and opportunities, and any further data you may need to thrive in the household lending industry. This household lending market research report delivers a complete perspective of everything you need, with an in-depth analysis of the current and future scenario of the industry. Read the full report: https://www.reportlinker.com/p04590164/?utm_source=GNW
About Reportlinker ReportLinker is an award-winning market research solution. Reportlinker finds and organizes the latest industry data so you get all the market research you need – instantly, in one place.
Lending money to friends and family is a generous act — one that could easily backfire and even ruin your relationship. Most of the time when someone is considering a loan to a family member, I think, “Don’t do it.” There can be other ways to help. But when it’s someone you care about, logic only plays one role in the decision-making process.
Not too long ago I was in this situation. (I want to share it, but obviously I also want to be sensitive about revealing personal information, so I’m changing names and other minor details.)
I’ve been friends with Megan for almost 10 years. In that time, she’s never had much money, but she also never asked for so much as $5. Last year, she and her boyfriend rented an apartment. A month later, he lost his job, and she had to go on medical leave. He couldn’t find another job, and she had tried to return to work but her doctor wouldn’t sign the medical release (it was still too early). To complicate things, they had a child. I knew my friend, and I knew she was only asking for help because of her child. They were behind on rent, and although she had just started back at work, she wouldn’t see a paycheck for another two weeks.
I don’t believe in loaning money most of the time. It’s not that I don’t want to help make things better, I just think that in most situations it’s a temporary fix. If someone can’t make a house payment this month, what’s going to change next month? In many cases, money troubles are a sign of ongoing issues and habits. Also, it can strain your relationship. If your brother owes you $1,000, and he buys a Harley motorcycle, you can’t help but wonder where he came up with the cash when he hasn’t even paid you back. Then things get icky.
The Right Way to Lend Money to Friends
I ended up giving my friend the money. I felt that this was a situation where she just plain fell on some hard times. The job situation couldn’t have been predicted. They thought they had two incomes to cover a very modest apartment. There wasn’t a sufficient emergency fund to cover situations like this. She was unable to work, and now that she could, she had to wait for a paycheck.
But I was careful about how I did it, both to protect my interests and our friendship.
Here’s what I did:
I talked it over with my husband. He and I had a conversation before I gave my friend an answer. Talking it over with my spouse was good to know we were on the same page.
I expected to not be repaid, and only loaned as much as I was willing to lose. My husband and I agreed that we would view the money as a gift, not a loan. If she paid us back, fine. If not, fine. I made it clear that we weren’t expecting repayment.
I helped find a solution to the situation. If possible (and only if they’re okay with it), help your friend in other ways. In my case, I knew someone who could give my friend’s boyfriend a job.
I’ve read several articles that advise drawing up a contract when lending money to friends or family. While it seems like a good idea, what will you really be able (and willing) to do to enforce it? If your friend or relative doesn’t feel a responsibility to pay you back, a piece of paper isn’t likely to change that.
Not Always a Happy Ending
Unfortunately, my friend continued to have money problems, and eventually she was evicted. Her boyfriend was fired from the job after a few weeks. While I feel for her, that’s the extent of how much I can help her — at least financially. I don’t regret our decision to help out, and though the money is gone, our friendship has remained intact, which was my primary concern when she asked for help.
Have you loaned money to family or friends? How did you do it? What went right? What went wrong? Do you have any advice for others in this situation? (Or, if you’ve borrowed money from friends or family, what can you tell us from that side of the fence?)
This post is an illustrated, pared-down version of my recent “Inflation, Explained” podcast episode.
It was created as a simple, easy-to-digest guide to help you understand the current inflationary environment in the US.
Ready? Let’s dive in!
What is inflation?
Simple definition: too much money chasing too few goods.
– a.k.a. this: –
When Does it Happen?
When the growth of the money supply outpaces the growth of the economy
The money supply grows from…
– Printing & issuance of new money
– The government loaning money into banking system by purchasing government bonds
– The government deciding to legally devalue currency*
(*The U.S. dollar has only been deliberately devalued once, in 1933-1934)
When demand outpaces supply, (aka too much money chasing too few goods) which causes prices to rise.
What this can look like…
– Higher demand for goods that can’t quickly or easily increase in supply. (More on this in a minute.)
– Manufacturers and retailers facing higher production costs due to external factors driving up the cost of raw materials or manufacturing. These higher costs get passed down to the end consumer.
Fun fact!
There’s also something called the “wage price spiral.”
It takes place when…
1. Prices begin to rise,
2. Causing life to get generally more expensive,
3. And so workers ask for higher salaries,
4. Which employers pay,
5. And then the employers have to raise the price of **their own goods and services** to pay those increased labor costs!
6. …Which then cycles back to step 1 and compounds, pushing prices up further.
(If this sounds familiar, it’s because this has been our reality for the past 2 years!)
What the wage price spiral has looked like these past couple years:
Services were unavailable (e.g. concerts, restaurants, travel, etc.) so people turned their attention towards goods.
But at the same time, the supply chain capabilities couldn’t meet all the added demand for goods.
Fun fact!
In many sectors, producers must make large capital expenditures in order to increase production capacity. (For example: lumber millers.) These heavy CapEx investments require a long lead time, often multi-year.
Many producers lack either the capital to invest, or the confidence that the increased demand will persist. They don’t want to invest in CapEx for fear that two years down the line they’ll be overproducing for lower demand.
On top of all this, there are a lot of people opting out of the work force, whether for home schooling, general Covid concerns, caring for a family member, relocation, etc.
This further compounds the wage price spiral.
What are the effects of inflation?
Background info…
1. Some degree of **controlled inflation** is desirable for the economy, because it causes investors to look for investments to outpace inflation.
(📈 Investment activity = ⛽️ Fuel for the economy)
2. Controlled inflation also encourages consumers to spend now since tomorrow’s cash is worth less than today’s.
(💸 Money changing hands = ⛽️ More fuel for the economy)
The takeaway here…
All this is to say that inflation can be a good thing.
But!!! It needs to be managed carefully.
Fun fact!
For developed economies, around 2 percent inflation is the targeted “sweet spot” amount.
For developing economies, the targeted amount is usually higher. For example, India targets 4 percent. (+/- 2%)
With that background info out of the way, let’s move on to…
“How does inflation affect me?”
Who inflation is good for…
1. Borrowers
Once the banking system has money (from the government buying bonds), they’re able to loan it out.
The people who are able to get these loans are poised to benefit *significantly* as inflation picks up, especially the borrowers who were able to get fixed-rate loans.
Why?
If you have a fixed-rate loan with a rate that’s *lower* than inflation, it means that over time you repay that loan with cheaper and cheaper dollars.
2. Exporters
Inflation is good for exporters because they pay lower production costs associated with a weaker USD and sell their products in a stronger currency.
Who inflation is bad for…
1. Savers
Your dollar can buy less stuff, and the value of your cash gets eroded the longer you hold it.
2. Importers
The weaker USD means foreign-made goods are effectively more expensive.
How different assets are affected by inflation
Tangible assets
Tangible assets (that are valued in currency) are strong inflation hedges.
These allow you to store monetary value in something other than currency.
Examples include real estate (residential, commercial, land), commodities (oil, natural gas, precious metals, wheat and corn), art, and jewelry.
As inflation increases, often so could the value of these assets.
How to get a triple win!
If you were to take out a fixed-rate mortgage to buy real estate, you’d have a fantastic setup for an inflationary environment.
Here’s why:
1. You’d own an asset that historically has performed incredibly well in inflationary periods
2. You’d have a locked-in fixed-rate mortgage that you secured before interest rates rise further (the Fed has 7 rate hikes planned for 2022, and more for 2023)
3. You’d repay your mortgage with cheaper dollars over time
(Check out my free “2022 Real Estate Inflation & Recession Guide” for an in-depth overview of real estate investing in our current inflationary environment.)
What about stocks?
Historically, stocks and real estate have been great hedges against inflation.
But not all stocks are equally strong in inflationary periods.
Growth Stocks = 👎
Growth stocks are stocks that look promising for the future but don’t have particularly great numbers right now.
(e.g. Amazon, Facebook, Netflix, etc.)
Growth stocks usually take a hit during high-inflation environments. 💩
Value Stocks = 👍
Value stocks are stocks for companies that are doing well today but that investors believe are underpriced in the market relative to their performance.
Value stocks historically have done well in high-inflation environments. 📈
Fun fact!
Many (but not all) tech stocks are growth stocks, and several tech stocks (the “FAANG” stocks — Meta, Amazon, Apple, Netflix, Alphabet) also represent the largest cap stocks in the index.
This is one reason why we’ve seen such huge swings in the overall stock market lately…
Investors have been reassessing what they’re willing to pay for potential future returns on growth stocks in light of our high inflationary environment.
When the Fed tightens the money supply, there’s a risk of recession, which means battling inflation necessarily holds a degree of recession risk. This makes investors more cautious.
Said another way…
Lots of growth stocks being sold + Those stocks representing a large percentage of the total market cap = Volatility in the stock market
Takeaways and next steps
Hopefully you now have a better foundational understanding of inflation and how it affects you.
Here’s what to do next…
Stay Calm
Don’t get too wrapped up in headlines.
Don’t blow up your entire strategy and portfolio.
Remember that you’re in this for the long game, and that smart investing is about being patient and strategic, NOT trying to time the market.
Evaluate your portfolio
Take a look at your portfolio and ask yourself how your portfolio will fare if this inflationary environment lasts 2, 3, or even 5 years.*
(*Note: Historically in the U.S., it’s taken an average of slightly over two years — 27 months — for inflation to reach its ideal 2 percent target, as measured from the inflation rate at the start of a recession).
Know thyself
Start with the end in mind. Before you make changes to your portfolio, think about your investment goals, timelines, risk tolerance and risk capacity.
Fun fact!
If you’re interested in real estate investing, your next step is to check out my 2022 Real Estate Inflation & Recession Guide.
You’ll get answers to questions like…
– “How do rising interest rates affect real estate investing?”
– “If there’s a recession in 2022, will housing prices tank like they did in 2008?”
– “Can good deals still be found, or have I missed the boat?”
– “How should I set up my portfolio to handle inflation and a recession?”
Just let me know where I should send it…
What NOT to do
Don’t dump all your money into any asset that you’re not ready for.
Don’t panic-buy a house because you’re afraid of getting priced out of the market.
Don’t blow up your entire portfolio.
Don’t radically change your investing style, asset mix and timeline. Remember to think in decades; invest for the long-term.
Aim for balance and flexibility, and the right amount of liquidity for your lifestyle needs.
Thanks for reading!
If you have a friend or family member who could use some clarity about inflation, I’ll love you forever (as will they!) if you share this post with them.
And if you’re interested in real estate investing, be sure to check out my 2022 Real Estate Inflation & Recession Guide.
This article will explain the Big Short and the 2008 subprime mortgage collapse in simple terms.
This post is a little longer than usual–maybe give yourself 20 minutes to sift through it. But I promise you’ll leave feeling like you can tranche (that’s a verb, right?!) the whole financial system!
Key Players
First, I want to introduce the players in the financial crisis, as they might not make sense at first blush. One of the worst parts about the financial industry is how they use deliberately obtuse language to explain relatively simple ideas. Their financial acronyms are hard to keep track of. In order to explain the Big Short, these players–and their roles–are key.
Individuals, a.k.a. regular people who take out mortgages to buy houses; for example, you and me!
Mortgage lenders, like a local bank or a mortgage lending specialty shop, who give out mortgages to individuals. Either way, they’re probably local people that the individual home-buyer would meet in person.
Bigbanks, such as Goldman Sachs and Morgan Stanley, who buy lots of mortgages from lenders. After this transaction, the homeowner would owe money to the big bank instead of the lender.
Collateralized debt obligations (CDOs)—deep breath!—who take mortgages from big banks and bundle them all together into a bond (see below). And just like before, this step means that the home-buyer now owes money to the CDO. Why is this done?! I’ll explain, I promise.
Ratings agencies,
whose job is to determine the risk of a CDO—is it filled with safe mortgages,
or risky mortgages?
Investors, who buy part of a CDO and get repaid as the individual homeowners start paying back their mortgage.
Feel lost already? I’m going to be a good jungle guide and get you through this. Stick with me.
Quick definition: Bonds
A bond can be
thought of as a loan. When you buy a bond, you are loaning your money. The issuer of the bond is borrowing your money. In exchange for borrowing your money, the
issuer promises to pay you back, plus interest, in a certain amount of time.
Sometimes, the borrower cannot pay the investor back, and the bond defaults, or fails. Defaults are not
good for the investor.
The CDO—which is a bond—could hold thousands of mortgages in it. It’s a mortgage-backed bond, and therefore a type of mortgage-backed security. If you bought 1% of a CDO, you were loaning money equivalent to 1% of all the mortgage principal, with the hope of collecting 1% of the principal plus interest as the mortgages got repaid.
There’s one more key player, but I’ll wait to introduce it.
First…
The Whys, Explained
Why does an individual take out a mortgage? Because they want a home. Can you blame them?! A healthy housing market involves people buying and selling houses.
How about the lender;
why do they lend? It used to be
so they would slowly make interest money as the mortgage got repaid. But
nowadays, the lender takes a fee (from the homeowner) for creating (or originating) the mortgage, and then
immediately sells to mortgage to…
A big bank. Why do
they buy mortgages from lenders? Starting in the 1970s, Wall St. started
buying up groups of loans, tying them all together into one bond—the CDO—and
selling slices of that collection to investors. When people buy and sell those
slices, the big banks get a cut of the action—a commission.
Why would an investor
want a slice of a mortgage CDO? Because, like any other investment, the big
banks promised that the investor would make their money back plus interest once the homeowners began
repaying their mortgages.
You can almost trace the flow of money and risk from player to player.
At the end of the day, the investor needs to get repaid, and that money comes from homeowners.
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CDOs are empty buckets
Homeowners and mortgage lenders are easy to understand. But a big question mark swirls around Wall Street’s CDOs.
I like to think of the CDO as a football field full of empty buckets—one bucket per mortgage. As an investor, you don’t purchase one single bucket, or one mortgage. Instead, you purchase a thin horizontal slice across all the buckets—say, a half-inch slice right around the 1-gallon mark.
As the mortgages are repaid, it starts raining. The repayments—or rain—from Mortgage A doesn’t go solely into Bucket A, but rather is distributed across all the buckets, and all the buckets slowly get re-filled.
As long as your horizontal slice of the bucket is eventually surpassed, you get your money back plus interest. You don’t need every mortgage to be repaid. You just need enough mortgages to get to your slice.
It makes sense, then, that the tippy top of the bucket—which
gets filled up last—is the highest risk. If too many of the mortgages in the
CDO fail and aren’t repaid, then the tippy top of the bucket will never get
filled up, and those investors won’t get their money back.
These horizontal slices are called tranches, which might
sound familiar if you’ve read the book or watched the movie.
So far, there’s nothing too wrong about this practice. It’s simply moving the risk from the mortgage lender to other investors. Sure, the middle-men (banks, lenders, CDOs) are all taking a cut out of all the buy and sell transactions. But that’s no different than buying lettuce at grocery store prices vs. buying straight from the farmer. Middle-men take a cut. It happens.
But now, our final player enters the stage…
Credit Default Swaps: The
Lynchpin of the Big Short
Screw you, Wall Street nomenclature! A credit default swap sounds complicated, but it’s just insurance. Very simple, but they have a key role to explain the Big Short.
Investors thought, “Well, since I’m buying this risky tranche of a CDO, I might want to hedge my bets a bit and buy insurance in case it fails.” That’s what a credit default swap did. It’s insurance against something failing. But, there is a vital difference between a credit default swap and normal insurance.
I can’t buy an insurance policy on your house, on your car, or on your life. Only you can buy those policies. But, I could buy insurance on a CDO mortgage bond, even if I didn’t own that bond!
Not only that, but I could buy billions of dollars of insurance on a CDO that only contained millions of dollars of mortgages.
It’s like taking out a $1 million auto policy on a Honda Civic. No insurance company would allow you to do this, but it was happening all over Wall Street before 2008. This scenario essentially is “the big short” (see below)—making huge insurance bets that CDOs will fail—and many of the big banks were on the wrong side of this bet!
Credit default swaps involved the largest amounts of money in the subprime mortgage crisis. This is where the big Wall Street bets were taking place.
Quick definition: Short
A short is a bet that something will fail, get worse, or go down. When most people invest, they buy long (“I want this stock price to go up!”). A short is the opposite of that.
Certain individuals—like main characters Steve Eisman (aka Mark Baum in the movie, played by Steve Carrell) and Michael Burry (played by Christian Bale) in the 2015 Oscar-nominated film The Big Short—realized that tons of mortgages were being made to people who would never be able to pay them back.
If enough mortgages failed, then tranches of CDOs start to fail—no mortgage repayment means no rain, and no rain means the buckets stay empty. If CDOs fail, then the credit default swap insurance gets paid out. So what to do? Buy credit default swaps! That’s the quick and dirty way to explain the Big Short.
Why buy Dog Shit?
Wait a second. Why did people originally invest in these CDO bonds if they were full of “dog shit mortgages” (direct quote from the book) in the first place? Since The Big Short protagonists knew what was happening, shouldn’t the investors also have realized that the buckets would never get refilled?
For one, the prospectus—a fancy word for “owner’s manual”—of a CDO was very difficult to parse through. It was hard to understand exactly which mortgages were in the CDO. This is a skeevy big bank/CDO practice. And even if you knew which mortgages were in a CDO, it was nearly impossible to realize that many of those mortgages were made fraudulently.
The mortgage lenders were knowingly creating bad mortgages. They were giving loans to people with no hopes of repaying them. Why? Because the lenders knew they could immediately sell that mortgage—that risk—to a big bank, which would then securitize the mortgage into a CDO, and then sell that CDO to investors. Any risk that the lender took by creating a bad mortgage was quickly transferred to the investor.
So…because you can’t decipher the prospectus to tell which mortgages are in a CDO, it was easier to rely on the CDO’s rating than to evaluate each of the underlying mortgages. It’s the same reason why you don’t have to understand how engines work when you buy a car; you just look at Car & Driver or Consumer Reports for their opinions, their ratings.
The Ratings Agencies
Investors often relied on ratings to determine which bonds
to buy. The two most well-known ratings agencies from 2008 were Moody’s and
Standard & Poor’s (heard of the S&P
500?). The ratings agency’s job was to look at a CDO that a big bank created,
understand the underlying assets (in this case, the mortgages), and give the
CDO a rating to determine how safe it was. A good rating is “AAA”—so nice, it
got ‘A’ thrice.
So, were the ratings agencies doing their jobs? No! There are a few explanations for
this:
Even they—the experts in charge of grading the
bonds—didn’t understand what was going on inside a CDO. The owner’s manual
descriptions (prospectuses) were too complicated. In fact, ratings agencies
often relied on big banks to teach
seminars about how to rate CDOs, which is like a teacher learning how to
grade tests from Timmy, who still pees his pants. Timmy just wants an A.
Ratings agencies are profit-driven companies.
When they give a rating, they charge a fee. But if the agency hands out too
many bad grades, then their customers—the big banks—will take their requests
elsewhere in hopes of higher grades. The ratings agencies weren’t objective, but instead were biased by
their need for profits.
Remember those fraudulent mortgages that the
lenders were making? Unless you did some boots-on-the-ground research, it was
tough to uncover this fact. It’s hard to blame the ratings agencies for not
catching this.
Who’s to blame?
Everyone? Let’s play devil’s advocate…
Individuals: some people point the finger at homeowners, saying, “You should know better than to buy a $1 million house on a teacher’s salary.” I find this hard to swallow. These people, surrounded by the American home-ownership dream, were sold the idea that they would be fine. The mortgage lender had no incentive to sell a good mortgage, they only had an incentive to sell a mortgage. So, it’s hard for me to put too much blame on the homeowners.
Mortgage lenders: someone knew. I’m not saying that all the mortgage lenders were fully aware of the implications of their actions, but some people knew that fraudulent loans were being made, and chose to ignore that fact. For example, check out whistleblower Eileen Foster.
Big banks: Yes sir! There’s certainly blame here. Rather than get into all of the various money-grubbing, I want to call out one specific anecdote. Back in 2010, Goldman Sachs CEO Lloyd Blankfein testified in front of Congress. Here it is:
To explain further, there are two things going on
here.
First, Goldman Sachs bankers were selling CDOs to investors. They wanted to make a commission on the sale.
At the same time, other bankers ALSO AT GOLDMAN SACHS were buying credit default swaps, a.k.a. betting against the same CDOs that the first Goldman Sachs bankers were selling.
This is like selling someone a racehorse with cancer, and then immediately going to the track to bet against that horse. Blankfein’s defense in this video is, “But the horse seller and the bettor weren’t the same people!” And the Congressmen responds, “But they worked for the same stable, and collected the same paychecks!”
So do the big banks deserve blame? You tell me.
Inspecting Goldman Sachs
One reason Goldman Sachs survived 2008 is that they began buying credit default swaps (insurance) just in time before the housing market crashed. They were still on the bad side of some bets, but mostly on the good side. They were net profitable.
Unfortunately for them, the banks that owed Goldman money were going bankrupt from their own debt, and then Goldman never would have been able to collect on their insurance. Goldman would’ve had to payout on their “bad” bets, while not collecting on their “good” bets. In their own words, they were “toast.”
This is significant. Even banks in “good” positions would’ve gone bankrupt, because the people who owed the most money weren’t able to repay all their debts. Imagine a chain; Bank A owes money to Bank B, and B owes money to Bank C. If Bank A fails, then B can’t collect their debt, and B can’t pay C. Bank C made “good” bets, but aren’t able to collect on them, and then they go out of business.
These failures would’ve rippled throughout the world. This explains why the US government felt it necessary to bail-out the banks. That federal money allowed banks in “good” positions to collect their profits and “stop the ripple” from tearing apart the world economy. While CDOs and credit default swap explain the Big Short starting, this ripple of failure is the mechanism that affected the entire world.
Betting more than you have
But if someone made a bad bet—sold bad insurance—why didn’t they have money to cover that bet? It all depends on risk. If you sell a $100 million insurance policy, and you think there’s a 1% chance of paying out that policy, what’s your exposure? It’s the potential loss multiplied by the probability = 1% times $100 million, or $1 million.
These banks sold billions of dollars of insurance under the assumption that there was a 5%, or 3%, or 1% chance of the housing market failing. So they had 20x, or 30x, or 100x less money on hand then they needed to cover these bets.
Turns out, there was a 100% chance that the market would fail…oops!
Blame, expounded
Ratings agencies—they should be unbiased. But they sold themselves off for profit. They invited the wolves—big banks—into their homes to teach them how to grade CDOs. Maybe they should read a blog to explain the Big Short to them. Of course they deserve blame. Here’s another anecdote of terrible judgment from the ratings agencies:
Think back to my analogy of the buckets and the rain. Sometimes, a ratings agency would look at a CDO and say, “You’re never going to fill up these buckets all the way. Those final tranches—the ones that won’t get filled—they’re really risky. So we’re going to give them a bad grade.” There were “Dog Shit” tranches, and Dog Shit gets a bad grade.
But then the CDO managers would go back to their offices and cut off the top of the buckets. And they’d do this for all their CDOs—cutting off all the bucket-top rings from all the different CDO buckets. And then they’d super-glue the bucket-top rings together to create a field full of Frankenstein buckets, officially called a CDO squared. Because the Frankenstein buckets were originally part of other CDOs, the Frankenstein buckets could only start filling up once the original buckets (which now had the tops cut off) were filled. In other words, the CDO managers decided to concentrate all their Dog Shit in one place, and super glue it together.
A reasonable person would look at the Frankenstein Dog Shit field of buckets and say, “That’s turrible, Kenny.”
BUT THE RATINGS AGENCIES GAVE CDO-SQUAREDs HIGH GRADES!!! Oh I’m sorry, was I yelling?!
“It’s diversified,” they would claim, as if Poodle shit mixed with Labrador shit is better than pure Poodle shit.
Again, you tell me. Do the ratings agencies deserve blame?!
Does the government deserve blame?
Yes and no.
For example, part of the Housing and Community Development Act of 1992 mandated that the government mortgage finance firms (Freddie Mac and Fannie Mae) purchase a certain number of sub-prime mortgages.
On its surface, this seems like a good thing: it’s giving money to potential home-buyers who wouldn’t otherwise qualify for a mortgage. It’s providing the American Dream.
But as we’ve already covered today, it does nobody any good to provide a bad mortgage to someone who can’t repay it. That’s what caused this whole calamity. Freddie and Fannie and HUD were pumping money into the machine, helping to enable it. Good intentions, but they weren’t paying attention to the unintended outcomes.
And what about the Securities & Exchange Commission (SEC), the watchdogs of Wall Street. Do they have a role to explain the Big Short? Shouldn’t they have been aware of the Big Banks, the CDOs, the ratings agencies?
Yes, they deserve blame too. They’re supposed to do things like ensure that Big Banks have enough money on hand to cover their risky bets. This is called proper “risk management,” and it was severely lacking. The SEC also had the power to dig into the CDOs and ferret out the fraudulent mortgages that were creating them. Why didn’t they do that?
Perhaps the issue is that the SEC was/is simply too close to Wall Street, similar to the ratings agencies getting advice from the big banks. Watchdogs shouldn’t get treats from those they’re watching. Or maybe it’s that the CDOs and credit default swaps were too hard for the SEC to understand.
Either way, the SEC doesn’t have a good excuse. If you’re in bed with the people you’re regulating, then you’re doing a bad job. If you’re rubber stamping things you don’t understand, then you’re doing a bad job.
Explain the Big Short, shortly
You’re about 2500 words into my “short summary.” But the important things to remember:
Financial acronyms suck.
Money flowed from the investors down to the mortgage lenders, and the risk flowed from the mortgage lenders up to the investors. In between, the big banks and CDOs acted as middle men and intermediaries.
When someone feels like their actions have no risk, or no consequences, they’ll behave poorly (big banks, mortgage lenders) When someone is given what seems like an amazing deal, they’ll take it (individual home owners).
CDOs are like empty buckets. Mortgage payments are like rain, filling the buckets. Investors buy tranches, or slices, across all the buckets. If mortgages fail, then the buckets might not fill up, and the investors won’t get their money back.
CDOs are intentionally complex. So complex, that not even the people grading them understood what was going on (ratings agencies).
Buying insurance on something your do not own is a behavior with potential for abuse (big banks)
Buying insurance on something for more than it’s worth is a behavior with potential for abuse (big banks). This is where most of the money in the financial crisis switched hands.
And with that, I’d like to announce the opening of the Best Interest CDO. Rather than invest in mortgages, I’ll be investing in race horses. Don’t ask my why, but the current top stallion is named ‘Dog Shit.’ He’ll take Wall Street by storm.
Thank you for reading! If you enjoyed this article, join 6000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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