Who May Get Hurt the Most?

    A recent item about interest rates on the news really got to me.  The reporter said something to the effect of “. . . and rising interest  rates may hurt homeowners.”

    I can’t tell you how many news articles and statements by experts I disagree with after I really think about them.  They often get things  exactly backwards.  This is a good example.

    The folks who can’t get a mortgage may be disappointed, and they may have their plans put on hold, but they aren’t really getting hurt financially. 

    The bigger risk of financial loss as I see it is the people who hold all those existing mortgages.  That news quote should really have said “ . . . .and rising interest  rates may hurt mortgage holders.”

    As interest rates drop, mortgages tend to pay off more quickly (read:  less risk).  More people are selling and moving up, paying off the old mortgage as they do so.  Others, like me, simply refinance to a lower rate by getting a new mortgage that pays off the old one.   Mortgage holders aren’t usually happy when they get paid off, because “Murphy’s Law” of mortgage payoffs says they will happen when the investor has only low rate replacement options.  But at least they are getting their money back and again have control over the principal (read:  less risk)

    In rising interest rate markets all of a sudden a mortgage holder may have a rate that is below what they might get with a new mortgage or other investment.  If they want to pursue a new investment they can’t change!  They have no control over their principal unless someone refinances or sells and pays off the mortgage.  And in rising interest rate environments refinancings dry up and resales slow down.  The net result is few mortgages get paid off to give investors back their principal (read:  more risk).

    If the mortgage holder wishes to sell they will find that the market for their mortgage will probably have gone down, too, because new, higher yielding mortgages are available.  After all why should a new investor buy an old lower rate mortgage when they can just lend money to a new homebuyer at a higher rate.  They won’t, unless the price of the mortgage is “discounted”.   (read:  another risk)

    So the big losers when interest rates bottom and begin to rise are mortgage holders.  And rates may have begun to rise already, with the yield of all the benchmark treasuries being higher than a month or so ago.  Is the beginning of the long, sustained rise that investors should fear?  I don’t really know.

    But what I do know is that investors should know what they hold, and what the risks are.  Increasingly, mortgages are packaged into other investments such as CMOs, mutual funds, variable annuities and the like, so they may not be immediately recognizable as mortgages, but they will still act like mortgages.  If you are not absolutely sure what the underlying investments are in your portfolio, call the office for a review of your portfolio.  Preferably before rates rise, not after. 778-4000.