Why a Bailout in Cyprus May Mean Lower Mortgage Rates in Rochester

At first glance it seems an unlikely connection. The island of Cyprus, whose economy is just a tiny sliver of the Eurozone, would seem to have little impact on our local economy. But as so often happens, a small domino falling somewhere in the global economy can have an impact far from where it fell.

On Saturday, Eurozone bureaucrats in Brussels – let’s call them Eurocrats – enacted a $13 billion bailout of Cypriot banks.   Cyprus is a small country, total population just over a million; more people live in Dallas. And the Cypriot economy is small – smaller than that of Shreveport, Louisiana. But as part of the Eurozone, Cyprus uses the Euro as its currency.  The damaged banking system, with billions in defaulted loans to Greek companies, was on the brink of collapse. Hence the Eurocrats decreed a bailout to save Cypriot banks.

Still with me? Stop yawning, I’ll make it quick. This Euro-bailout differs from past bailouts in that bank depositors are getting a haircut –  10% on deposits over $130,000 and 6.75% on more modest deposits. Another word for haircut is confiscation. Cypriots with $5,000 in a savings account will wake up with $4,662. Ouch. This new get-tough Euro-bail policy has bank depositors running for the exits. Previous bailouts have left savers untouched. (Makes me think some of those folks would have been better off owning stock in Exxon, but I digress.)

My point: scared European investors will bolster the US dollar and the US economy. If you don’t want the risk of seeing your checking account confiscated, what are you going to do – invest in Chinese Renminbi? Urugayan Pesos? Fact is, scared money flows to one place: the US. More money flowing into our financial markets means higher bond prices and lower interest rates. If you thought 3% mortgage rates were the bottom, think again.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

And This, My Friends, Sums Up The Disaster of a Solution in Greece

Investors presumably choose fixed-income strategies in an effort to help guarantee safety in exchange for upside gains.  If that safety is deemed arbitrary—if a central bank is able to subordinate other investors of that very same security—then that, my friends, is a default regardless of snazzy semantics or promises that it’s an isolated situation. You don’t need a law degree to understand this; you only need to have an unbiased lens.

The concern in the marketplace has never been Greece; it has been the ramifications of a Greek default on an interconnected maze of global derivatives tying together financial institutions that, until a few years ago, viewed sovereign debt as one of the safest investments in the world.  The underlying issue — and the fate of the free market world — boils down to two very simple, yet difficult questions: Who wrote the Credit Default Swap contracts, and what collateral/counter-party risk sits on the other side of that bet?

The answer, as it stands, is “I don’t know.” 

“Nobody does, and that’s the problem.” –Todd Harrison, Minyanvillle

It seems that the central banks around the globe do not understand the unintended consequences of the things they do or even more frightening …they don’t care

Doug Hendee
Vice-President

Related articles

• Todd Harrison: Is the European crisis over or just beginning? (marketwatch.com)

Freddie Mac and Inverse Floaters: a love story

In an interesting twist to the current Freddie Mac situation (which I blogged about here), President Obama has decided to elaborate on his New Housing Proposal that he briefly mentioned in his State of the Union Speech last Tuesday. Obama’s plan to expand the Home Affordable Refinance Program HARP would assist homeowners who are attempting to qualify for refinancing.  According to the HARP website, the program expects to refinance “as many as 2.85 million loans by the end of 2013.”

How does the Freddie Mac bet against homeowners affect this goal?

First, let’s look at Freddie’s questionable position:

Freddie Mac has bought ‘inverse floaters’ which essentially means they invested in packages of mortgages and sold off their right to collect on the principal of those mortgages with the mindset that they would just collect the interest rate payments.  This is a bet that people will continue to pay these interest payments and one way that they may get out of paying those interest payments is to replace them with a new loan with lower interest payments – that’s a little something called ‘refinancing’.  Well, if you or I invested in inverse floaters like those bought by Freddie Mac, we could debate the merits and risks of that investment.  But Freddie Mac is charged with helping people refinance – so why would Freddie Mac make such an investment?  It was likely a hedge – a way to trade off some possible risk in other investments.  But here’s the kick: there should never, ever be even a hint of a conflict of interest in an organization’s positions, even in a hedge.

The answer is simple: as long as Freddie Mac has an role in refinancing, they must remove their hedge against it. 

As I have been writing, I noticed a little piece of news float up: Freddie Mac seems to know this is a bad idea to some extent, although they don’t seem to know why.

Jonathan Marlowe
Financial Advisor Trainee

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

The Federal Home Loan Mortgage Corporation’s Bet Against Homeowners

After a bailout in 2008, tax payers like you and me own Freddie Mac, a government-sponsored enterprise that exists to work with mortgage lenders to help citizens get lower housing costs and a better opportunity for home financing.  However, a National Public Radio and ProPublica exclusive report on Monday, January 30^th, discovered that Freddie Mac, in an attempt to make additional money and potentially hedge itself, has invested in securities that benefit from higher mortgage payments. This is simply an act of betting against the very the purpose it stands for.

 What does this mean?

 With financing rates at a historic low, homeowners across the nation are looking to benefit through refinancing their home mortgages.  Freddie Mac should be fulfilling its mission of making (or keeping) more homeowners by being a resource for refinancing.  Instead, it is betting on mortgages with high-interest rates not being refinanced – an exact opposite of its mission statement.  So now, either Freddie Mac will attend to its own interests and act to prohibit homeowners from attaining lower borrowing costs, or Freddie Mac will act in accordance with its mission and lose money on its in-house investments!

 Should a government entity be betting against the very purpose for which it exists?

Jonathan Marlowe
Financial Advisor Trainee

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Wall Street Rumors

It has been nearly four years since the US banking sector has been imploding due to the millions of bad mortgage loans made during the housing bubble:

 June 2007: Subprime mortgage firms collapse like dominos under the weight of bad loans; Bear Stearns bails out a hedge fund loaded with junk debt.

January 2008: In what will turn out to be a poison pill, Bank of America swallows Countrywide for $4.1 billion, helping Countrywide avert bankruptcy, and handing BofA a fat portfolio of toxic loans.

March 2008: Investment bank Bear Stearns collapses and is acquired by JP Morgan in a shotgun wedding arranged by the Federal Reserve.

September 2008: In one weekend, Lehman Brothers files for bankruptcy, insurance giant AIG gets a federal bailout, and Merrill Lynch is bought by Bank of America in yet another rescue buy. The nation’s largest savings & loan, Washington Mutual, collapses. Something close to sheer panic reigns on Wall Street.

November 2008: Citigroup, struggling with $300 billion in toxic assets, is bailed out by taxpayers.

March 2009: the Standard & Poors 500 Index hits bottom, down 57% from its October 2007 peak.

 There was more, much more, but this is a blog post, not the Great American Novel, so that’s plenty to make my point. Why do I bring this up today? Because now rumors are swirling on Wall Street that JP Morgan may buy Bank of America (with assistance from taxpayers, of course).  Time will tell if the rumors are true. But what is clear is that the effects of bad mortgages overhanging our financial system are still being felt. Four years in, and subprimes still have the power to sink even the biggest banks.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).