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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35339  
Subject: Banks Buying More Mortgages Date: 6/12/2003 3:53 PM
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From:

http://money.cnn.com/2003/06/12/markets/mortgagebanks/index.htm

What's behind the move? In the statement it released following the May 6 meeting, the Fed indicated it was more worried about the potential for deflation than inflation. To the market, that read like a promise that while the fed funds rate, now at a 40-year low of 1.25 percent, may go lower, it will not be going higher any time soon.

And suddenly, like magic, mortgage debt began to look a lot less risky to financial institutions. No longer worried that short-term rates are going to go up, they began to borrow and buy up the tradable baskets of mortgages known as mortgage-backed securities with abandon. According to the Fed, large domestic banks added $35.8 billion in mortgage-backed securities to their portfolios in the four weeks ended May 28 and are now carrying 43 percent more of the securities on their books than they did a year ago.


...

But while the mortgage trade will be a boon for profits in the short term, in time it could put the banks in a tight spot. When rates do rise -- and someday they will -- mortgage rates tend to rise faster and more than other types of debt. In 1994, for example, when the Fed went into tightening mode after a long hiatus, the yield on the 10-year Treasury rose 1.34 percentage points to 7.17 percent. The average rate on a 30-year mortgage rose 2.03 percentage points to 9.2 percent. And institutions that had bet big on mortgage-backeds got creamed.

Splotto



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