Why The Spreads are Getting Wider

On Friday, the 10 year Treasury note fell to its lowest level since September 2005, 4.01%.  Typically 30 year fixed mortgages are tightly associated with the 10 year note.  As the 10 year Treasury moves, so does the mortgage rate.  But the gap between these two rates have widened substantially in June the difference between the 10 year and 30 year fixed mortgage was 2.22% last week as opposed to just 1.52% in June.
Why Did They Move Together To Begin With?
The reason they move together is because of perceived risk.  Treasury Notes are considered very safe investments.  The Federal government has never defaulted on its bonds.  Investors in mortgage backed securities assumed the same.  They thought people basing a security on individuals paying their mortgage in a timely fashion was a very secure investment. 
 

Why Is The Spread Getting Wider?
Uh…well…not so much.  With a foreclosure nightmare occurring right now, these mortgage backed securities are nowhere nearly as safe as the 10 year Treasury.  As a result the spread has widened siginificantly!  Risk = reward.
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Dollars & Sense Education – Raising Your Financial IQ!
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Subprime Mess Only Getting Worse

So over the past year the subprime mortgage industry has gone straight down the tubes.  So what is on the horizon?  Much worse. 

This weekend’s WSJ had an excellent artice about the subject. Even more mortgage resets are coming due in 2008.  Bank of America estimes $85 million in subprime mortgages will reset in the first quarter of 2008, $101 million in the second quarter.  Falling home prices and tighter lending standards mean borrowers who can’t afford the increase have few options when it comes to getting out to the debt obligation.  The Mortgage Bankers Association estimates that 1.44 million homes will enter foreclosure in 2008, that up from 705,000 in 2005. 

The housing slowdown is emerging as a major issue in both the presidential and congressional races as this issue could push our economy into a housing fueled recession.  What will happen?  Only time will tell.   

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

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Dollars & Sense Education – Raising Your Financial IQ!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834