As part of its rate hike cycle, yesterday the Federal Reserve announced the expected increase of only 25 basis points.
The Fed hiking rates can result in “correlation with mortgage rates over very long time horizons, but there can be weeks and even months where they move in the opposite direction.” (Mortgage News Daily)
To better understand why borrowers and lenders of RTMs™ (Risk-Transfer Mortgages™) and institutional investors in RT-MBS™ (Risk-Transfer Mortgage Backed Securities™) are going to be less affected by the Fed’s hikes, we need to understand what are the main reasons that cause the fed to hike rates to begin with:
Containing inflation Raising interest rates can help slow down the pace of economic growth and curb inflation, maintaining price stability and purchasing power.
Encouraging saving Higher interest rates increase the return on savings, incentivizing people to save more and spend less, promoting a more balanced economy.
Strengthening the currency Higher interest rates can make the USD more attractive to foreign investors, leading to increased demand and strengthening its exchange rate.
Stimulating investment Higher interest rates can increase the return on investments, making it more attractive for businesses and individuals to invest in productive assets.
Managing economic booms and busts By adjusting interest rates, the Fed can help smooth out the ups and downs of the business cycle, promoting sustainable economic growth over the long term.
Risk-transfer mortgages™ (RTMs™) transfer the credit risk of a mortgage loan from the originator of the loan to an institutional investor through the sale of
Risk-Transfer Mortgage-Backed Securities™ (RT-MBS™). The interest rate on RTMs™ is fixed and determined at the time of the loan origination, so borrowers, lenders, and institutional investors are not directly affected by interest rate hikes. Furthermore, RTMs™ encourage potential homebuyers to buy a home even with the current interest rates, as they provide downside protection in case the home value drops, and significantly better terms enabling lower monthly payments.
RTMs™ exchange some of the risk in homeownership for a portion of the home’s future value, thus reducing borrowers’ financial fragility. The lower monthly payments generate increased disposable income that households can use for saving in more appropriate and diversified channels (Instead of putting all their available cash into one asset - their home).
The value of the RT-MBS™ that represents the RTMs™ may be affected by changes in interest rates, but as previously stated, there can also be weeks and months where the hiked rates and mortgage rates move in opposite directions. Also, since institutional investors have no other way to access this specific asset class and diversify their portfolio, that’s exactly the risk they’re willing to take in exchange for a portion of the home’s future value.
We’re getting ready to launch Contigo Capital’s RTMs™ soon. For more info please contact us at info@contigo-capital.com or sign up for more news and updates.