Rising interest rates

5 Replies

Note buyers,

I'm wondering how you will modify (if at all) your business model when interest rates increase?? I bring this up since the Fed recently said they were going to systematically reduce the 85 billion they've been purchasing mortgage bonds with each month for the past couple years which will no doubt cause interest rates to rise. What do you think??

Good question, I would like to see what the experts say on this topic. My thought, and no I'm not an expert, is that modifying would involve more of a principle reduction versus rate reduction since most borrowers are underwater, or possibly a combination of both. This of course means you must buy the note at a sizable discount with enough margin to negotiate, if that is indeed what a note buyer is hoping to do.

In reality, many note buyers are not wanting to modify, they want to churn the transaction via short-payoffs, short-sales, cash for keys/deed-in-lieu, refi, or worst case scenario- foreclose.

Notes and bonds are the same thing. If interest rates rise the present value of a note or bond declines. So, a bond or note holder loses portfolio value if rates rise. Once you're committed and own the note there's little you can do. Hang on and collect your payments (and hope they refi you out) or sell at a loss. OTOH, as rates rise you can pay less for a note than you could when rates were lower.