NEW YORK – The mortgage mess has bitten borrowers and lenders alike. And some fixed income-rates, such as government bonds, have actually dropped as skittish investors have sought cover. So what's the good news?
How about this: you can get perfectly safe yields exceeding 5 percent on one-year CDs. A quick 15-minute search will show dozens of options.
That's right. Mortgage companies — as most of you in the "Millionaire Zone" know by now — are starving for cash. Their "traditional" cash sources have stopped lending them money wholesale. And the debt securitization markets have taken a summer holiday.
So how do the lenders stay in business? Well, some of the mortgage companies, anyway, are so-called portfolio lenders — that is, they have a banking or savings-and-loan arm that acquires money, which they in turn lend as part of their own portfolio. These loans aren't sold to others, and are hence immune from much of the chaos in the secondary mortgage markets today.
And some of the larger lenders like Countrywide (CFC) and Golden West (now part of Wachovia) (WB) and smaller outfits like Fireside and eLoan are in just this sort of business. And now, more than ever, they depend on their banking subsidiaries' ability to attract deposits.
So how does a bank attract deposits if everybody is afraid of the bank — or more appropriately, the parent company of the bank? They raise rates paid to their depositors.
North of 5 percent
So, one-year CD rates in excess of 5 percent (annual percentage rate) have become fairly common. Countrywide leads the pack with one-year, $10,000 minimum CDs paying 5.65 percent. IndyMac Bank follows at 5.5 percent and a slew of others, including assorted Internet banks, Fireside, and even GMAC pay in the 5.2 percent to 5.3 percent range.
And some have lower minimums: $1,000 for NetBank, $2,500 for Fireside.
And what about risk?
Sure, the headlines called attention to nervous Countrywide depositors lined up to redeem their funds or find out what happened to them.
But in reality there's no risk, so long as your CD is smaller than $100,000. Why? That is the limit to which most CDs are FDIC insured. In the event of a bank failure, you'll get a check in a few days.
So what do you do if you have more than $100,000 to invest? Good question. Answer: you play the "FDIC game." FDIC insures each individual deposit at each institution for $100,000. So a husband-wife team with two individual deposits and a joint account — that's $300,000 covered. Add a trust account, and an IRA or 401(k) — and that's at one institution — you can repeat the process at different banks.
By the way, if you do your research you'll find that Countrywide pays 5.75 percent on a one-year CD with a $250,000 minimum. I wouldn't go there — no reason to sacrifice $150,000 in coverage for a 0.1 percentage point interest-rate premium.
Where to shop
Rates change daily, and the gold-standard portal for bank products and interest rates is bankrate.com, specifically the 1- year CD page.
And it's a good idea to keep track, for things could change if the mortgage market stabilizes and/or if the Fed cuts short-term rates.
In the meantime, it's worth 15 minutes to get 5 percent or more while getting a good night's sleep.
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