To: Mr. Jeeves
Plus the article admits most of the portfolios are _fixed rate mortgages_.
So how can a rise in interest rates affect fixed rate loans? You might suffer an opportunity cost if you have invested in long-term fixed rate loans and could get a higher rate elsewhere or suffer a real loss if inflation jumps to much higher levels, but that's it.
To: pierrem15
So how can a rise in interest rates affect fixed rate loans?
Its really pretty simple. Banks (including FNMA and FHLMC) fund their loan portfolios with short term borrowings (deposits, borrowings from other banks, etc.) So, if a bank books a lot of loans at 6%, and short term funding costs rise to 7%, the bank is losing 1% a year on its loan portfolio. Banks are supposed to hedge this risk by booking variable-rate loans (whose yields increase along with funding costs) and locking in low fixed rate fundings. Those that don't end up getting shut down by regulators.
89 posted on
07/06/2006 11:27:08 AM PDT by
VegasCowboy
("...he wore his gun outside his pants, for all the honest world to feel.")
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