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Low Interest Rates Hurt Bonds For Housing U. S.

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http://www.nytimes.com/2010/11/09/business/economy/09bonds.html?_r=1&ref=business

It is not just retired savers who are struggling with a sharp reduction in their investment income as interest rates hover near zero. Hundreds of affordable housing projects across the country are feeling the pain, too.

That sets them apart from most borrowers in the municipal bond market, who see today’s low rates as a rare spot of cheer amid shrinking tax revenues and rising pension costs.

But this battered collection of public borrowers is learning that low rates can be a two-edged sword — one that can slice their credit ratings to the bone, as detailed in a report to be released Tuesday by Standard & Poor’s Ratings Services.

These borrowers, primarily affordable housing projects across the country that are allowed to raise money in the tax-exempt bond market, had been relying on the interest they earned on their spare cash to help them pay off their outstanding bonds. Like other investors, they are now earning far less on those cash reserves than ever anticipated.

As a result, their bond ratings are being cut sharply, reducing the value of their bonds to investors and potentially making affordable housing less available or more expensive for senior citizens and lower-income families who rely on such projects for shelter.

The magnitude of the pain is clear in the report from Standard & Poor’s, one of Wall Street’s largest credit-rating agencies, of a sweeping review begun last spring of nearly 600 tax-exempt housing bonds.

The changes are stark. The number of AAA-rated bonds, the blue chips of the bond market, fell by more than half, to 271 from 552. The number of bonds in the “junk” category — too low to be considered investment grade — rose to 46 from just 9, and the agency said it anticipated that 10 of those issues could default over the next decade.

The ratings for 256 more bond issues were withdrawn, either because they were no longer outstanding or because the issuers did not respond to the agency’s request for more information.

“We have seen years of record-low short-term interest rates cause stresses across the housing revenue bond spectrum,” said Valerie White, senior director of tax-exempt housing at the rating agency. “We have observed this to be particularly true of bonds whose revenues or cash flows rely on investment earnings from short-term investments such as money market funds.”

As a result, although the mortgages that secure the bonds are federally insured, the projects that issued the bonds are at greater risk of falling short of the cash needed to repay bondholders, the S.& P. analysts said.

Pure genius they clearly only had one plan and had nothing in reserve for if the Fed decided to screw them to save the banks.

It's clear there was only Plan A and nothing else.

Bernanke it appears loves the laws of unintended consequences.

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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