My borrower is buying a home for $300,000. His down-payment of $60,000 is in a money market fund "for safety" he says.
Money Market funds are generally considered as safe as cash, and while they earn interest like mutual funds, you can write checks on them as if they were a savings account.
Safe, right? Not so much.
Money market funds (MMF) came into existence in 1970. Twice since then, the value of a fund has dropped below the benchmark value of $1.00. It's called "breaking the buck." (Breaking the buck has happened more often than that, but parent companies almost always are able to step in and provide liquidity for one of its funds, and investors are not affected.)
The most spectacular event ocurred when Lehman Brothers went bankrupt in 2008. One MMF--the Reserve Primary Fund--with $785 million invested in Lehman bonds saw all that money evaporate.
It wasn't the end of the world for the NY based fund, because it had billions invested in T-Bills and other bonds. But defaults are like dominoes. Investors panicked and pulled 40 billion out of the fund. It would have been a disaster except for the Federal Reserve providing liquidity.
Fast forward to today. "The Fed is said to be terribly worried that -- because of provisions in the Dodd-Frank law -- it will no longer be able to rescue a money-market fund if it “breaks the buck,” as the Fed did famously the day after Lehman Brothers Holdings Inc. filed for bankruptcy." William Cohan, Bloomberg.com
The law requires MMFs to invest in low risk assets, and many funds have exposure to European banks. With the crisis in Greece, that might not be a good thing. And then there's the US T-Bill. 10 year bonds rallied 60 basis points today, pushing yields down. But what happens if Treasury bills themselves are downgraded in two weeks? It's uncharted territory.
I wish my borrower would convert his downpayment to cash...
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I'm Mike in Tucson, your preferred Tucson Arizona Mortgage Lender
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