Will Your Sale Close? Is Your Buyer's Downpayment Safe?

By
Mortgage and Lending with SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) NMLS 223495

Federal Reserve Note circa 2011My 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...

image license purchased

_____________________

I'm Mike in Tucson, your preferred Tucson Arizona Mortgage Lender

NMLS #223495

SUNSTREET MORTGAGE LLC ~ Correspondent Mortgage Bank
Offices in Mesa, Tucson, Sierra Vista & Nogales

 

Comments (23)

Evelyn Kennedy
Alain Pinel Realtors - Alameda, CA
Alameda, Real Estate, Alameda, CA

Mike:

Is your client reluctant to transfer his money to cash or to a title company trust account?  If so, I would give him all the information you have and let him make the decision. 

Jul 19, 2011 11:38 AM
Lorraine or Loretta Kratz
Crescent Moon Realty, Inc. & Land N Sea Auctions. - San Marcos, CA
Certified Negotiation Consultants

What a pickle, educate, educate, buyers are very uninformed at times. Good luck.

Jul 19, 2011 12:03 PM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Mike

I would move the money into an attorney's account or a title company escrow account.

Good luck and success.

Lou Ludwig

Jul 19, 2011 01:06 PM
Daniel H. Fisher
www.FisherHermanRealty.com (704) 617-3544 - Charlotte, NC
MCRP - Charlotte Real Estate, NC or SC

Interesting possibilty if the US defaults, If you have 30+ days until closing and are not required to make the deposit, I'd put it in a CD...

Jul 19, 2011 01:28 PM
Gay E. Rosen
Julia B. Fee Sotheby's International Realty - Larchmont, NY
As Real as Real Estate Gets!

Mike-  I agree with LOu. LOL G

Jul 19, 2011 01:28 PM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Gay,

Me, too.

Daniel,

I like Lou's idea (@6) and Evelyn's (@4) about pulling it out now and placing it with Title.  We don't use attorneys for closings in Arizona.

Lou,

Great idea!

Lorraine and Loretta,

That's the truth!

Evelyn,

We've recommended it.

Mike in Tucson

Jul 19, 2011 01:37 PM
1~Judi Barrett
Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745 - Idabel, OK
BS Ed, Integrity Real Estate Services -IDABEL OK

Is your buyer concerned about the fund... or is it something you have to convince him of?

 

Jul 19, 2011 01:42 PM
Deb Brooks
Brooks Prime Properties Wichita Falls Texas - Wichita Falls, TX

Mike, well, I'm not surprised. It is really tough for the Fed to guarantee funds while they are printing money like some print T-shirts! As the dollar devalues even the interest rate evaporates and as far as I'm concerned no funds are safe. LOL, buy gold.

Deb ;-)

Jul 19, 2011 02:26 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

An interesting question and I an I will return to check out the conversation on this important topic.

Jul 19, 2011 02:51 PM
Rodney Mason
Guaranteed Rate NMLS# 2611 - Atlanta, GA
VP of Mortgage Lending - AL, FL, GA, SC, & TN

I do remember the liquidity issues of those accounts a few years ago.  Luckily, they didn't last long.

Jul 19, 2011 02:54 PM
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co

Hi Mike,

Oh my, I had no idea that could really be an issue when it comes to MMF.

As for the borrower depositing the funds into the title or attorney trust account, personally I wouldn't suggest/encourage that for one minute. Personally imho it's not a good idea to have one's funds deposited where it could possibly take the other party/principal (e.g. the seller) to sign off to release.

What would happen if someone died during the transaction, one of the buyers or sellers, believe me it happens. Or if for some reason at the last minute the buyer looses his job (or whatever) again why have a buyer's funds tied up like that if in fact it would take both parties to agree to return/release funds. I'd just have him/them move it into a low paying insured institution.

 

 

 

 

Jul 19, 2011 03:10 PM
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

I too would recommend that the funds be transferred either to the title company or to the borrowers checking or savings account.

Jul 19, 2011 03:59 PM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Kathy,

Thanks for stopping by to comment; see you on your blog.

Lynda, O Wise One...

See?  This is why I read comments and grow thereby.  Your points are well taken.  There's many a slip 'twixt the cup and the lip!

Rodney,

The future isn't over yet.

Joan,

We'll keep the light on for ya!

Deb,

...but are we stoking a gold bubble?

Judi,

The buyer's not concerned at all.  He's young.  :)

Mike in Tucson

Jul 19, 2011 04:38 PM
Kent Simpson
Realty One Group Mountain Desert - Tucson, AZ
Real Estate Is About People

In AZ escrow companies can pay interest on a deposit - you have to ask for it & pay a small fee (like $15) for them to set it up.  Safe & you get a small bit of interest - around 2.75% right now.

Jul 19, 2011 05:13 PM
James Sanson - Ranked in the TOP 1% of Arizona
Keller Williams Realty Phoenix - Maricopa, AZ
Homes for sale in Maricopa AZ

Who made your logos like your photo and your website one you have on activerain? I like them.

 

James Sanson
Long Realty Arizona Properties
Maricopa AZ Homes for sale

Jul 19, 2011 06:23 PM
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566
Nice clip art selection. Where did you find it for your post?
Jul 19, 2011 07:07 PM
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Mike, I don't think a lot of people know this. Money Market funds are not backed by the FDIC like bank savings accounts. Need to read the fine print. Thanks.

Jul 19, 2011 11:37 PM
Harry F. D'Elia III
RentVest - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

It is best to put the money in escrow account paying interest so the money is there when the home closes.

Jul 20, 2011 03:10 AM
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

Great information! These are indeed strange times we are living in right now!

Jul 22, 2011 01:24 AM
James R. Taylor
http://mortgagecrunchapp.com - Livermore, CA
Co-Founder of MortgageCrunch Loan Origination Software

I agree with Cheryl, great picture to match this interesting post. If you are looking for pictures for your posts you can usually find great options by going to flickr.com and doing an advanced search for any relevant key terms. In the result set there is an option to sort by "most interesting". This is a good way to find images. Just remember to give credit to the photographer somewhere below the image.

Aug 01, 2011 04:00 PM

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