6.25% CD ?

[Nords]

Speaking of astonishing ways for PenFCU to lose money, what am I missing here?

Fixed Equity Loan Rates
OWNER OCCUPIED HOME - no closing costs
80% OR LESS LOAN TO VALUE (LTV)
Borrow $10,000 - $400,000 APR
Up to 60 Months 5.74
61 to 120 Months 5.99
121 to 180 Months 5.99
181 to 240 Months 5.99

7-Year money-market certificate APY 6.25%

Arbitraging $400K equity loan at 0.25% would generate $1000/year before taxes.

There's gotta be a pre-payment penalty or some other catch... maybe PenFed figures that no one will bother for less than $1000/year.

[jazz4cash]

Quote:

Originally Posted by Nords Speaking of astonishing ways for PenFCU to lose money, what am I missing here?

Well, here's my theory: The "real" profit comes from the credit card operations.

I think penfed's CC's run around 9.9%. My other CU cards are in that range also. These are 25-50% lower than the major banks. The mortgage products are generally more competitive, but that 80% loan equity product is a grand slam....and so is the 6.25 CD!

The 5 yr Home Equity rate at NFCU is currently ~5.6%............lower than 1st mortage rates! The pre-payment penalty is generally that you must have a minimum draw for 2 yrs or they charge back the closing costs.

[brewer12345]

No catches. I suspect that they do the CD sale as an interest rate management tool. If they are running a big duration mismatch, they can either run a CD special where lots of money jumps into 5 or 7 year CDs, or they can go buy a cap/swaption/other derivative. Since they are a member-focused credit union, they do the former.

[Nords]

Quote:

Originally Posted by jazz4cash The 5 yr Home Equity rate at NFCU is currently ~5.6%............lower than 1st mortage rates! The pre-payment penalty is generally that you must have a minimum draw for 2 yrs or they charge back the closing costs.

Darn, I feel like I've been asleep at the switch.

A $350K loan from NFCU at 5.65% deposited into PenFed's 6.25% CDs... that's a $2100/year pre-tax zero-risk bonus on dead equity. I'll have to check their closing costs and see if we can move fast enough.

Quote:

Originally Posted by brewer12345 No catches. I suspect that they do the CD sale as an interest rate management tool. If they are running a big duration mismatch, they can either run a CD special where lots of money jumps into 5 or 7 year CDs, or they can go buy a cap/swaption/other derivative. Since they are a member-focused credit union, they do the former.

OK, this makes sense and gives reassurance that they're behaving rationally.

I just got off the phone with both CUs. PenFed's latest CD rates are good through 31 Jan and NFCU says that they won't match PenFed's latest CD rates. However NFCU says that their next board of directors meeting is 17 Jan and they'll post their new CD rates on 22 Jan. We'll see what happens.

[brewer12345]

I dunno how to post it pretty, but if you want to see their latest financials, you can dig them up here: http://www.ncua.gov/indexdata.html

They have a large slug of loger term fixed rate mortgages and their funding is predominately short term (1 year and less to mturity/repricing). That means t hey have a potential issue with a mismatch between asset and liability durations (in size, this is bad). So I think they partially close the gap with the CD sale.

[JohnEyles]

I posted this to another thread, and maybe it was thought too stupid to
acknowledge, but I'll try again ...

Why not put all one's fixed-income in these 6.25% CDs ? Is not 6+%
a pretty optimistic total ROR for the FI portion of a portfolio ?

I can imagine one answer is that if the main purpose of FI allocation is
to damp portfolio volatility by being uncorrelated with equity returns,
then one would hope for substantially better than 6% FI return during
periods when equity returns falter.

[cute fuzzy bunny]

Awright...i've been thinking of pulling the trigger on a PFCU acct for some time now. 6.25% for 5 years looks pretty good.

Do note that over 5 years they pull a years interest out of the cert for early termination vs six months for the 3-5 year varieties.

[brewer12345]

Quote:

Originally Posted by El Guapo Awright...i've been thinking of pulling the trigger on a PFCU acct for some time now. 6.25% for 5 years looks pretty good. Do note that over 5 years they pull a years interest out of the cert for early termination vs six months for the 3-5 year varieties.

Ayuh. Unless it is in an IRA, you are over 59.5 and wearing a pink tutu at the time of withdrawal. I think 5 years is the way to go if you want to jump in this particular pool.

[cute fuzzy bunny]

So since you're on, care to contrast this with the ISM offering? Looks to me like for periods of CPI exceeding 2.5% ISM would pay better...for periods of less than that, this would be better...?

[brewer12345]

Quote:

Originally Posted by El Guapo So since you're on, care to contrast this with the ISM offering? Looks to me like for periods of CPI exceeding 2.5% ISM would pay better...for periods of less than that, this would be better...?

Put it this way: My parents are extremely conservative investors. The CD is perfect for them. They had some loose cash in a savings account, and some ducats floating around in a brokerage account I manage for them. When ISM got really, really close to 21, I put every spare penny already in the brokerage account into ISM rather than the CD. As ISM rises, the CD gets more attractive.

At current prices, you have to assume that inflation will stay at ~2% or lower to come out ahead with the CD. But ISM has a lot longer maturity and more volatility vs. the CD.

[FIRE'd@51]

I suppose one could argue that the credit quality of the CD (with FDIC) is better since ISM is single A. On the other hand, if the Fed begins to cut rates later this year, real rates will likely drop and one could sell ISM at a profit.

[brewer12345]

Quote:

Originally Posted by FIRE'd@51 I suppose one could argue that the credit quality of the CD (with FDIC) is better since ISM is single A. On the other hand, if the Fed begins to cut rates later this year, real rates will likely drop and one could sell ISM at a profit.

Yup, that's the trade-off. Having said that, I fully expect that SLM Corp. (issuer of ISM) will pay every coupon and principal on time and any takeover is likely to result in a ratings upgrade of teh debt.

[DRiP Guy]

I told you guys I would update you incrementally, and I also saw some incredulity over the combo of Penn Fed's great CD rates versus low fixed mortgage rates.

I got a letter today from PenFed telling me they got my money. Yay! Included in the letter was a list of fees. It looks to be about forty different fees (I am not making this up), including an "International Transaction Fee", "bad adress fee", etc, in addition to your more pedestrian NSF, paper statement, and non-network ATM stuff.

So I think they probably make a ton of money off of credit cards, shorter term loans (military signature loans, motorcycles, personal loans, etc) and fees from those who are unaware or too lazy to plan. I think most people reading this forum would manage their funds well enough to avoid most of these fees, but then, most people aren't readers of this forum!

Don't forget also that the beauty of Credit Unions is that 1) They are there to benefit the members, not to sell you out as part of a multinational M&A with golden parachutes for the scoundrels, 2) they don't have all of the overhead and fees that traditional banks do.

To steal from Martha, "It's a good thing."

[OAG]

Well they did match PENFED but only on the $20K CD's.

[Nords]

Quote:

Originally Posted by Old Army Guy Well they did match PENFED but only on the $20K CD's.

OAG, I dragged up this old thread and merged your post into it.

I called NFCU Monday (22 Jan) and was told that they'd be offering a special deal on 5 Feb-- $8K minimum for 15 months at 6%. Since this was just an official rumor and not fact, and because it wouldn't start up until after PenFed's special ended, I pointed out the "bird in the hand, two in the bush" aspect. NFCU's customer-service rep pretty much said "Yeah, we don't care."

But she was able to cash in our NFCU CD which I immediately EFT'd over to PenFed. Not only did we get a shorter term, but at PenFed's higher interest rate we'll make up the early redemption penalty in 22 months of their 36-month CD.

I guess NFCU's deal is good for those who aren't able to get over to PenFed by the end of this month. But we'll have to see if they really do have that offer up on their website on 5 Feb...

[OAG]

Thank Nords -- I was too lazy to go hunt this thread this morning. Interesting on the 8K CD but guess we have to wait and see. When this thing started the PENFED rumor was 6.0% +/- for 3 months. The 6% part turned out to be true -- I wonder if the 3 month part will turn out to be true. Based on the numbering of CD's I purchased at the start of the 6.25% rate and yesterday it appears PENFED has sold in excess of 15,000 of these things in about 3 weeks. Wonder where all the cash is going.

[d]

i'd not consider it likely that the penfed 6.25% will continue past end Jan

[JohnEyles]

Quote:

Originally Posted by d i'd not consider it likely that the penfed 6.25% will continue past end Jan

They actually say it's only valid 'til Jan 31. I guess they have the option to extend ...

[jazz4cash]

I can't believe how awkard it's been to do rollover from Fidelity IRA to Penfed. Fidelity has a lot more restrictions compared to the last time I did this. Classic case of "you go first, .....No, YOU go first, NO,........". Anyway, I went into the PenFed branch at the VA hospital today (one of the few that don't require military ID), and opened an IRA share account to xfer the funds from Fidelity into, and then purchase the certificate.

Sensing my frustration, the PenFed rep "volunteered" that the certificate rate after jan 31 will be 6.0%...............still pretty good, if accurate!

[cute fuzzy bunny]

Hmm...I mailed in my certificate forms yesterday. I wonder if their cut off is based on the date on the form (1/23), the postmark date (1/24) or when they receive it...which should be before 1/31, but no guarantees.

:P