When investing, you often want to know how much money an investment is likely to earn you. That’s where the expected rate of return comes in; expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.
Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting expectations for a good return on investment.
Key Points
• The expected rate of return is the profit or loss an investor expects from an investment based on historical rates of return and the probability of different outcomes.
• The formula for calculating the expected rate of return involves multiplying the potential returns by their probabilities and summing them.
• Historical data can be used to estimate the probability of different returns, but past performance is not a guarantee of future results.
• The expected rate of return does not consider the risk involved in an investment and should be used in conjunction with other factors when making investment decisions.
What Is the Expected Rate of Return?
The expected rate of return — also known as expected return — is the profit or loss an investor expects from an investment, given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.
Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return on an investment, investors get an idea of how that investment may perform in the future.
This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.
However, it’s important to remember that past performance is far from a guarantee of future performance. Investors should be careful not to rely on expected returns alone when making investment decisions.
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How To Calculate Expected Return
To calculate the expected rate of return on a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.
The formula for expected rate of return looks like this:
In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.
For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: all the probabilities must add up to 100%)
The expected return on this investment would be calculated using the formula above:
Expected Return = (40% x 20%) + (50% x 10%) + (10% x -10%)
Expected Return = 8% + 5% – 1%
Expected Return = 12%
What Is Rate of Return?
The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.
A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss in an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).
Recommended: What Is the Average Stock Market Return?
How to Calculate Rate of Return
The formula to calculate the rate of return is:
Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100
Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.
In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10
A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.
Recommended: What Is Considered a Good Return on Investment?
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Different Ways to Calculate Expected Rate of Return
How to Calculate Expected Return Using Historical Data
To calculate the expected return of a single investment using historical data, you’ll want to take an average rate of returns in certain years to determine the probability of those returns. Here’s an example of what that would look like:
Annual Returns of a Share of Company XYZ
Year
Return
2011
16%
2012
22%
2013
1%
2014
-4%
2015
8%
2016
-11%
2017
31%
2018
7%
2019
13%
2020
22%
For Company XYZ, the stock generated a 21% average rate of return in five of the ten years (2011, 2012, 2017, 2019, and 2020), a 5% average return in three of the years (2013, 2015, 2018), and a -8% average return in two of the years (2014 and 2016).
Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.
The expected return on a share of Company XYZ would then be calculated as follows:
Expected return = (50% x 21%) + (30% x 5%) + (20% x -8%)
Expected return = 10% + 2% – 2%
Expected return = 10%
Based on the historical data, the expected rate of return for this investment would be 10%.
However, when using historical data to determine expected returns, you may want to consider if you are using all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.
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How to Calculate Expected Return Based on Probable Returns
When using probable rates of return, you’ll need the data point of the expected probability of an outcome in a given scenario. This probability can be calculated, or you can make assumptions for the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.
Expected Rate of Return for a Stock of Company ABC
Scenario
Return
Probability
Outcome (Return * Probability)
1
14%
30%
4.2%
2
2%
10%
0.2%
3
22%
30%
6.6%
4
-18%
10%
-1.8%
5
-21%
10%
-2.1%
Total
100%
7.1%
Using the expected return formula above, in this hypothetical example, the expected rate of return is 7.1%.
Calculate Expected Rate of Return on a Stock in Excel
Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):
1. In the first row, enter column labels:
• A1: Investment
• B1: Gain A
• C1: Probability of Gain A
• D1: Gain B
• E1: Probability of Gain B
• F1: Expected Rate of Return
2. In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2 – E2
• Note that the probabilities in C2 and E2 must add up to 100%
3. In F2, enter the formula = (B2*C2)+(D2*E2)
4. Press enter, and your expected rate of return should now be in F2
If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.
If there’s a possibility for loss, that would be negative gain, represented as a negative number in cells B2 or D2.
Limitations of the Expected Rate of Return Formula
Historical data can be a good place to start in understanding how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide; it’s not necessarily predictive.
Another limitation to the expected returns formula is that it does not consider the risk involved by investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.
In this historical return example above, 10% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2014 and 2016. The variability of returns is often called volatility.
Standard Deviation
To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (values’ range) relative to its mean. The larger the standard deviation, the larger the range of returns.
Consider two different investments: Investment A has an average annual return of 10%, and Investment B has an average annual return of 6%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher and lower than with Investment B.
Year
Annual Return of Investment A
Annual Return of Investment B
2011
16%
8%
2012
22%
4%
2013
1%
3%
2014
-6%
0%
2015
8%
6%
2016
-11%
-2%
2017
31%
9%
2018
7%
5%
2019
13%
15%
2020
22%
14%
Average Annual Return
10%
6%
Standard Deviation
13%
5%
Investment A has a standard deviation of 13%, while Investment B has a standard deviation of 5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.
Recommended: A Guide to Historical Volatility
Systematic and Unsystematic Risk
All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic risks. Systematic risk affects an entire investment type. Investors may struggle to reduce the risk through diversification within that asset class.
Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.
In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than healthcare and energy companies. This type of risk can be mitigated with portfolio diversification, the process of purchasing different types of investments.
Expected Rate of Return vs Required Rate of Return
Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.
What Is the Dividend Discount Model?
Investors may use the dividend discount model to determine an investment’s required rate of return. The dividend discount model can be used for stocks with high dividends and steady growth. Investors use a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.
The formula for the required rate of return using the dividend discount model is:
So, if you have a stock paying $2 in dividends per year and is worth $20 and the dividends are growing at 5% a year, you have a required rate of return of:
RRR = ($2 / $20) + 0.5
RRR = .10 + .05
RRR = .15, or 15%
What is the Capital Asset Pricing Model?
The other way of calculating the required rate of return is using a more complex model known as the capital asset pricing model.
In this model, the required rate of return is equal to the risk-free rate of return, plus what’s known as beta (the stock’s volatility compared to the market), which is then multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.
The formula is:
RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)
For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and a risk-free rate of 1%. Using the formula, the required rate of return would be:
RRR = .01 + 1.5 x (.05 – .01)
RRR = .01 + 1.5 x (.04)
RRR = .01 + .06
RRR = .07, or 7%
The Takeaway
There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.
There’s no guarantee that the actual performance of a stock, fund, or other assets will match the expected return. Nor does expected return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.
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FAQ
How do you find the expected rate of return?
An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.
How do you calculate the expected rate of return on a portfolio?
The expected rate of return on a portfolio is the weighted average of the expected rates of return on the individual assets in the portfolio. You first need to calculate the expected return for each investment in a portfolio, then weigh those returns by how much each investment makes up in the portfolio.
What is a good rate of return?
A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if its performance is consistent, while others may be more aggressive and aim for a higher rate of return even if it is more volatile. Ultimately, it is up to the individual to decide what is considered a good rate of return.
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Key Fed inflation metric expected to drop June 28 following unexpected decline in May wholesale prices and jump in jobless claims to highest level since August 2023.
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Federal Reserve policymakers said Wednesday they wanted more evidence that inflation is subsiding before cutting interest rates. A day later, they get some.
Two reports out Thursday showed May jobless claims jumped to their highest level since August 2023 and that wholesale prices unexpectedly dropped last month.
An estimated 242,000 workers filed initial claims for unemployment insurance during the week ending June 8, the Department of Labor reported, up 13,000 from the week before and close to 20,000 more claims than forecast by economists.
Initial jobless claims surge
“Initial claims have been drifting up for some time, but the big increase this week leaves the uptrend far harder to dismiss,” Pantheon Macroeconomics Senior U.S. Economist Oliver Allen said in a note to clients.
Oliver Allen
“High long-term rates, tight credit conditions and a gradual softening in demand are starting to weigh more heavily on businesses, and on small companies in particular,” Allen said. “Greater layoffs will probably mean that the labor market starts to look a lot weaker very soon, especially when combined with the meaningful slowdown in gross hiring suggested by most of the business surveys.”
Thursday’s wholesale prices report, formally known as the Producer Price Index (PPI), tracks demand, prices and profit margins for goods ranging from diesel fuel to eggs and services like freight and cargo transportation.
The PPI for final demand fell by a seasonally adjusted 0.2 percent in May, the Bureau of Labor Statistics reported Thursday. Economists had expected headline PPI to moderate from the 0.5 percent increase registered in April but projected the index would still manage to eke out 0.1 percent growth in May.
Bond market investors — who had already sent mortgage rates plummeting Wednesday after the latest Consumer Price Index reading showed inflation easing in May — kept the rally going Thursday, bringing 10-year Treasury yields down another 6 basis points.
Mortgage rates trending down
Rates for 30-year fixed-rate mortgages, which are largely determined by investor demand for mortgage-backed securities, dropped 14 basis points on Wednesday, to 6.84 percent, according to rate lock data tracked by Optimal Blue. A basis point is one-hundredth of a percentage point.
That’s a 43 basis-point drop from a 2024 high of 7.27 percent registered April 25, and mortgage rates are likely to keep tracking down with 10-year Treasury yields, a barometer for mortgage rates. An index maintained by Mortgage News Daily showed rates for 30-year fixed-rate loans eased again on Thursday, but only by a single basis point.
Key Fed inflation metric set to drop June 28
But mortgage rates have now come down nearly half a percentage point from this year’s highs — and could be poised for another big drop when the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is updated on June 28.
CPI and PPI are key components of the PCE price index. Now that the latest CPI and PPI numbers are out, forecasters at Pantheon Macroeconomics have run the numbers for what core PCE — which excludes food and energy costs — might look like when the numbers for May are released in two weeks.
Fed policymakers took some of the momentum out of Wednesday’s CPI-fueled bond rally when they released economic projections indicating that they only expect to cut rates once this year, by 25 basis points. The Fed wants to see more evidence that inflation is moving toward its 2 percent annual target before cutting rates more drastically, Chair Jerome Powell said.
The Fed’s latest forecasts imply they expect core PCE to rise at an average pace of 0.19 percent each month from May through December, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Thursday.
But Pantheon’s mapping of PPI and CPI data suggests core PCE increased by just 0.11 percent in May — a drastic slowdown from the 0.32 percent average increase in the first four months of 2024.
Ian Shepherdson
“We don’t know what policymakers specifically penciled in for May, but our estimate points to a material downside surprise,” Shepherdson said. “Meanwhile, the outlook for slower rent gains, falling wage inflation, and margin compression at retailers suggests that the core PCE deflator will continue to rise more slowly than the Fed predicted this week, laying the foundations for the first rate cut to come in September and multiple easings this year.”
When last updated, the full PCE index was up 0.26 percent from March to April, and 2.65 percent from a year ago. That’s much closer to the Fed’s 2 percent inflation target than in June 2022, when inflation peaked at 7.12 percent.
Pantheon Macroeconomics forecasters predict the Fed will ultimately cut the short-term federal funds rate by 1.25 percentage points this year, starting with a 25 basis-point cut in September followed by 50 basis-point reductions in November and December.
While that’s more aggressive than many forecasts, futures markets tracked by the CME FedWatch tool on Thursday put the odds of two or more Fed rate cuts by the end of the year at 71 percent, up from 53 percent on May 13.
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Even when flying on a long-haul flight across the Atlantic Ocean, it can be tough to fully disconnect.
British Airways realizes this and offers Wi-Fi on most of its aircraft. However, between two different speed options, three currency options and up to three connection lengths, passengers may be overwhelmed by choice.
Here’s what you need to know about British Airways Wi-Fi, its availability, pricing options and how you might be able to get it for free.
Does British Airways have Wi-Fi?
British Airways was relatively late in installing Wi-Fi on its aircraft, with its first three aircraft only connected in 2018. However, British Airways now offers Wi-Fi on most of its flights — both long-haul and short-haul.
Unfortunately, the London-based airline doesn’t publish which particular aircraft types are connected and doesn’t let passengers check in advance if their flight will have Wi-Fi capabilities.
Instead, the airline advises passengers to wait for an announcement onboard to see if their flight is connected.
Alternatively, travelers can look for a small “hump” on the top of their aircraft or a “.air” sticker near the boarding door.
British Airways Wi-Fi coverage map
British Airways Wi-Fi is available over most of the globe, including most of the key transatlantic routes between the U.S. and British Airways’ hub in London.
However, it’s important to note that you may lose connection mid-flight. Wi-Fi is not available as the aircraft travels to high latitudes, or over India.
British Airways Wi-Fi speeds
British Airways doesn’t publish expected speeds for its two connection tiers, “Browse and stream” (higher speeds) and “Messaging” (slower speeds).
On a recent flight from London to Budapest, I was rather disappointed by the slow speeds for the more-expensive “Browse and stream” package. When I ran a speed test, I found that the connection seemed to be throttled to 1.4Mbps.
That’s a rather low speed for for less than two hours of connection for $11.
British Airways Wi-Fi Cost
The cost of British Airways Wi-Fi depends on several factors, including the length of the flight, the tier of the connection, how long you want to be connected and even the currency in which you pay.
Let’s take a flight from New York-John F. Kennedy to London-Heathrow as an example. When paying in US dollars, the faster “Browse and stream” connection costs:
$6.99 for 1 hour.
$16.49 for 4 hours.
$20.99 for a full-flight pass.
Meanwhile, the BA Wi-Fi cost for the slower “Messaging” connection is:
$4.49 for 1 hour.
$6.99 for a full-flight pass.
Meanwhile, on a shorter flight from London-Heathrow to Budapest, passengers have just three British Airways Wi-Fi connection options:
$4.49 for a full-flight “Messaging” pass.
$6.99 for a 1-hour “Browse and stream” pass.
$10.99 for a full-flight “Browse and stream” pass.
How to get free (or cheap) British Airways Wi-Fi
Use exchange rates to your advantage
Travelers may be able to save on their British Airways Wi-Fi cost by choosing to pay in a foreign currency.
As an example, let’s review the (overwhelming) 15 Wi-Fi pricing options from New York to London and their USD equivalents at current exchange rates:
Connection tier
€3.49 = $3.77.
£2.99 = $3.77.
Flight pass.
€5.99 = $6.47.
£4.99 = $6.29.
Browse and stream
€5.99 = $6.47.
£4.99 = $6.29.
Browse and stream
€13.49 = $14.58.
£11.99 = $15.10.
Browse and stream
Flight pass.
€16.99 = $18.36.
£14.99 = $18.88.
At the time of writing, paying in U.S. dollars is the most expensive option in every case, although the least-expensive currency varies between euros and pounds.
🤓Nerdy Tip
If you want to save a few bucks, it’s worth checking the current exchange rate to see which option is best.
Fly first class
British Airways offers free Wi-Fi connection for passengers flying in first class.
Unlike similar offerings from its competitors, passengers don’t have to book through a particular channel to get this free connection (e.g. Emirates, who offers no free connection if you book using partner miles), and you don’t have to get a paper voucher from the crew and scratch off to reveal a code (e.g. Etihad Airways).
Instead, if you’re flying in British Airways first class, simply connect to the BA Wi-Fi network and open shop.ba.com. There, you should see a banner for “Free Wi-Fi if you are flying in first.” Click “Connect now” and then enter your seat number and last name in the form to activate your connection.
Spend wisely with the right credit card
But if you pay for your Wi-Fi connection using a travel card that includes an airline spending credit that can be applied to in-flight Wi-Fi, you can consider it free.
Cards that cover airline Wi-Fi fees
The Platinum Card® from American Express
Bank of America® Premium Rewards® credit card
on Bank of America’s website
Chase Sapphire Reserve®
on Chase’s website
Annual fee
Airline spending credits
Up to $200 annually with your preferred airline. Enrollment required. Terms apply.
Up to $100 annually.
$300 annual statement credit for travel purchases.
Still not sure?
How to connect to Wi-Fi on British Airways
British Airways activates the Wi-Fi connection when the aircraft is above 10,000 feet. That means you’ll need to wait until around 10 minutes after takeoff to connect, and you’ll be disconnected about 10 minutes before landing. That differentiates it from some U.S.-based airlines which offer a gate-to-gate Wi-Fi connection.
Once above 10,000 feet, turn on your Wi-Fi connection, connect to the BAWi-Fi network, and browse to shop.ba.com — if you aren’t automatically redirected.
Keep in mind that British Airways doesn’t let you switch between devices using the same Wi-Fi pass. So, you’ll want to be intentional about choosing which device you connect.
The bottom line
You have a pretty good chance of getting a Wi-Fi-enabled aircraft on your next British Airways flight. However, you won’t know for sure until you’re at your gate and can see if the aircraft has the tell-tale radome bump.
Depending on the flight, British Airways offers up to five different Wi-Fi packages, each of which can be purchased in one of three currencies. The cheapest option will depend on current exchange rates, so it might be worth having an updated currency converter app on your phone to do some quick math.
To view rates and fees of The Platinum Card® from American Express, see this page.
A banker’s acceptance (or BA) is a financial instrument used to guarantee large future transactions, often in the import/export markets. As a debt instrument, it can function as an investment, commonly traded between large banks and institutional investors on the secondary market. It can trade at a discount to par like U.S. Treasury bills in money markets.
BAs play a key role in facilitating international trade and in broader fixed-income markets. While you may not own an individual banker’s acceptance in your checking account, these instruments help promote sound and liquid markets.
What Is Banker’s Acceptance?
A banker’s acceptance (which you may see written as bankers acceptance) is a short-term form of payment guaranteed by a bank; it is often used for international trade transactions.
Banks often make money on the spread between the buy and sell price on a fixed-income asset or through fees and commissions. BAs commonly have a maturity of between 30 and 180 days and trade at a discount to par. Functioning like a post-dated check, they are seen as a relatively safe method of payment for large transactions. BAs are considered short-term debt instruments.
Here are some more details about banker’s acceptance and how these instruments work.
• The BA is issued and priced based on the creditworthiness of the issuing bank. An investment banker earns a commission for making the transaction.
• Only customers with a strong credit history can access the BA market. These entities are often corporations involved in international trading (import/export) markets.
• A banker’s acceptance can also be highly marketable and liquid, allowing money to transfer from one bank to another.
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How Banker’s Acceptance Works
A banker’s acceptance is considered a time draft. A business can request one from a bank as a way of gaining enhanced security while conducting a deal. The bank essentially promises to pay the firm that is exporting goods a particular amount of money on a certain date. When it does this, it takes funds out of the importer’s bank account.
Typically, the term of a banker’s acceptance is between 30 and 180 days.
Who Issues Banker’s Acceptance?
Not all banks offer BAs. Businesses with a good relationship with a large bank can obtain a banker’s acceptance. It can be an appealing product for an institution entering a large-value transaction. Like signing a check over to someone, the account holder must have enough cash to execute the transaction.
More than a simple checking account transaction, though, obtaining a BA typically requires an amount of credit to be detailed. There are usually fees involved in obtaining a BA, too.
Who Buys Banker’s Acceptances?
Banker’s acceptances are traded by banks and securities dealers on a secondary market, similar to how debt instruments are traded. They are available for a discount on its face value. The exact value may vary with the rating of the bank that has promised payment on the banker’s acceptance.
How Banker’s Acceptance Is Used
Here’s more detail on how banker’s acceptances can be used.
Checks
Think of a banker’s acceptance as a certified check. It’s a relatively safe way to do a transaction. The money owed is guaranteed on a specific date listed on the BA bill. Credit analysis is usually done to verify the creditworthiness of the issuer, so it’s a bit different than how a bank will verify a check before you deposit it.
BAs are frequently used to facilitate the international trading of goods. A buyer of imported products can issue a BA with a payment date after a shipment is scheduled to be delivered. The seller exporting can then take payment before finalizing the shipment. The exporter in this case can hold the BA to maturity or sell it on the secondary market. Unlike a check, the BA is backed by the guarantee of the bank, not an individual.
Investments
Aside from the import/export market, bankers’ acceptances are used commonly in the investment world. Buyers might purchase a BA and hold it to maturity to effectively earn a rate of return on short-term money. Since BAs are seen as very low-risk products, they are used as a cash-like security.
Still, retail consumers usually won’t be able to purchase a BA in an online or traditional retail bank. The purchase is, as noted above, only available to certain financial entities.
Recommended: What Are Some Safe Types of Investments?
Pros and Cons of Banker’s Acceptance
There are a number of positive aspects of bankers’ acceptances to consider.
Pros
First, the upsides of BAs:
Provides Seller Assurances Against Default
Backed by the guarantee of a bank, a banker’s acceptance is regarded as a high-quality fixed-income security that is often liquid and highly marketable. For importers and exporters, financial transactions can be made to facilitate international trading of goods without the risk that one party goes bust.
Buyer Does Not Have to Prepay for Goods
A banker’s acceptance works like a promissory note so the buyer does not have to prepay. Liability can immediately transfer from the issuer of the banker’s acceptance to the bank. The payment is likely debited only on the due date.
Enhances Confidence in the Deal
Part of the process of issuing a banker’s acceptance is usually having a good credit standing and a relationship with a major bank. Since high-risk customers might not be considered, there is strong confidence in BAs traded. There would be no need for the exporting company to worry about default risk; that lies with the banker. While individual investors often do not engage in BA trading, there are important traditional banking alternatives that feature financial solutions to help facilitate transactions.
Cons
While there are many positive aspects of bankers’ acceptances, there are still some risks for those involved in the transaction and trading of BAs. Consider the following:
Bank May Require Buyer to Post Collateral to Hedge Risk
Collateral is sometimes required for a deal to happen. Collateral provides a backstop should the importer be unable to pay. It can reduce risks to the bank and expedite the deal. Think of it like seller concessions to get a deal done, though collateral is generally not used when buying and selling a home.
Buyer May Default
With a banker’s acceptance, the bank accepts default risk, which can be a downside. The issuing bank typically must honor the payment terms even if the account holder, perhaps an importing/exporting corporation, does not have the cash on the payment date. Not all banks choose to be in this market due to the risk that the buyer could default.
Potential Liquidity Risk
Liquidity risk means an individual or financial institution cannot meet its debt obligations in the short term. Investors may not encounter liquidity risk with a banker’s acceptance instrument, but the issuing bank could have liquidity risk from the importer who must pay. This may be a key consideration for a bank issuing a BA. The secondary market for banker’s acceptance products remains highly liquid.
Pros of BAs
Cons of BAs
Provides assurance vs. default
Bank may require collateral
Buyer doesn’t need to prepay for goods
Buyer may default
Enhances confidence that deal will work
Potential liquidity risk
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The Takeaway
A banker’s acceptance is a debt instrument that plays a key role in well-functioning capital markets. BAs help facilitate international trade through bank guarantees. Knowing about this important fixed-income product type can help individuals understand financial markets and institutions.
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FAQ
What is the difference between a letter of credit and a banker’s acceptance?
A letter of credit is a financial instrument that a bank issues for a buyer (the bank client) guaranteeing that a seller will be paid. A banker’s acceptance, on the other hand, guarantees that the bank will pay for a future transaction, rather than the individual account holder.
What is a banker’s acceptance in a real-life example?
An example of a banker’s acceptance would be that, on April 1st, the Acme Bank sends a BA to Back-to-School Supplies, saying it will make funds available on June 1st for a shipment of goods for their client. On June 1st, the school supply company will be able to withdraw those funds.
How safe are banker’s acceptances?
Banker’s acceptances are a relatively safe transaction for all involved, but the exact degree will vary with the creditworthiness of the bank guaranteeing the funds.
Is a banker’s acceptance a short-term investment?
Banker’s acceptances are considered a short-term investment or debt instrument. They are usually traded at a discount, and they are seen as similar to Treasury bills.
Is a banker’s acceptance a loan?
A banker’s acceptance isn’t a loan. It’s a short-term debt instrument, typically with a maturity date of 30 to 180 days.
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Almost all mortgage rates have dropped. The 30-year fixed rate is 6.50%, and the 15-year fixed rate is 5.75%.
Mortgage rates have been ticking down for days — but you’re probably wondering when mortgage rates will go down enough to make a noticeable impact on your monthly payments. When will rates plummet?
The answer? Probably not in 2024 — but possibly in 2025. The Federal Reserve should only cut the federal funds rate once this year; however, it will likely slash the rate four times in 2025. When the federal funds rate falls, mortgage rates tend to follow suit.
Read more: Mortgage rates dip below 7%, but meaningful declines are still months away
Current mortgage rates
Here are the current mortgage rates, according to the latest Zillow data:
30-year fixed: 6.50%
20-year fixed: 6.08%
15-year fixed: 5.75%
5/1 ARM: 6.66%
7/1 ARM: 6.56%
30-year FHA: 5.91%
15-year FHA: 5.89%
30-year VA: 5.84%
15-year VA: 5.28%
5/1 VA: 6.08%
Remember, these are the national averages and rounded to the nearest hundredth.
Learn more: Is it a good time to buy a house?
30-year vs. 15-year fixed mortgage rates
The average 30-year mortgage rate today is 6.50%. A 30-year term is the most popular type of mortgage because by spreading out your payments over 360 months, your monthly payment is lower than with a shorter-term loan.
The average 15-year mortgage rate is 5.75% today. When deciding between a 15-year and a 30-year mortgage, consider your short-term versus long-term goals.
A 15-year mortgage comes with a lower interest rate than a 30-year term. This is great in the long run because you’ll pay off your loan 15 years sooner, and that’s 15 fewer years for interest to accumulate. But the trade-off is that your monthly payment will be higher as you pay off the same amount in half the time.
Let’s say you get a $300,000 mortgage. With a 30-year term and a 6.50% rate, your monthly payment toward the principal and interest would be about $1,896 and you’d pay $382,633 in interest over the life of your loan — on top of that original $300,000.
If you get that same $300,000 mortgage but with a 15-year term and 5.75% rate, your monthly payment would jump up to $2,491 — but you’d only pay $148,421 in interest over the years.
Fixed-rate vs. adjustable-rate mortgages
With a fixed-rate mortgage, your rate is locked in for the entire life of your loan. You will get a new rate if you refinance your mortgage, though.
An adjustable-rate mortgage keeps your rate the same for a predetermined period of time. Then, the rate will go up or down depending on several factors, such as the economy and the maximum amount your rate can change according to your contract. For example, with a 7/1 ARM, your rate would be locked in for the first seven years, then change every year for the remaining 23 years of your term.
Adjustable rates typically start lower than fixed rates, but once the initial rate-lock period ends, it’s possible your rate will go up. Lately, though, fixed rates have been starting lower than adjustable rates.
Dig deeper: Adjustable-rate vs. fixed-rate mortgage
How to get a low mortgage rate
Mortgage lenders typically give the lowest mortgage rates to people with higher down payments, great or excellent credit scores, and low debt-to-income ratios. So if you want a lower rate, try saving more, improving your credit score, or paying down some debt before you start shopping for homes.
Waiting for rates to drop probably isn’t the best method to get the lowest mortgage rate right now unless you are truly in no rush and don’t mind waiting until the end of 2024 or into 2025. If you’re ready to buy, focusing on your personal finances is probably the best way to lower your rate.
Learn more: How to get the lowest mortgage rates
How to choose a mortgage lender
To find the best mortgage lender for your situation, apply for mortgage preapproval with three or four companies. Just be sure to apply to all of them within a short time frame — doing so will give you the most accurate comparisons and have less of an impact on your credit score.
Dig deeper: Best mortgage lenders for first-time buyers
When choosing a lender, don’t just compare interest rates. Look at the mortgage annual percentage rate (APR) — this factors in the interest rate, any discount points, and fees. The APR, which is also expressed as a percentage, reflects the true annual cost of borrowing money. This is probably the most important number to look at when comparing mortgage lenders.
In regards to your recent “When to Take Social Security” article, you left something out. You can take Social Security early (say, age 62), then invest that money, and your investment will end up better than if you had waited on Social Security until age 67 or age 70.
Interesting! But does the math work? Let’s dive in. Should you take Social Security early and invest it?
What Kind of “Returns” Do You Get For Waiting on Social Security?
Let’s start by looking at Social Security. What kind of “return on investment” do you receive by delaying your Social Security decision?
There’s no easy way to do this today without a spreadsheet, so we will use this Google Sheet to show you some math. (I keep the original file pristine so all readers see the same numbers, but you can go to File –> Make a Copy to create your own copy of the file to play around with.)
For starters, we need to understand how retirees’ benefits change as they age. Depending on their birth year, today’s retirees reach their “Full Retirement Age” (FRA) at 66 or 67 years old. Depending on the age at which they apply for Social Security, they’ll receive a certain percentage of their full benefits, described in the table below.
To make the math easy, we will assume our retiree’s Primary Insurance Amount (PIA)…aka the amount you receive if you wait until FRA…is $1000 per month. So “100%” on the table above equals $1000 per mont
The longer our retiree waits, the higher their monthly payments will be. But what does that look like as an “investment?” And how does inflation factor in?
What About Inflation?
The Social Security Administration adjusts everybody’s Social Security payments yearly to account for inflation. This “cost of living adjustment” is often shortened to “COLA.”
The average COLA adjustment since 1975 has been 3.66%. We need to include that in our spreadsheet too.
Baseline Analysis – No Investments Yet
Let’s start with a baseline analysis. We’ll examine a series of retirees who collect their Social Security monthly, and immediately spend it. They make no investments with their Social Security cash flow. We could conceptualize this as hiding those dollars underneath their mattresses.
We’ll compare results by looking at the total dollar amounts collected over time. This will be our baseline analysis. You can follow along on the spreadsheet tab labeled “No Investment Return (Yet) – Nominal Dollars Only”
The results: in this scenario, early collection only makes sense for a retiree who dies before age 74. This should make sense. We know that delaying Social Security makes more and more sense the longer someone lives.
Let’s add in investment returns.
Analysis 1: Investing in a 4.7% Savings Account
Let’s consider a retiree who takes all of their Social Security income and deposits it into a savings account bearing 4.7% annual interest.
Why 4.7%? That’s the average overnight Federal Funds rate since 1960, and modern-day high-yield savings accounts tend to offer interest rates that are closely correlated to the Fed Funds rate.
Note: if your personal pile of cash isn’t in a high-yield savings account, you should ask yourself why that is…
The results: if you pass away at age 77 or earlier, collecting earlier makes sense. Otherwise, waiting until FRA or later likely makes sense. This is no different than “traditional” Social Security advice.
Analysis 2: Investing in a “Standard” 60/40 Portfolio
What if our retirees put their money in a tried-and-true 60/40 portfolio?
From 1950 until today, that kind of diversified 60/40 portfolio has returned an average of 9.3% per year.
The results: Whoa! As shown on the “A2” tab, collecting as early as possible makes sense for anyone who would pass away before age 88.
We know, on average, most 62 years olds are going to pass away well before age 88. The smart, probabilistic thing to do then, is collect Social Security as early as possible and invest it in something like a 60/40 portfolio (or, something with greater returns).
But wait…because I’ve only showed you half the story. And that’s a major problem.
Big Problem: What’s the Risk?
If we zoom out on reader DT’s idea as originally stated, we should confidently conclude: OF COURSE it makes sense! If you have sufficiently high investment returns, you should always start as early as possible.
Even if the benefit of delaying Social Security was 20% per year, but I had an investment that paid me 40% per year, I’d rather start collecting as soon as possible and get the money invested. Given sufficiently high returns, you always want to get the compound growth started.
But we must return, once again, to a foundational pillar of investing and oft-repeated maxim of The Best Interest: Risk and return are intrinsically connected.Returns are not “free.” They are compensation for taking on investment risk.
Whenever an investor compares returns alone, without also comparing the risks involved, they’re making an incomplete analysis. DT’s original question only considers return. It doesn’t consider risk.
What Comparison Makes Sense?
The benefits of delaying Social Security are guaranteed by the U.S. government. That’s very low risk. What kind of investment risk should we compare that to?
I see two viable options.
First, why does Warren Buffett invest all of Berkshire Hathaway’s extra cash into U.S. Treasuries, instead of an S&P 500 index fund? Doesn’t he know the S&P 500 has much better long-term returns?!
Answer: U.S. Treasuries are as risk-free as anything in the investing universe, backed by the full faith and credit of the U.S. government. As long as Uncle Sam pays debts, U.S. treasuries are risk-free. The S&P 500 is far from risk-free, and Buffett knows it. He wants his cash to be safe and ready for deployment at a moment’s notice. The S&P 500 cannot fulfill that need.
The first logical comparison today, then, is to use a true “risk-free” rate as our investment return. Something like a high-yield bank account (FDIC insured) or short-term U.S. Treasury is appropriate. Conveniently, we already did that in Analysis #1, where our conclusion is no different than traditional Social Security advice: the “break even” point occurs in the late 70s.
Note: this is reason for the concept of “risk-adjusted returns.”To compare only the returns of two investments is not an apples-to-apples comparison.
The second option is to show the downsides of Analysis #2. That is, to show how 9.3% per year from a 60/40 portfolio is far from a guarantee. More specifically, I’d like to show how the downside risk of a 60/40 portfolio could turn our result on its head. What happens if we suffer some bad markets during our early Social Security period?
Looking at historical returns, a 60/40 portfolio has had 10-year periods with returns below 2% per year. What if we started our Social Security timeline with that kind of low return, and then made up for it at the end of the analysis? That’s what I show on our spreadsheet on the A3 tab.
The results? The 60/40 “solution” comes with risks! In this scenario, “taking Social Security early and investing it” only worked out if our retiree died before age 75. That’s not a good outcome. Doubly so if Social Security is a safety net or backstop in your financial plan.
To Apply or Not Apply
If your Social Security is “play money” in your financial plan, and you’re ok with risking a loss, then I can see the merit and appeal of DT’s proposal. You can apply for Social Security early, invest it (reasonably), and the odds are in your favor that you’ll end up in a good spot.
But it’s no guarantee.
And the entire point of the Social Security system is to provide a guaranteed benefit to retirees. If Social Security plays even a minor role in your financial plan, I would strongly discourage putting that money at investment risk to eek out extra returns.
When we make a level comparison by using a risk-free rate, like in Analysis #1, we see there is no net benefit to taking Social Security early to invest it.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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Victor Ciardelli beamed as his mortgage company, Chicago-based Guaranteed Rate, launched a “financial wellness” and “personal well-being” app last fall before a live audience in Times Square with wellness celebrity Deepak Chopra.
“Something we are passionate about at Guaranteed Rate is caring about people and their overall well-being,” Ciardelli said in a video of the event posted online. “We wanted to make sure that we did something to help people in their general stress and alleviate pain.”
But in the days following the launch of the app, which offers home loan applications and other financial services alongside yoga classes and nutrition advice, Ciardelli wasn’t happy. Yelling at executive leadership on company calls, he referred to his employees as “failures,” complained that the team did not show him from a particular camera angle and said “Marketing is a f−−−ing disaster,” according to two executives who were on the calls.
Despite Ciardelli’s public remarks on the importance of personal well-being, many former employees told the Tribune they experienced or witnessed persistent verbal abuse and a misogynistic environment while working at Guaranteed Rate. As part of a Tribune investigation, reporters interviewed nearly 80 former employees and reviewed court records, internal company emails, written exit interviews and text messages.
Many of the former staff members who spoke with the Tribune described Ciardelli, the company’s president, CEO and founder, as a boss who was quick to berate, swear at and demean employees.
“Every person that works directly under Mr. Ciardelli is terrified of his potential anger outbursts,” one former assistant wrote to human resources after she was let go from the company a couple of years ago, according to an email reviewed by the Tribune.
Some former employees who spoke with the Tribune said they were driven to seek mental health care because of the work environment at the company; one former worker said she contacted a suicide hotline last year.
Multiple women who used to work at Guaranteed Rate, meanwhile, described working in a sexualized atmosphere where some male loan officers and managers made sexually explicit remarks to female employees, hit on them in the office or at work events, and commented inappropriately on their appearance — even, in one case, encouraging a woman to use her looks to help close a loan.
In February, a woman who used to work as a loan officer at Guaranteed Rate filed a lawsuit against two high-producing loan officers at the company, alleging sexual harassment and gender discrimination. Her complaint alleges one of the male loan officers sexually harassed her at a corporate event, that the other loan officer pressured her not to report the incident to human resources, and that for the remainder of her employment the man who made the remark used “gender-based and demeaning slurs to refer to” her and other women at the company.
Other former employees said they did not bring their complaints to human resources because they thought Ciardelli or other executives and managers meddled in the department’s business and might retaliate, with at least two former employees saying they’d observed how company leaders protected certain staff members. Others said they did complain but felt the department didn’t take the information seriously.
In response to a detailed list of questions from the Tribune, Ciardelli and Guaranteed Rate vehemently denied all of these allegations, describing the company as a positive workplace environment where women in particular are supported. The firm went to remarkable lengths to dispute the allegations, including sending the results of a worker satisfaction survey it conducted and forwarding more than 80 testimonials from current and former employees. Among them were five of Ciardelli’s current or former assistants, as well as numerous male and female executives praising his leadership and support.
The company also retained an outside law firm that, even before receiving the reporters’ list of questions, threatened to sue the newspaper for defamation.
Guaranteed Rate, whose corporate headquarters is in Chicago’s North Center neighborhood, has grown tremendously since its founding in 2000 to become one of the largest mortgage lenders in the country based on loan volume, according to industry news and data provider Inside Mortgage Finance. Its name has adorned the White Sox stadium since 2016, and as recently as 2018, Guaranteed Rate was named a Chicago Tribune Top Workplace — a distinction based on surveys conducted by an outside company, with no input from editorial staff on the selection.
Jason Scott, a former top-producing loan officer and director of VA lending, which provides home loans to military veterans and active-duty service members, at Guaranteed Rate said his earlier years at the company — when lower mortgage rates fueled industry growth — were positive. But Ciardelli’s outbursts and verbal abuse of employees grew more noticeable, he said, when rising interest rates started to erode those gains, especially after the boom years of the COVID-19 pandemic.
“I think crazy success just brings out who the real people are,” said Scott, who reported to Ciardelli in his director role and now works for CrossCountry Mortgage, a competitor of Guaranteed Rate. “What did you sacrifice to get there? Did you sacrifice your soul or your core values?”
Many other former employees who spoke with the Tribune did so on the condition they would not be named in this story, saying they feared Guaranteed Rate would sue them. Guaranteed Rate has filed lawsuits against former employees to claw back signing bonuses; it also has sued competitor New American Funding and former employees who have hired former Guaranteed Rate workers, accusing them of unlawful poaching.
Ciardelli declined to be interviewed without his attorney for this story. In response to written questions provided by the Tribune, he and the company suggested the criticism of Guaranteed Rate came from disgruntled employees who could not succeed in a demanding work environment within a challenging industry, or from people who now work for a competitor and therefore would benefit from disparaging the company.
“We hold ourselves and our team members to an incredibly high standard and are not apologetic about that,” Ciardelli said in his written responses, sent through the outside law firm retained to handle communications with the Tribune. “We also recognize … that to achieve great success, one must embrace a full ownership for their actions, both successful and otherwise to achieve growth and most important optimally serve our customers. We promote a transparent culture that supports all our team members toward that goal and welcome constructive criticism. As a result, we are not for everyone.”
Ciardelli specifically denied berating staff, yelling at executives after the app launch or ever calling employees “stupid” or “failures.” He quoted the company’s chief operating officer, Nik Athanasiou, as saying: “I have worked with Victor for 15 years. No one is in more meetings with him than me. I do not ever recall an instance where Victor was abusive toward another employee.”
Ciardelli also pointed to the company’s anti-discrimination and anti-harassment policies and said neither he nor any other executive interfered with human resources.
In response to questions from the Tribune about women’s complaints, including being subjected to sexually explicit comments and working in a “boys club” atmosphere, Ciardelli wrote that such allegations are “simply not true.” The company “has not, does not, and would not objectify women or put them in uncomfortable personal or professional situations,” he wrote.
Ciardelli also highlighted the large number of female loan officers working at the company, their professional success and the testimonials from female employees. When the Tribune asked to speak with four of those women, only one — Rola Gurrieri, the company’s New Jersey-based chief fulfillment officer — agreed to be interviewed without outside counsel or management present.
Regarding the lawsuit filed by former Guaranteed Rate loan officer Megan McDermott, the company told the Tribune it had “found no evidence supporting Ms. McDermott’s allegations of sexual harassment or gender discrimination” after conducting a “comprehensive investigation.”
Guaranteed Rate also sent a general statement detailing the company’s business philosophy, which includes a “fierce commitment to excellence.” Employees who do not “meet our core values or our quality standards” find it challenging to maintain job satisfaction at the company, it said.
“Many of these employees walk away not feeling good about the company which is a natural emotion when faced with a reality that their standards and the company standards are not aligned,” the statement said.
But many of the former employees who spoke with the Tribune described a cutthroat work culture they said could be frightening and upsetting, with several attributing that culture to Ciardelli’s laser focus on making money and growing Guaranteed Rate.
The former assistant who emailed human resources asked not to be identified in this story, fearing it might jeopardize her current job or trigger retaliation from Ciardelli. In that email, the woman wrote that she was “constantly on edge and terrified to have an interaction with Mr. Ciardelli” and that she had “consoled each assistant on his team that endured the wrath of Mr. Ciardelli’s behavior.”
“I hope that my experience will open your eyes,” she wrote.
Flying too close to the sun
In an interview with the Tribune in 2014, Ciardelli made plain his ambition to grow the company.
“If you can’t handle it, you shouldn’t be here,” Ciardelli said. “Instead of feeling like, oh, we care about people’s feelings and all that, it’s all about results.”
In the same article, Ciardelli said he worked constructively with his employees when issues arose at work. “There’s no drama involved; there’s no yelling,” he said. “Let’s fix the issue and move on.”
But multiple former executives and employees told the Tribune Ciardelli regularly yelled at and verbally attacked executives and other employees in person and on company calls, sometimes in front of hundreds of people, with the calls following the app launch just one example.
Some former and current employees told the Tribune they tried to avoid Ciardelli because they were scared of his temper.
Scott, the former director of VA lending who worked at Guaranteed Rate from 2017 until he resigned in 2022, splitting his time between offices in Hawaii and Colorado, called Ciardelli a “bully.”
Scott told the Tribune that, during one call, Ciardelli took an executive “to the woodshed and just eviscerated him verbally,” saying things such as “I can’t believe you are this stupid.”
“(Victor) throws the grenade and then he leaves the room,” not giving people a chance to explain or talk through the issue, Scott said.
At the time of Ciardelli’s 2014 Tribune interview, Guaranteed Rate had 2,500 employees nationally, 1,050 of whom were based in Chicago, according to Tribune archives.
The company grew to employ 9,708 people nationwide at its peak in 2021, Guaranteed Rate told the Tribune in May. Part of the company’s growth stemmed from its acquisitions of other mortgage companies: Manhattan Mortgage and Superior Mortgage in 2012 and Stearns Lending in 2021.
Guaranteed Rate also partners on mortgage services with some of the largest real estate companies in the country. Including the people working in those partnerships, Guaranteed Rate had 14,264 employees at its height in 2021.
Like other mortgage companies, Guaranteed Rate has suffered a significant decline in business over the last two years, stemming from mortgage rates that have more than doubled from their record lows during the pandemic.
As mortgage rates soared in 2022 and 2023, the firm implemented thousands of layoffs, with only 3,871 workers remaining as of April, or 5,756 among all its companies, excluding contractors, as of May, according to the company.
Yet Ciardelli’s volatile behavior predated the stressful times in the housing market, according to some people who worked for Guaranteed Rate. Many people who “fly too close to the sun” — a metaphor some employees used to describe working directly with Ciardelli — eventually leave, they said.
People who work in personal and executive assistant roles for Ciardelli rarely last long in their jobs, with many leaving after less than a year, former employees said. Some referred to Ciardelli’s assistant position as a “revolving door,” and the LinkedIn profiles of multiple former assistants show short stints with the company.
More than two dozen executives and senior loan officers have left the company over the last decade, with a significant exodus occurring in the past two years. Multiple former executives and loan officers — including Scott — told the Tribune they left because of Ciardelli’s verbal outbursts and what many described as a workplace where they felt bullying and misogyny were tolerated. Most now work for competitors.
Ciardelli and other executives sometimes would disparage people who left the company, according to Scott.
“I would be like ‘Guys, did anybody ever think about reaching out to them before they left and having an exit interview with them?’” Scott said. “You are talking about a person that was a top producer here that you loved them as long as they produced, and now that they leave, they are an enemy? … They are leaving for a reason.”
In Ciardelli’s written responses to Tribune questions, he said allegations of a toxic work environment or bullying on his part are “not aligned with Guaranteed Rate or my leadership.” He said neither he nor other executives have disparaged former employees when they left the company.
In response to a question about assistant turnover, Ciardelli wrote that he has worked closely with five “primary” assistants since 2000. “As is the case with any demanding support roles, there has been some turnover with secondary and tertiary assistants, but nothing that is abnormal or unexpected,” he wrote.
One testimonial sent to the Tribune was from Melissa Czaszwicz, who said she worked for Ciardelli as an executive assistant in the early 2000s. She wrote that she had a positive experience working closely with Ciardelli, who she said was especially supportive when she had children.
“Never did I witness anything inappropriate or out of line,” said Czaszwicz, who still works at Guaranteed Rate.
‘Mental health has suffered’
Some former employees who spoke with the Tribune said they were driven to seek mental health support during and after their time at the company because of the negative work environment they experienced at Guaranteed Rate.
Most of those who shared their experiences worked for an executive who has a close working relationship with Ciardelli. Former workers said this executive also verbally abused staff and was prone to volatile mood swings.
One told the Tribune she texted and called a suicide hotline last year while working at the company because of verbal abuse from the executive; she shared the texts she sent with the Tribune.
In her resignation email, sent to the executive and to the human resources department last year, she wrote: “My mental health has rapidly declined due to the way I have been treated and spoken to in the last couple of months.”
Another employee from the same team wrote in a 2019 resignation letter sent to the executive, human resources, Ciardelli and others that his “mental health has suffered.”
In the resignation email and in an interview with the Tribune, the former employee said his boss gave him the runaround when he asked for time off to attend his mother’s chemotherapy appointments and complained to other employees about his requests.
Other employees discouraged him from requesting leave directly from human resources, warning him he would be fired if he went around the executive, according to the email.
Alyssa Ortiz, another former employee, said working with this executive was like being in an “abusive” relationship, being yelled at one minute and being invited for drinks the next.
“Everyone has gotten … chewed out and left crying,” said Ortiz, who worked for Guaranteed Rate from 2017 to 2019.
Ortiz told the Tribune that human resources and Ciardelli had been notified of this executive’s verbal mistreatment of employees but did nothing. She and about a dozen other former employees told the Tribune they felt Ciardelli protected this executive because of their working relationship.
In a written exit interview from 2020, one employee from the same department described how the executive would discuss former employees’ exit interviews with current employees.
“This created a fear for us to go to HR for anything moving forward,” the employee wrote.
Ciardelli said the company was not aware of any incident in which an executive read former employees’ exit interviews aloud; he said Guaranteed Rate “would never support this practice.”
Dozens of employees have left the executive’s department since 2017, according to interviews with former workers and LinkedIn profiles. The executive has since been promoted, the executive’s LinkedIn profile and the company’s website show.
In 2018, the head of human resources at the time took away the HR representative working with the executive’s department because of “risks” the executive posed to the company, according to an email reviewed by the Tribune.
“I can’t in good conscience keep allowing (the executive) to drag other employee (sic) into … schemes,” the former HR head wrote. “And by schemes I mean risky bull−−−−.” The department would have no assigned human resources representative after that, according to the email.
In correspondence with the Tribune, Guaranteed Rate described the company as a positive workplace where abuse and harassment are not tolerated and where complaints to human resources are taken seriously.
“We are not perfect by any means, but we do work hard to listen to our employees and make sure they feel supported,” a company spokesperson wrote in an email to the Tribune in April. “Most of all, we have no tolerance for any form of bullying, harassment or mistreatment. It is not who we are or who we want to be.”
Some of the employee testimonials provided by Guaranteed Rate expressed similar sentiments. For example, Mohamed Tawy, a branch manager and senior loan officer who has been with Guaranteed Rate for three years, wrote that the culture at the company is the best he has experienced in his 15-year career.
In an interview with the Tribune, Tawy said: “As a top producer … and I’m also a minority myself, I haven’t felt anything or seen anything that makes this company in any way negative for anybody that’s different. … I’ve seen here all that matters is that you do a good job, your production is good and that you follow the protocols and the rules, and I’ve seen people succeed with that more than any company I’ve been with.”
The Guaranteed Rate spokesperson also shared the results of an employee experience survey conducted in February. According to the company, the average rating for the culture at Guaranteed Rate was 8.49 out of 10, with nearly 75% of 3,745 employees responding. Those ratings were based on employees’ stated level of comfort providing feedback and/or concerns, how much they felt supported by the company in maintaining a healthy work-life balance and their sense of Guaranteed Rate’s commitment to promoting diversity and inclusion.
The email from the spokesperson said the company received “a countless number of positive comments and appreciation for their leaders, teams and our overall culture.”
In response to Tribune questions, Guaranteed Rate said in May that the survey was anonymous and it was analyzed by its “employee experience team.” The company did not provide the Tribune with a complete set of responses from the survey, but it volunteered that employees used the word “toxic” to make a negative comment about Guaranteed Rate in only 14 of the more than 5,000 written responses provided to three open-ended survey questions.
‘Mortified and disgusted’
Megan McDermott, a single mother of three, met her supervisor at Guaranteed Rate, Jon Lamkin, in person for the first time at a corporate event in December 2015, according to the lawsuit she filed in February.
When Lamkin heard the age of her oldest child, the suit alleges, he said: “You should have known better than to let some guy’s d−−− c−−− inside you.”
According to her lawsuit, McDermott reported the comment to Joseph Moschella, a regional manager and senior loan officer at Guaranteed Rate who was responsible for McDermott’s region while she worked at the company. Moschella, the suit alleges, “pressured” her not to make a formal complaint of sexual harassment to human resources.
McDermott told the Tribune she was “mortified and disgusted” after Lamkin made the comment.
“The irony here is that Jon should have known better than to treat an employee the way he did rather than telling me I should have known better to become a single mother at 20 years old,” McDermott said, “which is vile. … He set the tone the first day I met him of the power Joe and Jon had over my career.”
As McDermott went on to become a top-producing loan officer for Guaranteed Rate in New Jersey, her suit alleges Lamkin subjected her to abuse by “regularly screaming at her and using gender-based and demeaning slurs to refer to” her and other women at the company.
Her lawsuit alleges she was “subjected to a sexual and gender-based hostile work environment” by Guaranteed Rate, Lamkin and Moschella. Her suit also alleges McDermott did not receive the same opportunities, treatment and pay as male loan officers, which some other female loan officers told the Tribune reflected their own experiences as well.
McDermott did not lodge a complaint after Lamkin’s comment because she “believed she would be retaliated against” if she did so, the suit states. When she did report to HR around 2019 that Lamkin had engaged in “abusive behavior,” the department “failed to do anything to investigate or curtail Defendant Lamkin’s behavior,” the complaint alleges.
“Joe encouraged me not to go to HR because of the damage it would do to Jon’s career,” McDermott said. “Ultimately, all that they were worried about was Jon, his reputation and his career versus reporting inappropriate behavior.”
Guaranteed Rate told the Tribune in its May response that Lamkin’s comment was “nothing more than a single off-color joke,” that McDermott accepted an apology from Lamkin and that Moschella “encouraged” McDermott to contact human resources if she was “still upset.”
The company said it “could not find any record of Ms. McDermott making any form of complaint to the company’s human resources department in 2019, either verbally or in writing.”
McDermott told the Tribune she helped build Guaranteed Rate’s business in north Jersey from the ground up and said she loved the work until she found out she was not being treated equally as a woman.
“I believe management did not want to see me succeed, didn’t take me seriously and made decisions that negatively affected me and my children financially,” said McDermott, who now works for CrossCountry Mortgage, a competitor. “I ultimately left GR because I could no longer work in an environment where I was not valued and leadership felt that they could exploit me.”
Moschella and Lamkin are still employed at Guaranteed Rate. They did not respond to a Tribune request for comment. Guaranteed Rate told the Tribune in May that it had investigated McDermott’s allegations of sexual harassment and gender discrimination and found that “there is no evidence that Mr. Lamkin or anyone else at Guaranteed Rate ever created a hostile work environment for women.”
Guaranteed Rate also said in a statement that it complies with state and federal equal pay laws. The company said an “outside law firm” had reviewed its 2023 pay data and found it compliant with state equal pay laws.
In his written responses, Ciardelli highlighted the high percentage of female loan officers at the company in comparison to its competitors and said “our women originators thrive more than at any mortgage company in the industry.”
Employee statements provided through Guaranteed Rate’s attorneys included testimonials from dozens of women. Some noted the existence of the company’s employee resource group for women, GROW, while others cited the presence of women in leadership roles throughout the company.
“In addition to my professional growth I’ve experienced, I am equally grateful for the respect and dignity with which I have been treated as a woman in the workplace,” Jaime Kinman, a senior loan officer, said in her statement. “In an industry where gender biases still exist, I have never once felt marginalized or overlooked because of my gender.”
Gurrieri, the company’s chief fulfillment officer, said in an interview with the Tribune that she “never one time” experienced misogyny at the company.
“I got promoted when I’m six months pregnant,” she said. “That’s unheard of.”
Gurrieri, who has worked for Guaranteed Rate for more than six years, described Ciardelli’s leadership style as “extremely passionate.”
“There’s never been a day where I ever felt disrespected or not appreciated,” she said.
According to a former top executive who reported to Ciardelli for many years and a former human resources employee, a handful of loan officers at Guaranteed Rate were known sexual harassers, making women feel uncomfortable with inappropriate touching and unwanted advances in work settings.
But that behavior was rarely addressed, the former workers believed, because the men were friends with Ciardelli or were high-producing loan officers — each responsible for bringing in tens of millions of dollars in loan volume. Some of these loan officers still work at Guaranteed Rate.
Ciardelli called these allegations “simply not true” and said they were contradicted by the employee testimonials provided through the company’s attorney.
“They are also inconsistent with the recollections and experiences of multiple former HR professionals,” Ciardelli wrote.
A ‘sex-driven’ culture
In interviews with the Tribune, multiple former employees described a “boys club” atmosphere at Guaranteed Rate; Scott, the former director of VA lending, said there was “a lot of misogyny.”
Jessica Moreno, a former Chicago employee who started at Guaranteed Rate at age 23, said she was the first in her family to get a corporate job. Within a year of starting her job, she said, she was paying the mortgage on her family home.
But in her department, Moreno said she experienced a “sex-driven” culture.
“All the guys were just like, tongues on the floor,” said Moreno, who worked for the company for about four years starting in 2014. Her workplace was “like a men’s locker room, and women were in it,” she said.
Male co-workers and managers would hit on her and make comments on her appearance, calling her pretty, Moreno said. Comments made at Christmas parties or happy hours could be crasser, she said.
“You’ll get, ‘Oh, I’ve always wanted to f−−− you,’” she said.
Moreno said she once overheard a male manager describe a woman who had interviewed for a job as a “fox.” Another time, she said, a manager invited a female massage therapist to the office; Moreno remembers male co-workers commenting on the therapist’s body, too.
Soon after she’d started at Guaranteed Rate, Moreno said, she met with HR to make a complaint about a manager who swore at and belittled her. The HR representative brushed off her concerns in that meeting, she said.
“After that, I felt so discouraged to never even speak up again,” Moreno said.
Moreno ended up leaving her position before taking a job working for a Guaranteed Rate loan officer; she said she was terminated after clashing with the loan officer’s assistant.
Some female former employees of Guaranteed Rate said they understood looks to be a currency within the company.
One former Chicago employee said a manager encouraged her to text a selfie to a client after hearing the client flirt with her over the phone and say he’d be inclined to speed up the loan process if he knew what she looked like.
The employee said she sent the selfie, and the manager then pushed her to go along with the client’s harassment until the loan closed, she said.
After receiving the photo, the client responded, “As pretty as you are I can’t believe some man hasn’t run off with you just howling away,” in a text reviewed by the Tribune. Later on, after sending her forms, the client texted her: “You said I would get another pic when I sent you the forms so?”
The employee said another manager in her division would frequently flirt with her and comment on her appearance. He once texted her to “stop losing weight damn it” and another time texted her that she “broke (his) concentration,” according to texts reviewed by the Tribune.
Another former Chicago employee remembered a manager telling her, while she was pregnant with her first child, “Whatever you do, don’t get a C-section — you’ll never wear a bikini again.” The employee went out on maternity leave days later. She said she did end up needing a C-section and remembers the manager’s comment echoing in her head as she was wheeled back for surgery. Two people the woman told about the incident at the time corroborated her account in interviews with the Tribune.
Several former employees in the marketing department, including two men, told the Tribune Ciardelli made comments about workers’ ages. One employee got Botox and fillers after Ciardelli told employees they were “too old” and likened the marketing department to his “grandmother’s mortgage company,” according to former marketing department employees.
In his written responses, Ciardelli said “Guaranteed Rate is committed to fostering an environment that promotes diversity, equity, inclusion, and accessibility. We maintain a comprehensive set of employment policies aimed at providing a work environment free of unlawful harassment and discrimination, where all employees treat one another with dignity and respect.”
A spokesperson said in the April 1 email sharing the employee survey results that the company had launched “even more initiatives to ensure we have a positive work environment,” including anti-harassment training, training for the human resources team “to take proper and appropriate steps and best practices for investigating and responding to employee complaints” and reminders to employees on how to report harassment or abuse.
“Our executive team has emphasized to Human Resources that all complaints should be investigated, and any form of harassment and misconduct should be dealt with swiftly – and all managers and employees who are not acting in accordance with our values be rooted out of our organization,” the spokesperson wrote.
In the company’s May responses, it said these initiatives were launched in 2023 and were to “expand and enhance” the existing training program.
All Guaranteed Rate employees must complete “harassment and discrimination prevention training” upon being hired and on an annual basis thereafter, according to the company’s May response. The company said Guaranteed Rate has an “anti-retaliation” policy that prohibits retaliation against employees who report alleged harassment or discrimination or participate in an investigation into the conduct. The company also noted it has an ethics hotline through which employees can make anonymous complaints.
“We respect and treat all employees equally no matter their sex, color, or creed,” Ciardelli wrote.
In the last 10 years, Guaranteed Rate has not settled any lawsuits involving claims of a hostile work environment, according to the company. Guaranteed Rate’s response stated that within that time frame, the company settled six claims involving allegations of a hostile work environment, including arbitration cases as well as claims filed with the Equal Employment Opportunity Commission and state and local agencies. The majority of those claims were brought by male employees, and one was resolved in Guaranteed Rate’s favor, the company said.
Guaranteed Rate employees are asked to sign mandatory arbitration agreements when they are hired, but sexual harassment claims and claims filed with the EEOC and similar state agencies are not subject to arbitration, according to Guaranteed Rate’s May responses.
‘Positive thinking’
Publicly, Ciardelli presents himself as a champion of a positive work environment — an image the company has encouraged employees to promote.
In an email sent in February by a company executive and obtained by the Tribune, employees were encouraged to share a Forbes article featuring Ciardelli; the email provided step-by-step instructions for posting it on social media.
The story, published Feb. 7, was titled “Guaranteed Rate Founder Is All In On ‘Positive Thinking’ This 2024” and described his leadership style as “Chicken Soup for the Mortgage Industry.”
“I communicate the power of positivity and gratitude to everybody around me: employees, friends, family members, everyone,” Ciardelli was quoted as saying.
Less than 24 hours after it went live, the article disappeared from the Forbes website. The site provided no explanation, but one former Guaranteed Rate employee told the Tribune former workers had written to the author about factual inaccuracies.
On Feb. 8, a Guaranteed Rate executive sent another email encouraging employees — again with step-by-step instructions — to delete any social media posts linking to the article.
“We are working with Forbes to resolve and will let you know when it will be reinstated,” the email said. “We apologize for the inconvenience, and we will send out a new link as soon as it’s available.”
The Forbes contributor declined to comment for this story. Forbes told the Tribune the article was taken down because it did not adhere to the company’s “editorial guidelines” and did not respond to further questions.
The article has yet to be republished, but Guaranteed Rate still wants people to read it. The company shared it in a PDF on its LinkedIn page.
Earnings calls and earnings reports recap a company’s quarter or fiscal year, giving investors critical information as to how a company is functioning and faring. Understanding what’s going on with stocks can be tricky for both new and seasoned investors. It’s not always clear where you can turn for accurate information that will help with investment decisions — that’s why earnings calls or reports may be helpful.
But an earnings report doesn’t tell the whole story. Therefore, companies will hold earnings calls to provide context and backstory behind the data in an earnings report to help investors make informed decisions.
What Is an Earnings Call?
An earnings call is a conference call between the management of a public company and any interested outside party — usually investors, analysts, and business reporters — to discuss the company’s financial results and future outlook. Earnings calls are generally held quarterly, in the form of a teleconference or webcast; anyone can listen to an earnings call.
The earnings call often comes on the heels of the release of an earnings report and covers a given reporting period, typically a fiscal quarter or fiscal year.
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The Securities and Exchange Commission (SEC) requires that public companies disclose certain financial information regularly and on an ongoing basis. Companies must file Form 10-Q quarterly reports during the first three fiscal quarters of the year. A 10-Q includes unaudited financial statements and provides the government and investors with a continuing account of the company’s financial position throughout the year.
For the fourth quarter of the year, a company will file a Form 10-K, an annual report that shares audited financial statements, a look at the company’s business overall, and financial conditions over the previous fiscal year. The financial information and metrics included on these reports, like earnings per share, is discussed during an earnings call.
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What Is the Importance of Earnings Calls?
An earnings call is important because it allows a company’s management to discuss pertinent financial information and a company’s outlook.
Publicly-traded companies are not required to hold earnings calls; they are only required to release the details of their financial performance in a Form 10-Q or Form 10-K. However, most public companies have quarterly conference calls to keep shareholders up to date with the latest financial developments and provide context beyond the earnings data.
Earnings calls are also important for investors, especially those practicing fundamental analysis. These calls help long-term investors decide whether or not to invest in or continue investing in a company. For short-term traders, earnings calls may be helpful to capitalize on short-term volatility in a stock’s price immediately following an earnings call.
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The Structure of an Earnings Call
A company will announce upcoming earnings calls several days or even several weeks before the event. The company will usually issue a press release containing dial-in or webcast access information for stakeholders interested in participating in the call.
Earnings calls are generally scheduled in the morning, before the stock market’s opening bell, or in the afternoon, following the end of the day’s trading. These calls occur shortly after an earnings report is made public.
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Safe Harbor Statement
When the call begins, a company representative will likely share a safe harbor statement, which is a disclaimer about some of the comments executives will make. Specifically, some statements might be “forward-looking” and discuss future revenue, margins, income, expenses, and overall business outlook. Because no company can predict the future, the SEC requires that each warns investors that forward-looking statements may differ from actual results and trends.
Overview of Financial Results
The earnings call is usually led by the CEO, CFO, or other senior executives. During the call, these executives will deliver prepared statements covering financial results and the company’s performance for the reporting period.
This section of the call allows company leaders to give a more in-depth look at the company from their own eyes beyond the data found in the earnings reports. Executives may discuss market trends or even unpredictable factors that could influence how the company moves forward. Management will also likely share risks and their plans to take them on.
Question and Answer Session
At the end of the call, there may be a chance for investors and analysts to ask questions about the financial results the company presents. However, not everyone will get to ask a question. The company’s management may answer these questions, or they may decline or defer answering until they have the correct information to make an accurate response.
Preparing for an Earnings Call as a Shareholder
Before listening in on an earnings call, it may help to research the company and its earnings history and listen to previous earnings calls. Here’s additional information to know how to listen to an earnings call.
Where to Find Earnings Call Info?
Companies will send out a press release announcing when they will give an earnings call. Investors can also check the investor relations section of a company’s website for scheduled earnings calls. Additionally, some financial news websites may keep calendars of expected upcoming earnings reports and calls investors can check to stay current.
Many companies will post audio from the call on their website, making it available to investors and analysts for a few weeks. Companies also frequently offer transcripts of the call to read. This is especially useful for investors who may have missed an earnings call.
Much of the information discussed in conference calls, including Forms 10-Q and 10-K, are part of the public record and searchable on the SEC’s website. To find a company’s public filings, the SEC has a searchable Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).
How Long is an Earnings Call?
An earnings call usually lasts for less than an hour. However, there are no requirements for how long an earnings call should be.
What to Listen For
Investors should treat earnings calls as valuable information on a company but know that it doesn’t typically paint the complete picture of its potential performance.
Some key things investors should listen for in an earnings call are:
• How the company performed compared to analysts’ expectations
• What the company attributes its financial performance to
• Any changes in guidance for the future
• Any significant challenges or headwinds the company is facing
• Questions from analysts and how management responds to them
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Additionally, it may help to listen to the tone of the company’s executives when they are talking about the company’s performance. It isn’t quantifiable, but learning to pick up on the tone of management’s description of the company’s financials and the answers to analysts’ questions can help investors better understand the outlook for the company.
The Takeaway
Earnings calls provide investors with valuable insights into a company’s financial performance and outlook. These calls, paired with quarterly earnings reports, give investors a thorough understanding of the company, which helps with making investment decisions.
While earnings calls and earnings reports can be helpful to investors, keep in mind that they don’t tell the whole story. You’ll want to do your due diligence and further research to better inform your investment decisions, too.
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A stunning private estate in Weston, MA, has just been listed for $15 million, offering a rare opportunity to own one of the area’s most luxurious properties.
This magnificent Boston-area mansion sits on over 8 acres of conservation land, ensuring that no future neighbors or developers will be changing the current landscape — or causing a ruckus in the future.
Custom-built in 2010, the 14,620-square-foot home has been meticulously maintained by its current owners, who purchased the land back in 2008 for $1,675,000.
Now, for the first time in 16 years, this exquisite home is available for discerning buyers looking for a grand estate in one of Weston’s most exclusive south side neighborhoods — with Jamie Genser of Coldwell Banker Realty holding the listing. And since Jamie was kind enough to give us all the deets on this remarkable property, we’re going to take you on a quick tour of the suburban Boston mansion.
A custom-built, stately mansion
The current owners bought the land back in 2008 for $1,675,000 and built their dream home in 2010. With over 14,000 square feet of living space, 6 bedrooms, and 11 bathrooms, and amenities that range from an indoor basketball court to a massive pool pavilion, the custom-built mansion is made for grand living and entertaining.
Luxurious living spaces
There’s no shortage of eye-catching spaces throughout the house’s generous 14,620 square feet, and most feature elegant finishes like hardwood flooring, French doors, recessed lighting, and coffered ceilings. So let’s take them one by one.
Formal living room
The formal living room, with its elegant arched doors, opens into an expansive dining room capable of seating up to 24 guests. Featuring a custom coffered ceiling, large bay window, and 24-inch mahogany wainscoting, this space is perfect for hosting grand dinners.
Ultra-elegant dining room
Featuring show-stopping design details like coffered ceilings, an arched doorway with double pocket doors to the living room, a custom bay window, and 24″ mahogany wainscoting, the formal dining room seats 20 people and can be extended to seat 24.
It also connects to a butler’s pantry and a back hallway, ensuring seamless service during gatherings.
Chef’s dream kitchen
The kitchen is a chef’s dream, equipped with top-of-the-line appliances and exquisite finishes.
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The family room
The adjacent family room, with its circle wood-paneled dome ceiling, includes an oversized gas fireplace and a custom room divider. This room overlooks the pool and opens onto a three-season porch with a herringbone mahogany ceiling and bluestone floor.
Primary suite and additional bedrooms
The serene primary suite offers a sitting room and two dressing rooms, providing a luxurious retreat. Each of the additional five bedrooms comes with its own en suite bathroom, ensuring privacy and comfort for all family members and guests.
Standout entertainment and leisure facilities
While no corner of this house is what we’d call “ordinary”, it’s the entertainment level that truly makes it stand out.
Featuring everything from a game room with a movie theater to an indoor lap pool, indoor basketball court, gym & spa, and a bunk bed room, this level is like a playground for adults.
Indoor lap pool and spa
One of the estate’s standout features is its incredible indoor lap pool.
The 25-yard pool features a jetted hot tub, a waterfall with a mahogany bridge, and a kitchen area with quartz counters and high-end appliances. Access to the pool is available via the lower level or a stainless-steel staircase leading to the family room.
Like being in a snow globe in the winter
The pool area, described by listing agent Jamie Genser as feeling like a “five-star hotel,” includes cathedral greenhouse units with venting skylights, limestone flooring, and Venetian plaster walls.
“I adore the pool area. It feels like a 5-star hotel,” Jamie tells us. “The moment I walk into the pool area, I feel relaxed and calm. I can only imagine what it would be like in the winter. It’s cold and snowy and you are in a snow globe.”
Game room, gym, and movie theater
The entertainment level also includes a game room with a theater, a gym overlooking the basketball court, and a movie theater with fabric sound-absorbing walls, surround sound, a projector with an 8-foot screen, and cove lighting.
The gym features triple impact-resistant windows, adding to the space’s functionality and safety.
The bunk room
The bunk room, which sleeps nine, includes an en suite bathroom with frameless glass showers and mosaic tile accents.
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Exclusive neighborhood and outdoor features
Situated in one of Weston’s most exclusive south-side neighborhoods, this estate offers the perfect blend of privacy and convenience. The property is located on a private road, surrounded by conservation land and the MWRA reservoir, which offers miles of dog walking and hiking trails.
Despite its secluded feel, the estate is just a short distance from the elementary school, town center, and highway access.
Insights from the house’s real estate agent
Jamie Genser, the real estate agent representing this property, highlights the estate’s exceptional design and thoughtful amenities, while also emphasizing the property’s prime location — that offers privacy, convenience, and proximity to top-notch schools and the town center.
In Genser’s words, “This custom-built home on over 8 acres of land surrounded by conservation land is pretty incredible. The house is large but feels very homey. The materials used in building the house were all top of the line, with thoughtful design throughout.”
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A cloudy mortgage outlook might cause consternation among lenders, but it is opening the door a bit wider for growth in home equity investments.
A confluence of events over the past few years, including rising interest rates, a dearth of refinances and surging property values are driving some consumers to borrow against home equity. With a spate of securitizations and new issuers recently entering the market, investors are seeing a range of opportunities on offer as a result, coming from both established home equity lines of credit or loans and new alternative credit platforms.
“It will take years and years for the market to recover. And our thought is that even if interest rates were to fall 100 basis points, you’re still not going to see a refi boom,” said Bill Banfield, chief business officer at Rocket Cos.
Rocket Mortgage introduced a closed-end home equity loan in 2022 and has since issued three securitizations backed by its originations, with hopes to at least double that total for the remainder of 2024. The Detroit-based lender rolled out the lien in the same period several other nonbanks launched similar products.
Since that upswing in product offerings, the secondary market has seen a wave of aggregators or originators offering HELOC-backed residential mortgage-backed securities, including Figure, Achieve, JPMorgan and Goldman Sachs all with issuances over the past 12 months. As the number of securitizations increase, it brings with it better pricing.
“In 2022, there was really no liquidity. There was not a secondary market for HELOC or home equity loans. Now that’s materially changed,” Banfield said.
“We’ve gone from taking the leap of faith that we’re going to use portfolio money to do proper risk management around that, to building out a buyer base, to then ramping up our securitization platform,” he said about Rocket’s strategy.
Huge potential — on a theoretical basis While growing, numbers today just represent a tiny slice of the total addressable second-lien market that totals into trillions. In May, ICE Mortgage Technology reported home equity rising to a record $17 trillion in the first quarter this year, but other reports estimate it to be as high as $35 trillion. Home equity totals hit a record high in 2017 and the amount only increased in the years since, according to Vadim Verkhoglyad, vice president and head of research at dv01, a Fitch Rating subsidiary.
“This is a real market, massive, huge,” he said. “It’s a borrower-demand question much more than a supply question at this point.”
According to Clayton, a due diligence solutions provider and reviewer of MBS pools prior to issuance, $12 to $14 billion worth of second-lien products are expected to be securitized in 2024 based on current trends. Volumes have grown by at least threefold in the past three years, the company said.
The rate of growth the market sees depends on what the consumer decides to do. “Borrowers in general, homeowners in America — are just not using that much debt,” Verkhoglyad said.
Although home equity securitizations have existed for years, the growth in issuances coming to market over the past several months may seem like a new development to some in the investment community, leading to hesitation. But the sentiment is largely shifting, as issuers have addressed some of the initial reasons driving investor wariness.
Concerns emerged in some industry offerings that included both closed-end junior loans and HELOCs, according to Banfield. “It made it more difficult to be transparent.”
“The investor has to understand what they’re investing in,” he said.
Rebuilding a market framework and investor confidence With home equity originations languishing for a prolonged period when mortgage rates were at historically low levels, the financial structure supporting the secondary market also had to be created.
“The correspondent relationship had to get redeveloped around second liens,” said Pete Pannes, chief business officer at Covius, parent company of Clayton.
“It was something that had to re-emerge from the credit crisis,” but as those issues have resolved, “I think the market became very efficient,” Pannes said.
“There were entities that came to the table, like our clients, to regenerate capital to put back into the market and go upstream to the originators,” he said, referring to independent mortgage banks and other nonbalance sheet lenders.
Meanwhile, borrower performance also eased worries, according to Kyle Enright, Achieve’s president of lending. Since late 2022, the personal finance company has issued four rated securitizations backed by HELOCs from its home loan unit. Target customers for the HELOCs are concentrated among consumers with credit scores under 700, below the average of American homeowners.
For Achieve’s first securitization, “Nobody really looked at it seriously,” Enright said.
“We basically didn’t talk to almost anybody who was a traditional RMBS buyer because it was just too weird,” he added. But sentiment has shifted as some of the first originations reach their five-year point.
“I think a lot of the questions that investors had back early in the day have been answered for the most part. Other people joining the party has helped us,” Enright added.
HEIs bring something new to the table The growth in home equity is also driving an influx of alternative credit platforms entering the field in recent years, including companies such as Aspire, Button Finance and Easyknock. Through equity sharing agreements with originators, homeowners tap into their appreciating property values for financing needs.
Home equity investment, or HEI, products represent a new frontier for the secondary markets, though, as they are based on what seems like an unfamiliar business model. “It’s not a loan. It’s junior, and you’re living in equity appreciation,” Verkhoglyad said.
HEIs’ recent arrival means much of the industry will be learning about product performance and possible risk in real time, particularly if homeowners end up struggling or face foreclosure.
With the first lien prioritized, “There’s not going to be equity appreciation because you’re taking sales proceeds,” according to Verkhoglyad.
“The servicer is going to advance; they are going to be recouped. Legal fees, they’re going to be recouped. All those things are kind of going into the fold.”
A more significant question in the short-term might be whether HEI volume can build to a point to sustain demand in secondary market trading.
“Where do you consistently find these borrowers?” said Pannes, whose company also provides originations services for companies in the home equity investment community.
“There’s certainly enough equity out there. Can you find those borrowers? Can those borrowers find you to create substantial, substantially sized securities consistently enough, so it’s not a flash in the pan?” he asked.
Still, despite the unanswered questions, HEI securitizations are hitting the market, recently coming from the likes of Unison and Point, which issued its third in mid 2024. Other platforms have publicly announced intentions to issue transactions later this year.
The aggregators and investors drawn to the newer HEI products thus far appear to fit a different profile than purchasers of more established loans.
“We’ve got a set of clients that are your more traditional securitizers and investors that are dealing in closed-end seconds and HELOCs. We’ve got some of the newer folks in the niche for HEI. There is a little bit of crossover but not much to speak of at all,” Pannes said.
Recognition by stakeholders A potentially pivotal point for HEI development in the investment community came with the addition of a ratings methodology by Morningstar DBRS a year ago. Kroll Bond Rating Agency followed with its own in early 2024.
“Based on the feedback we have received from the issuers, rated transactions allow for expanded investor base (and consequently better pricing) as certain investors are mandated to invest only in rated securities,” Morningstar’s leaders and researchers said in a comment.
In an April 2024 primer, the ratings service said it “anticipates continued interest in the features of the HEI product as it is a diversified source of funds for homeowners, as well as an attractive source of returns and diversification for investors.”
The value of a rating assigned to any type of home equity loan pool can be significant, making some attractive to a set of investors who might look for long-term returns based on creditworthiness, Enright said.
“These folks have been there since day one, participating in the AA tranche, buying that AAA slice, and they continue to do so,” he said of Achieve’s issuance history. “I think that appetite is also growing quite substantially,” he said.
Recent developments shone a spotlight on the role home equity liens might end up having in the home finance system, with Freddie Mac’s proposal to potentially purchase some closed-end home equity loans. The controversial plan garnered a range of reactions, with concerns raised that the government-sponsored enterprises might displace current issuers. Some leaders, though, welcomed the likelihood of additional liquidity it would bring should the proposal come to pass.
No resolution appears to currently exist that the entire industry would likely find agreement. Freddie Mac said it intends to make a decision on the proposal in June.
But the suggestion of GSEs participating in the second-lien market points to how recent trends have shifted the conversation within the home finance system, as mortgage originations return at a slower pace than what many lenders would prefer.
The future of the market, though, is not entirely in lenders’ hands.
“We’re still talking about a space that is largely very nascent, and the question of how much it’s going to grow is far more a question of what borrowers want to do than lenders,” said Verkhoglyad.