CDARS - CD 3% - Is anyone buying these?

Our HOA has been looking into certificates of deposit rates. Our bank suggested CDARS (Certificate of Deposit Account Registry Service) with a current rate of 3% for 2-year term. We cancelled a regular cd with a 1% rate that was maturing soon and opened a CDARS cd in its place.

I know they are FDIC insured and can be used by Non-Profits. Is anyone familiar with these and know of any concerns?

Brokered CDs may not be appropriate because you can lose principle on them. If you limit yourself to new issues and hold to maturity then you should be OK. However, if you buy and sell on the secondary market, you need to know what you're dealing with.

CDARS stands for Certificate of Deposit Account Registry Service. This service allows account owners whose accounts exceed the FDIC insurance limit to deal with a single bank. The money is actually spread out across as many individual banks as necessary to maintain insurance on all of the funds.

This program doesn't do anything for you if your funds do not exceed FDIC insurance limits or if dealing with a couple banks isn't a burden. Since CDARS is a service, I would expect that account owners would pay for that convenience in some way. Read the fine print.

Also watch out for advertised CDs rates. These are often what's available to individuals, not businesses like HOAs. Credit unions may offer higher rates, and the federally insured ones have insurance that is comparable to FDIC.

In general, HOAs should limit themselves to investments that can't lose principle. These low risk investments will not keep pace with inflation except during periods of unusual market gyrations. Suitable investments include CDs (including CD ladders), money market accounts (NOT funds), new issue bonds that are held to maturity, bond ladders, and the like. Treasuries are also suitable, but the last time we talked about them here, some posters said that the only way to buy them is through a Treasury Direct account that had to be opened by an individual - this can be a problem in an HOA where board members and community managers come and go.

You sure your rates apply to HOA or commercial businesses?

Our property management's bank offered very low rates on regular CDs. They also said that moving funds to a brokerage account to obtain a higher-rate cd would incur a charge from them for set up and processing. Not aware of any credit unions that allows HOAs to open CDs. Our PM did NOT mention a service fee for CDARS, but I'll check the fine print. The 3% rate was quoted last week.

Thanks for all the information.

The CD market has some basics that are not often reported.

First, banks do not really need deposits. New loans themselves create deposits in the overall system, so at end of night the entire system ties. Some banks are short reserves and some long, and they loan or borrow needed amounts to balance each night, and as a last resort a bank can borrow from the Fed overnight for shortages. Those overnight loans approach federal fund rates, so they are more costly than if a bank has cheaper deposits, so banks try to manage them so costly overnight loans are limited.

Those operations drops banks into three catogries.

Large banks, such as Bank of America, have so many deposits, especially from larger accounts, they do not need more deposits and therefore tend to lend overnight more - they are money center banks, and pay squat on deposits.

Banks that really need deposits come in two sizes. Larger banks, which tend to participate in the new issue brokered CDs mentioned above, and small, regional banks that tend to offer more competitive deposits rates for local depositors.

Next you have banks that offer teaser rates, which an HOA probably cannot get. They offer higher rates on promotional CDs, or short term bumps in new checking accounts, to get new deposit accounts that they will then offer loans, their real business. They offer the rates in the hope that might get a few of the people to change their overall banking accounts, including refinancing mortgage loans etc. to the bank.

I think it mainly depends if you have a property manager and if your property manager can purchase CDs from other institutions on your behalf. In the case of my association, only the bank that is contracted through the PM recognizes the PM as being able to handle HOA business. Thus, if we go with a different entity, a Board member has to handle all of the paperwork.

The different of 3% per year might amount to $3,000 for a CD in the amount of $100,000. In our community, which has 274 doors, going with the higher rate CD will save the average owner in our community less than $1 per month in dues. I'm not willing to spend much of my personal time to save my neighbor less than $1 per month.

Thanks Wendy...I'll check them out. Appreciate all the info and tips.