Wells Fargo:Forecasting Much Higher Mortgage Rates

File this under: Jumbo Mortgage Rate Warning.

The CFO of Wells Fargo which funds/services about 25% of the US mortgage market was asked a very good round of questions by a Wall St analyst today regarding their take on mortgage rates. Summary for the time pressed, higher fixed jumbo mortgage and mortgage rates in general will rise after the FED is done in March 2010.

Analyst: just a follow-up question on rates. I just wanted to understand, Howard, how you are thinking about the impact of the Fed exit on the fixed-income market and how you are planning on managing the balance sheet for that?

Howard Atkins, Wells CFO: Well, that is a good question, Betsy, andthe Fed obviously is active in buying MBS. And despite the fact that the yield curve is as positively sloped as it is right now, their active purchases is a factor that is, in some senses, artificially keeping long MBS yields lower than they might otherwise be. At some point presumably, they will either gradually or more quickly reverse course and that could lead to an increase in mortgage interest rates. And as I mentioned a couple of times in my remarks, in possible preparation for that, we have been keeping our powder dry, in effect underinvesting this large base of core deposits that we have for the possibility that that reverses course.

Analyst: So you might get some OCI hit near term, but dry powder leads you to a better outlook for earnings, is that the way to think about it?

Atkins: Yes, again, while the mortgage business is showing good results right now, in effect, on the portfolio side, the investment portfolio, we, in effect, are giving up some current income. We don't believe in the carry trade and we do want to preserve some powder in case rates do go up and we'll have the powder at that point, we will invest the powder at that point to offset some -- whatever is going on in the mortgage business.

John Stumpf, CEO: I see this as the classic short-term view of the business and long-term view of the business. 400 basis points or something like that, which you make in the carry trade today is very attractive. But we think it is the wrong decision long term because we think the bias is for higher rates, not for lower rates and we are willing to wait for that to happen. We think that is the better trade.

Atkins: we are effectively giving up 400 basis points today for possibly a year or so, maybe plus or minus, to avoid the potential risk of a larger number of basis points for 30 years. So the last thing we want to do is get stuck with securities at these low levels of interest rates. 

Stumpf: Because I think when rates move, they are probably going to move at some speed and I don't think it's going to be maybe a quarter. It could be more than that and it could happen relatively quickly.

Atkins: this is the same thing that we did back in 2002, 2003 when interest rates were also at cyclical low points just before they went up a lot. What we are doing now is not very different from the way the Company has always managed itself.

So they are positioning themselves for much higher rates in mid 2010 and beyond.

Just Stop Waiting for the Perfect Rate

We speak to dozens of folks that are some way or the other waiting for rates to get lower than the 5% 5Y or 5.75% 30Y Fixed 2 million dollar jumbo they were quoted. Of course, who doesn't want a lower cost on something. Especially a budget item that represents roughly 20-30% of household income. But several factors could make waiting a disaster.

1. Home values continue to fall and your equity is diminished thus resulting in cash required to close. Primarily because loan to value levels in general within the jumbo mortgage market require at least 20% or more equity. Depends on the loan amount and the city/state.



2. The dollar and US based interest rates start to move higher because of a global view that the US is a riskier place to invest/lend. This has started to happen in the last few weeks. The US Dollar vs a global basket of other curriences has started to fall:

The value of the dollar rose nicely after the currency was viewed as a safe haven in Jan till March. Then the full breadth and scope of the recession(newpression?) plus the enormous costs of the bailouts investors(our creditors) began to move away from holding dollars and investing funds in US invesments.

3. The third largest risk is that all the government borrowing by countries around the world crowd out and soak up funds that normally would be put to work in the mortgage market. Here is the chart for what the US Treasury 10Y is currently going for:

Now, this isn't a disaster yet but today the US Government is having to pay 3.35% for ten year money vs about 2.50% range less than eight weeks ago. The enormous stimulus that congress passed has to be paid for right? The US goverment doesn't have any money. We basically have a line of credit with the rest of the world sitting at 11-12 TRILLION dollars owed now. This works out to about 37k for every man, woman and child in this country. See more here.

If investors/lenders decide that the US is a big credit risk then regular mortgage borrowers could be painted with the same brush and see much higher mortgage rates in the future. If you don't believe me and you want someone with some weight how about the manager of the largest bond group in the world? They manage about $750 billion.

If you don't want to play the jumbo mortgage rate casino game anymore with your house, Contact our office or another mortgage professional and get something done. It is better to lock and be wrong than to ride the interest rate rollercoaster in the coming years and regret it.

Finally Some Good News Out Of The Golden State

Calif. approves nation's 1st low-carbon fuel rule
By SAMANTHA YOUNG

California air regulators on Thursday adopted a first-in-the-nation mandate requiring low-carbon fuels, part of the state's wider effort to reduce greenhouse gas emissions.
The California Air Resources Board voted 9-1 to approve the standards, which are expected to create a new market for alternative fuels and could serve as a template for a national policy that has been advocated by President Barack Obama and Democrats in Congress.
Gov. Arnold Schwarzenegger said the rule would "reward innovation, expand consumer choice and encourage the private investment we need to transform our energy infrastructure."
"I think we're creating the framework for a new way of looking at automotive fuels where no longer will gasoline derived by petroleum be the only game in town," board chairwoman Mary Nichols said.
The rules call for reducing the carbon content of fuels sold in the state by 10 percent by 2020, a plan that includes counting all the emissions required to deliver gasoline and diesel to California consumers -- from drilling a new oil well or planting corn to transporting it to gas stations.
Transportation accounts for 40 percent of greenhouse gas emissions in the state.
"The emissions from this sector have traditionally grown in California at a rate that exceeds even our growth in population," Nichols said before the vote. "It has led to a host of environmental problems."
Representatives of the ethanol industry have criticized the rule, saying state regulators overstated the environmental effects of corn-based ethanol. They also have criticized the board's intention to tie global deforestation and other land conversions to biofuel production in the United States.
The board has said Brazil converted rainforest into soybean plantations as a result of the growth in corn-based ethanol in the U.S. A formula being considered by the board would take into account the destruction of forests and grasslands elsewhere to grow fuel crops for U.S. demand.
The ethanol industry also said it was unfair to penalize it for agricultural land changes abroad.
"We are not convinced expansion of ethanol in the U.S. has caused or will cause land use changes," said Geoff Cooper, vice president of research at the Renewable Fuels Association.
John Telles, the dissenting board member, said before the vote that he had a "hard time accepting the fact that we're going to ignore the comments of 125 scientists" who questioned the agency's decision to estimate the emissions tied to land-use changes.
"They said the model was not good enough," he said.
Representatives for BP PLC and Chevron Corp. said their companies supported the new standards, with the caveat that the board periodically review the standards. The air board agreed to ensure that the most up-to-date science is incorporated into the rule and that the alternative fuels have become available as expected.
Under the low-carbon fuel standard, petroleum refiners, companies that blend fuel and distributors must increase the cleanliness of the fuels they sell in California beginning in 2011.
The petroleum industry warned that the state was moving too quickly without assurances that the alternative fuels they will be required to sell would be available for the market. Representatives asked the board to delay a decision until next year.
"It's frankly unclear to us how we will comply with this regulation," said Catherine Reheis-Boyd, chief operating officer of the Western States Petroleum Association.
The statewide efforts come two years after Schwarzenegger directed air regulators to develop a rule that would boost the amount of renewable fuels sold in the state.
Nichols said Thursday that a low-carbon mandate would reduce California's dependency on petroleum by 20 percent and account for one-tenth of the state's goal to cut greenhouse gas emissions by 2020. From Businessweek.

I am not an environmental nut job but I have gotten out of the BAD habit of using plastic bottles and no longer us my private jet to fly to China for good food. Seriously, this vote and policy is a great move forward for clean energy. Take care and make it a great day.

Mortgage Rates: Gamble As You Shop.

Mortgage Rate Volatility slowed a bit in December after record-breaking changes in October and November. The slowing pace of change is good news for homeowners that joined the Refi Boom that closed out 2008. It was much easier to shop for a mortgage rate in the absence of 4- and 5-Rate Sheet days.

A "rate sheet" is a mortgage lender's active, available-to-the-public mortgage rates for all of its products. This includes 30-year fixed rate mortgages, 5-year ARMs, and the like.

However, rate shopping is not like shopping for a flatscreen TV to watch the BIG game. Mortgage markets are still moving with tremendous velocity, historically. Over the last two months, mortgage rates changed 2.15 times per day, on average -- nearly 11 rate changes per week.

In December, mortgage rate quotes "expired" every 3 hours, 39 minutes.

This rapid pace of change is one reason why "sleeping on it" can be dangerous. Mortgage rates may be low in the morning, but by the afternoon, they could absolutely be not-so-low.

Look, I've heard it from enough homeowner's by now that I can safely tell you -- unless you're prepared to accept a higher rate, you may not want to gamble on getting the lower one. A good question to ask yourself is this: "Is it worth a 1/8 percent rate increase to gamble that I'll find an 1/8 percent lower rate tomorrow?"

Mortgage shopping wasn't always complicated, but it is now.

In addition to a volatile rate environment, external factors are muddying up the mortgage waters, too:

1. Guidelines continue to tighten high income households.
   
2. Falling home values are making refinances very difficult. Your area is not immune. Trust us.
   
3. Rising defaults are pushing private mortgage insurance premiums higher.
   

In fact, there are very good reasons to consider taking the first low-rate mortgage you find that fits your long- and short-term financial goals. The most important one, of course, is that it's as likely that mortgage rates will rise in 2009 as they will fall. Forget what the experts tell you -- they're paid to make guesses and they're often wrong.

In markets like this, a sound piece of mortgage advice is to make friends with a "good lender". They're good mortgage lenders for a reason. They're fair with clients and they provide extra support that you won't get from a call center. And, most times, they're cheaper, too.

So, shop for mortgage rates every 3 hours, 39 minutes, or save yourself the trouble and work with a reputable jumbo mortgage lender who's both fair and knowledgeable. If you ever want a speedy rate quote, call or email me. We lend in all 50 states.

Buy vs Rent:Long Time Renter Takes The Plunge

From a recent client discussion:

"The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble. All this time, I have been a renter myself, ... [but] the housing market has, obviously, changed quite a bit since our last move, in 2005....This month, we found a house that we really liked, and we made an offer. It was accepted.I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. ...In fact, if you’re now renting - almost anywhere - and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way. But it’s O.K. with me if our timing wasn’t perfect.
Leonhardt isn't buying for appreciation, and he realizes the price will probably still decline further. He is buying because prices have fallen enough that the intangibles of homeownership (as he and his wife value them) outweigh the extra costs of owning a home compared to renting."

On FED Watch. Mortgages up or down?

Mr.Mortgage is on FED watch this morning as this may have positive or negative implications for clients. When the Federal Reserve lowers the Fed Funds Rate, mortgage rates tend to increase, and it's always for the same, few, related reasons:

Rate cuts create long-term inflation pressure. Bought gas or food lately?
Rate cuts makes the U.S. dollar weaker.
Rate cuts reflect short-term economic weakness

But rate cuts are just one way that the Federal Reserve can impact mortgage rates; there's more than one color in the Fed's crayon box, after all.
How the FOMC treats the Fed Funds Rate today is only one part of the story. The other part is what the Federal Reserve does to make mortgages feel "safe" to market investors.

One reason why mortgage rates are slightly down this past week is because the Fed has intervened with normal market activity on multiple occasions and with each intervention, the Fed is implicitly or explicitly saying, "We will not let conforming mortgage debt default."
This "guarantee" from the Federal Reserve reduces the risk of mortgage loans sold through Fannie Mae and Freddie Mac. Lower risk = lower rates.

What the Fed says today will be as important as what the Fed does. If the press release reveals a proclivity for guaranteeing additional mortgage debt, expect mortgage rates to fall because mortgage debt will be considered "safer" for investors. The jumbo loan market will key off the conforming market.

Diverging Jumbo Rates, should you take an ARM?

Jumbo Mortgage rates are highly sensitive to expectations for the U.S. economy.
When the economy is expected to sag, mortgage rates tend to fall
When the economy is expected to surge, mortgage rates tend to rise

Currently, the economy is expected to sag and surge in the later half of the year. I disagree but what live with what the market gives us. This is why adjustable-rate jumbo loan mortgage rates are holding their ground as fixed-rate jumbo mortgage rates increase.

Fixed-rate and adjustable-rate mortgages are not as interchangeable as in the past and it's mostly because the Federal Reserve's routine has created expectations of runaway inflation later this year.
The "Fool in the Shower" bit goes like this:
A fool gets in the shower and it's freezing cold
To get warm, he flips the hot water on to full blast
Before long, the water goes way past warm and into hot. It burns him.
The fool turns the water back to cold and repeats the process in reverse.

The Federal Reserve is following the same pattern. The economy showed signs of weakness (i.e. being cold) last year so the Fed took steps to warm it up. Since September 2007, the Federal Reserve has shaved 2.25% from the Fed Funds Rate. With each successive cut, though, the Fed is turning the proverbial water farther towards "hot". This makes it more likely that the economy will go from "ice cold" to "scalding hot" sometime later this year.

Overheated means inflation comes back and now investors are taking notice and a quarter of all jumbo mortgage loans are owned by foreign investors and they don't like our falling dollar.
The growing likelihood of inflation is now priced into longer-term mortgage rates. Inflation erodes the value of mortgage bonds so it's causing long-term mortgage rates to rise.
Meanwhile, short-term rates are still reflecting the short-term economic weakness to which the Fed is responding. In the near-term, the absence of inflation is holding rates low for a host of products, including:
The 1-year ARM
The 3-year ARM
The 5-year ARM

And that's where it ends. There is a increase right at the 7-year marker. The 7-year ARM along with the 10-year ARM and the fixed products are all priced for the Fool in the Shower bit, jacked higher for inflation and the eroded dollar. Of every client is different, you should match your time frame for the home with your mortgage as best as possible. With all the consumer choice comes enormous responsibility.

Two months ago, the spread between a fixed-rate mortgage and a shorter-term adjustable-rate mortgage was .125%. Today, the gap is 0.625%. We are currently advising clients to consider the 5Y and the 10Y jumbo loan interest only. We often advise to go interest only and max out all retirement accounts with the funds otherwise allocated to the mortgage principal. For a customized proposal from a banker contact us anytime.

Confusion reigns as to FEDs Impact on Mortgage Rates.

Contrary to the conviction of deeply confused clients and reports by lazy news media, mortgage rates are unchanged, about 6.50 percent for the lowest-fee 30-year jumbo loan.

Yet, the media refer constantly to "dramatically lower mortgage rates." They are better, but ... drama? Freddie's average for the whole of 2007 was 6.74 percent. A quarter-percent drop is nice for buyers, and a help to a few jumbo loan refinancers, but no fire sale.

"How can it be the same ... !?!" says the client, after a cumulative 1.25 percent cut at the Fed in only eight days? Answers follow.

Brand-new January economic data are not that bad. They're not bad enough to justify the Fed's panic, let alone to anticipate more cuts. Payroll growth slipped to flat in January (negative 17,000 is within the huge range of error and revision), unemployment down to 4.9 percent in a workforce statistical quirk -- soft, but hardly a recession. The purchasing managers reported their first gain in six months, likewise soft, but with persistent strength in foreign orders. Fourth-quarter GDP grew by a mere 0.6 percent; however, aside from a temporary drawdown of business, inventories grew at 2 percent.

The Fed's form is disturbing to long-term investors. Central banking is not figure skating, but Fed Chairman Ben Bernanke has departed his predecessor's 17 years of gradualism for lurching on the rink. A Fed that will lurch down will lurch up. This causes 10Y jumbo loans and 30Y fixed jumbo mortgage rates to stay elevated as who knows when the cuts will be taken back.

Investors bought long Treasurys and mortgages at these levels 2002-2004 because former Fed Chairman Alan Greenspan said after every meeting into 2006: Excessive monetary stimulus most likely will be "removed at a measured pace." Translation: You're safe for now, and we'll give you time to get out before we kill you.

In those late Greenspan years, deflation was the problem. Today, inflation is rising all over the world: Australia at a 16-year-high of 3.8 percent core; Europe at a 14-year-high of 3.2 percent; U.K. at 2.6 percent core; China at 6 percent-plus; and an economy completely out of control beginning to export inflation to us. Each time the Fed has lurched to a catch-up ease, all the way back to August, it has rescued stocks, commodities, oil, gold, and tanked the dollar.
I have chewed on the Fed for its inaction and credit-wreck oblivion. However, this situation is NOT a monetary problem: It is a banking-system near-insolvency that may morph into a recession, each making the other worse. The crying need for six months has been transparency of credit loss and bad-asset firewall. Cuts in the overnight cost of money may intercept recession, but inflation means that these cuts cannot be maintained or removed at a measured pace.

Two non-Fed forces holding up mortgage rates: Credit fear about Fannie and Freddie has the spread between mortgages and the all-defining 10-year Treasury (3.57 percent today) over 2 percent for the first time ever. Second, somebody by accident may arrive at an effective credit-wreck bailout: The giant bond insurers, Ambac and MBIA, may be resolved in days. If no collapse, then credit fear will give way to inflation fear.
The Fed's cuts have had a dramatic effect on ARM adjustments, and should revise estimates of housing doom to the better -- also reducing bond-market fear. This month, common one-year Libor-floating loans will adjust DOWN to 5.125 percent.

FED Hits Panic Button. Jumbo Loan Rates at Historic Lows.

On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.

It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.

When the Fed rate drops, so do interest rates on savings accounts and jumbo loan rates drop as well right? Well not exactly, here is a chart of the FED Funds, Prime Rate and the Fannie Mae 30Y Fixed. Conforming loans generally move in lockstep with jumbo mortgage loans so they act as a good indicator.

I see a loose correlation but nothing that suggests that we will see mortgage rates below 6% on a 30Y fixed jumbo mortgage anytime soon. Of course if the sky does indeed fall then all bets are off. Rates are excellent by all historical standards and refinances should be considered especially into long term fixed loans and 10/1 ARMs. Have a prosperous day.