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File this under: Jumbo Mortgage Rate Warning.

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.

Since Memorial Day, conforming mortgage rates have jumped by more than 1.125 percent, adding thousands of dollars to the annual cost of homeownership.

To the casual observer, the moves may seem random. There's a reason this is happening, however.

It starts with inflation.

As an economic force, inflation erodes the value of the U.S. Dollar. Left unchecked, it drives up the Cost of Living as each dollar "buys less" at the supermarket, gas station, or anywhere else.

But with respect to mortgage rates, inflation's impact is more immediate. Because inflation devalues the dollar over the long-term, it renders long-term mortgage bonds a less attractive investment for traders.

If bond investors are repaid in U.S. Dollars, after all, it would make the investment worth less if the dollar is in an inflationary freefall.

Therefore, in situations when inflation is likely to present, we find that traders often sell out of their mortgage bond positions which, in turn, drives down the bond prices. Then, because bond yields move in the opposite direction of bond prices, rising rates are the inevitable result.

Lately, Wall Street is fearing inflation for a number of reasons:

1. Job losses are slowing, adding to consumer spending expectations


2. Gas prices have risen 41 days in a row


3. The federal government is increasing the money supply

These 3 factors -- plus a few others -- are all coming to a head around the same time and traders are getting defensive with their portfolios. As a result, they're selling their mortgage bond positions and it's driving mortgage rates higher.

Rates may continue to trek toward 7 percent through July and August, or they may retreat toward 5 percent. We can't know for sure. What we can know, though, is that volatility in rates should continue until the economic picture gets more clear. That could be next week, or next year.

For now, be ready to lock at a moment's notice. Mortgage rates are changing quickly.

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.

After a dreadful start to the month of May, mortgage markets improved last week, pushing jumbo mortgage rates lower overall.

It was the first week since late-April in which mortgage rates fell.

The biggest reason rates improved last week was because the economic optimism that was responsible for the stock market's 30% gain since March faded somewhat.

Retail Sales came in weaker-than-expected as did Initial Jobless claims. Both of these data points show that the economy may not be recovering as quickly as investors had wanted to believe.

Combined with gas prices ballooning more than 10 percent over the last three weeks, it's clear that consumer spending will be muted this summer and into fall.

Consumer spending is important because it accounts for two-third of the economy. If it's slowed for any reason, the economy is less likely to emerge from the current recession as quickly as had been anticipated.

This is good news for mortgage rates because a slow economy tends to draw investors out of stocks and into bonds, including the mortgage-backed kind. More mortgage bond demand leads to higher bond prices and, therefore, lower bond yields and mortgage rates.

This week, there isn't much data to watch and, because of Memorial Day, trading will be very light towards Thursday and Friday.

It's during "calm" weeks like this that mortgage rates can make huge movements up or down. With no official announcements against which traders can make bets, every piece of news is a surprise.

If you're still floating a mortgage rate, take some risk off the table by locking in this week.

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.

For the third week in a row, mortgage markets improved early in the week, only to give back the gains before Friday's close.

Jumbo mortgage rates ended last week exactly where they started. However, if you locked your jumbo mortgage rate Tuesday, you got a rate decidedly lower than someone who waited until Friday.

Last week, one of the biggest mortgage rate drivers was a series of surprisingly strong corporate earning reports, including those from financial firms Goldman Sachs and Citigroup.

The positive reports pushed the Dow Jones Industrial Average to its 6th consecutive weekly gain. This is the market's longest winning streak in two years and its best 6-week rally since 1938, in percentage terms.

In part, the rally is boosting Consumer Sentiment, too. According to a survey, Americans are feeling better about the economy than at any time since last September's meltdown.

But while stock market rallies and rising consumer sentiment can be good for our investment portfolios, they're not always welcome when we're shopping for mortgage rates. This is because the bond market is considered a "safe place" for money, an alternative for when stock markets are risky.

When market risk is reduced like, say, following 6 consecutive weeks of gains, the safe haven of bonds loses some of its importance to investors.

As a result, bonds start to sell-off so more cash is available to invest in equities. Bond prices suffer when this happens and, because mortgage rates are based on the price of mortgage bonds, mortgage rates suffer, too.

This week, there are a number of large corporations reporting first quarter earnings including banking behemoths Bank of America and US Bank, plus companies like IBM, AT&T and McDonald's. Strong earnings may -- again -- lead mortgage rates higher.

If you're among the thousands of Americans still waiting for mortgage rates to "bottom out", consider that the bottom may have already been touched.

It's tough to follow mortgage rates in real-time unless you have a Bloomberg, at least in the short-term, you can find some clues in the stock market. If stock markets are rising this week, it's likely jumbo loan rates are, too. The biggest thing to remember as you await for the perfect time to refinance or purchase is lending continues to get more strict. FICO score requirements at many banks/investors have increased 40-60 points in the last two weeks. Some programs had 680 minimums now they are at 740. That is the middle score by the way. As credit quality gets worse across the country because of job losses and a million other factors expect things to get more strict and the fine comb treatment of each loan to be much higher. Meaning all your paperwork in your filing cabinet plus blood samples of everyone you know.

So what's the state of the market? We have seen down payment/equity requirements increase about 5% in most states. Property values are in freefall in some states you wouldn't expect to still be dropping so much. The market above 1m is especially tough in some states. We had a client enter a purchase contract on a new home in the bay area of CA that sold in 07 for 2.3m they bought it out of foreclosure from Bank of America for 1.4m. The best program available in the state requiries 20% down payment and stellar financials. It doesn't matter if we have 5.50% 30Y Fixed jumbo money if the buyers or refinance folks don't measure up to today's tight credit requirements. No banker who still has a job wants to make a loan that has the slightest chance of problems as the Treasury coffers only have so much to bail us out.

If all this makes you sad then go do something charitable or stick your head in the sand for 3-5 years till this meltdown is over.

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."