Wells Fargo Rate Jumps To 8% Overnight?

A: Not news, as this was announced late last week and is a result of the re-pricing of risk I discussed previously. On Friday, Wells Fargo announced that the rate for jumbo fixed rate loans will jump from 6.78% to 8% overnight due to the increased risk in the credit markets and specifically loans made to residential home buyers. While their website still shows lower rates for Jumbo loans, I'm sure that 8% quote is for those that are at the bottom of the credit quality food chain. In essence, this is Wells Fargo's way of tightening lending standards and controlling their exposure to mortgage risk without outright shutting down the loan products altogether. Whether or not other major lenders will follow suit remains to be seen.

Lets jump right to the news. Wells Fargo Raises Rates: Are Homeowners Out In The Cold:

"They're pulling themselves out of the market to regroup," is what one of my mortgage broker buddies told me on the phone this morning when I asked how in the heck Wells Fargo could raise rates on a 30-year jumbo fixed rate mortgage from 6 7/8% to 8% overnight. A jumbo is anything over $417,000, and given today's home prices, that's going to hit an awful lot of borrowers.

Then he tells me he got an email this morning from Vertice, which is part of Wachovia, saying:

Based on current market conditions, investor appetite and liquidity for Alt-A features, including higher LTV/CLTV products and reduced documentation types, have all but disappeared. In response, Vertice is announcing the temporary suspension of a number of programs effective immediately.

This means they're pretty much not doing Alt-A loans anymore (these are the loans somewhere between prime and subprime--the "low-doc" or "no-doc" loans with no income verification). There's just no liquidity for Alt-A. The CDO's are not being packaged and sold anymore because there's no market for them, so forget it.

Lets run down what some of the banks and lenders are saying:

IndyMac Bancorp (IMB) - CEO Michael Perry states that the market for mortgage backed securities is "very panicked".

Countrywide Financial (CFC) - Nation's largest home lender states they are seeing a spread from subprime defaults into alt-a and prime borrowers. Also states they have plenty of funds to weather the storm.

National City Corp. (NCC) - Said yesterday that it is suspending originations of stated-income loans, which don't require the borrower to verify income

Wachovia (WB) - Said it had stopped making Alt-A loans through brokers, joining a trend among big lenders to rely less on outsiders to arrange mortgages

Wells Fargo (WFC) - Raises rates on jumbo loans. Tells brokers this week that it was making "day-to-day" decisions on the pricing and availability of Alt-A loans amid reduced investor demand.

Accredited Home Lenders Holdings (LEND) - Stock dives after auditors said its "financial and operational viability" is uncertain if a pending merger isn't completed

American Home Mortgage (AHM) - Stopped making loans earlier this week, said late yesterday it would cease most operations, slashing its work force to about 750 from more than 7,000

Novastar Financial (NFI) - Will temporarily suspend funding for wholesale loans that have not been locked in. Suspension will last until Aug 7th when a re-evaluation will take place.

MGIC Investment (MTG) - Says $515M partnership stake in C-Bass, may be worthless. C-Bass hires Blackstone Group to advise and help raise cash to "help solve the liquidity challenge it currently faces."

Sound contained to you? I didn't even include the big bond players that are no longer buying these repackaged MBS. This is a perfect example of the widening of credit spreads that is happening at a very fast pace as the correlation between treasury yields and lending rates widen.

As long as the credit crunch continues to play out and more lenders publicly announce how deep their troubles really are, I would expect more of the same in the lending industry in the near term. Here is a chart of Jumbo Rates as published on Wells Fargo site right now:

Unfortunately I couldn't get any inside information to you as my favorite Wells Fargo contact Michael McGivney is in quarantine and not allowed to comment on the fast changing environment that surrounds their institution. I don't blame them for advising their lenders to keep quiet until credit concerns die down a bit. However, he did say that his rates are approximately 0.125% lower than what is quoted on the above chart, and that obviously depends on credit risk, risk adjusters, loan amount, relationship with wells fargo, and the other normal items that effect the ultimate rate you will be quoted.

Prospective home buyers are not only facing less options as tighter lending standards limit the number of loan products at their disposal and the conditions get stricter for qualifying for these loans, but now they need to deal with a jump in rates as well as risks rise.

Just so all of you are clear on one very simple and fundamental issue regarding credit: AS RISK RISES SO DOES THE RATE ASSOCIATED WITH THAT LOAN. IN OTHER WORDS, LITTLE RISK OFFERS LOW RATES & HIGH RISK DEMANDS HIGHER RATES

All of the lenders, brokerages, homebuilders and other industries directly exposed to the re-pricing of risk will continue to face pressure until the markets fully correct themselves and that will only happen when companies come clean, write down the losses, and remove the uncertainty.

I worry that this rational behavior might be difficult to gather, as companies try to ride out the bad times and do everything possible to avoid financial distress and investor/shareholder losses.

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine