Saturday, August 4, 2007

Wells Fargo ups prime rates to 8%, threatening real estate market

Much has been made of the sub-prime mortgage mess over the past couple of months, and the shock waves continue and grow stronger. This crisis is growing and presents the biggest challenge to the insulated and robust New York City real estate market in quite some time. Unfortunately, the sub-prime mess is clearly spilling over to loans to people with above average credit and below average risk levels. The result is draconian measures suddenly adopted by the likes of Wells Fargo yesterday, which increased rates on 30 year prime jumbo mortgages from 6.875% to 8% overnight Thursday. Banks like Bank of America have already followed suit increasing it's rate to 7.94% according to The banks have increased rates to price in "increased risk premium". Unfortunately, if unchecked, and if other major banks follow suit, this is a self-defeating spiral. If all rates were to jump by 1.125%+ overnight, this would result in much lower national home sales, lower prices, and hence more defaults, more risk and higher rates. I can be sure that the Federal Reserve is taking a hard look at this liquidity issue this weekend and working on potential solutions, including lower the federal funds rate on short notice. This may be a reasonable short term solution to increase liquidity. At the same time, legislators in Washington should be looking at long-term solutions, specifically, curbing the amount of leverage banks and hedge funds can exercise in lending and repackaging mortgage loans. Once again it appears as if the irresponsible lending practices of banks and mortgage companies will cost the responsible homeowner and potential home buyer.
Optimistically, this spike in rates is a short-term overreaction on the part of lenders.
As New Yorkers, the greatest threats to us are higher rates and lower bonuses on Wall Street. As it stands Bear Stearns and possibly Lehman Brothers will see an adverse impact on earnings and bonuses if all goes with the current trend. At the same time, the jury is out on Goldman Sachs. If Goldman emerges unscathed it will be a big positive for the New York real estate market, as Goldman was responsible for better than 60% of the total bonus money doled out last year. If Wall Street can shrug off the mortgage mess and have a positive year, rates get back to normal, and bonuses are as good this year as last, the NYC real estate market will likely remain unscathed. These ifs have gotten bigger over the past week. Much hinges on the next couple of weeks and the actions of banks and the feds in regards to rates for prime borrowers. Time will tell..check back for updates.
Update 8/6- One of my valued clients managed to get a 6 3/4% 30 jumbo rate locked in today from Chase. Apparently not all are following the lead of Wells Fargo, which is a relief!

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