Commentary: Even though it is shaping up to be one of the hottest summers on record -- mortgage interest rates are starting to freeze in a period of uncertainty. Investors are simply so unsure which way to bet with respect to the raging congressional battle over debt ceiling extensions, deficit spending reduction and the potential of debt default by the United States they are simply choosing to do nothing.
I think the further we get into next week the harder it is going to be for mortgage investors to simply stand around with their hands in their pockets. The majority of market participants will likely decide the safest thing to do is to raise mortgage note rates high enough to slow production to a trickle. Once the federal debt ceiling has been raised - which it almost certainly will be - there will be plenty of opportunities to nudge rates lower if need be to ratchet up loan production levels again.
Speaking of debt ceilings and payment defaults - in the last couple of days I've run across some data I think many of you may find interesting.
The truth behind all the hand-wringing headlines is that the government has to service a monthly nut of about $15 - 20 billion in terms of interest and principal payments on outstanding debt obligations.
The government's monthly income is about $200 billion -- so there is virtually no way we'll default on our debt payments.
There is sufficient cash flow after debt service to cover Social Security and Medicare and Medicaid obligations of roughly $100 billion and still have more than enough to pay active duty troops and veteran benefits. There is even money left over sufficient to pay the combined $15 billion monthly obligation for food stamps and section 8 government housing.
It is just the 44% of other Federal expenses that may be hard to cover. The necessity here is obviously to cut government spending rather than increase the borrowing capacity. I heard someone say that is so very interesting the press sees the government's possible failure to raise the debt ceiling as far more serious -- than the possibility the government will accumulate too much debt.
More experienced credit market participants have largely shrugged-off all the political posturing and the attendant media swirl suggesting there is a chance the United States will fail to pay its creditors. In terms of a potential credit downgrade by the rating agencies - the vast majority of credit market participants readily recognize these are the same guys that gave subprime mortgages the highest performance rating possible.
Even if the United States lost is coveted Aaa credit rating - capital from around the globe would still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.
I think Warren Buffett had it right when he said he could resolve the deficit spending issue in five minutes. His recommendation is that we create a law that states that anytime the federal deficit exceeds 3.0% of GDP -- all sitting congressmen are prohibited from ever running for re-election.
Looking head to next week the intensity of the political pushing and shoving associated with raising the government debt ceiling will no doubt intensify - causing volatility in the mortgage market to ramp up. With respect to the economic calendar Wednesday's June Existing Home Sales data and Thursday's weekly jobless claims numbers will be easily overshadowed by all the congressional "dust" being generated by the attempt to get Uncle Sam's financial house in order.
Be patient - be disciplined - and play it by the numbers.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
