Commentary: Trading activity in the mortgage market is relatively light today as mortgage investors turn increasingly cautious in front of the approaching potential debt default by the United States.
As you are probably aware, Democrats and Republicans have reached a rough agreement on billions of dollars in spending cuts but are at an impasse with respect to tax increases. Democrats want to increase taxes on wealthier Americans to help lessen the deficit, while Republicans refuse any tax increase, fearing the impact a tax increase would have on the already wobbly economy. Most analysts believe it will take substantive spending cuts together with a tax increase of some sort to convince global investors Americans' are serious about maintaining their enviable AAA sovereign debt credit rating. A failure to make meaningful progress on this issue by the end of the month has the potential to not only trigger a notable spike in interest rates - but it very likely will push the economy back into a recessionary spiral and send global financial markets into a panicked selling stampede. I am not saying such dire consequences will occur - I'm just outlining the risks associated if Congress fails to "get their collective act together." Against such a backdrop it will be difficult for mortgage investors to remain enthusiastic about pushing mortgage interest rates notably lower until the current game of political brinkmanship has run its course.
The economy limped into the end of the second quarter. Data released this morning from the private Institute of Supply Management showed the Service Sector Index for the month of June fell a larger-than-expected 1.3 points to 53.3%. The components of this report, a measure of activity in the nonmanufacturing sector of the economy, were not terrible but there were no meaningful signs suggesting the recovery gained any traction in the second-quarter. Mortgage investors had already "priced-in" this weakness and therefore it had little effect on rate sheets.
In a separate report, the Mortgage Bankers of America released their Mortgage Applications Survey for the week ended July 1st. Overall mortgage applications fell 5.2% from the prior week driven by a sharp 9.2% decline in refinance loan requests. The drop in the composite index masked a solid 4.8% week-over-week gain in the number of purchase money applications.
The contract rate for 30-year fixed-rate mortgages finished at 4.69%, up 23 basis points from a week ago, up 15 basis points from four weeks ago, and up by 1 basis point from the year-ago mark. Refinance requests accounted for seven out of every ten loan applications taken last week.
Be patient - be disciplined - and play it by the numbers.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
