Mortgage Market Update
This week has five economic reports scheduled for release that range from minor to extremely important. There are also a couple of Treasury auctions set that have the potential to influence rates. However, the big news is the government shutdown that has not been resolved as of this evening. If the shutdown continues, some of this week’s data won’t be released as scheduled. We will get to the reports and why they are relevant shortly. First, let’s discuss how the shutdown will affect the mortgage industry. While it may seem like new government-insured loans will cease, that actually is not true. FHA and VA loan guarantees should be uninterrupted as long as the shutdown does not carry on too long. This is partly because home funding guarantees are considered "essential". Conventional loans are made by private-sector companies as are Private Mortgage Insurance (PMI) policies and Fannie Mae and Freddie Mac are not considered governmental agencies. Therefore, they are not directly affected. Unfortunately, USDA loans will indeed be halted during until the shutdown ends. What could disrupt the industry more than anything comes from the IRS. Mortgage lenders use the IRS to verify income on some mortgage applications prior to closing, particularly self-employed borrowers. If your income comes from a source that requires IRS verification before closing, you likely will not be able to close until they are processing those requests again. That probably won’t be until after the shutdown ends. The impact on mortgage rates isn’t so simple. With many government agencies shut down, they cannot release the economic reports that market traders use as a basis for buying or selling mortgage-related bonds. We will still get some data from entities such as the National Association of Realtors, the Conference Board, ADP and the Institute for Supply Management (ISM). But important reports that come from the Commerce and Labor Departments will be put on hold. That prevents the markets from being able to react to key economic data. With a couple of exceptions, many private-sector economic releases don’t carry the same importance as some of the government-issued reports. Without having key economic data to drive trading, bonds are left to be influenced by factors that usually are not as relevant. That creates plenty of uncertainty for mortgage rates. Assuming the shut down carries on this week, we will still get two of the five scheduled reports. The first will be December’s Existing Home Sales report Wednesday morning that will give us a measurement of housing sector strength. The second is December’s Leading Economic Indicators (LEI) Thursday morning. The two most important reports of the week, Durable Goods Orders and initial reading to the 4th quarter Gross Domestic Product (GDP) will be affected by the shutdown. Lastly, the 5-year and 7-year Treasury Note auctions should take place mid-week as expected. There is nothing scheduled to take place tomorrow or Tuesday besides tomorrow’s Senate vote on funding to end the shutdown. We saw the benchmark 10-year Treasury Note yield break above a key resistance level of 2.63% last week. While that is a concern for mortgage rates, we need to see what impact the shutdown will have on bonds. An extended shutdown should have a negative impact on the economy and with stocks at or near record levels, it is a good opportunity for profits to be taken by investors. If that is widespread, the stock selling should cause funds to shift into bonds, especially with yields at their current levels. On the other hand, a quick resolution in Washington will prevent much of an impact on the economy, meaning we could see the negative momentum in bonds continue in the immediate future. With so much uncertainty, it would be wise to keep a close eye on the news wires and maintain contact with your mortgage professional if closing in the near future and still floating an interest rate. The next couple of days may not be as active as some expect, but if the funding issue drags on we could see an extremely active bond and mortgage market. Bond weakness late Friday caused many lenders to revise rates higher before closing. If your lender did not make an intraday upward revision Friday afternoon, you have a small increase in rates that will be absorbed into tomorrow’s pricing.