Marketweek 07/23/07: More Subprime Losses Not Expected to Cause Rates to Rise

Fixed and ARM rates open even this week over last week. Bond yields, which set the tone for mortgage rates, dropped last week on benign inflation data and on Fed chairman Ben Bernanke’s comments that the housing sector could see more weakness in the wake of another “$50 to $100 billion” in losses on bad sub-prime loans. But mortgage rates haven’t dropped commensurately with the market yet, since lenders are waiting to see if lower bond yields stick.This week, bond/rate markets will be trading on light data: June’s existing and new home sales data comes Wednesday and Thursday. Then GDP and Consumer Sentiment provides broader economic guidelines for traders on Friday.

For perspective, please keep in mind that $100b in sub-prime losses only amount to 1% of total outstanding mortgage debt. It shouldn’t cause prime rates to rise. What it will do is cause stricter loan approval guidelines across the entire credit spectrum, which pressures consumers and over the long-term, lower rates are the only way to ease that pressure. But also keep in mind, it losses could be way higher than $100b and if so, it could have longer-term impacts on the economy.

As for this week, I think we’ll see some modest rate improvement.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year:  6.75%  (6.89% APR)
10/1 ARM:  6.875%  (7.015% APR)
5/1 ARM:  6.625%  (6.775% APR)

Jumbo ($417,001 – $650,000) – NO POINTS
30 Year:  6.875%  (7.015% APR)
10/1 ARM:  6.875%  (7.015% APR)
5/1 ARM:  6.625%  (6.775% APR)