Mortgage Rates Roll on Debt Concerns, July 18, 2011

Mortgage rates continue to roll with the waves of economic news across the world.  Today that initially meant a dip in mortgage rates as fears mount regarding the impact of failure of the US government to reach a debt ceiling and deficit reduction deal and dire forecasts regarding the European debt crisis.  In times of fear investors seek of “safe-haven” investments including mortgage-backed securities (MBS).  When MBS are popular current mortgage rates fall for consumers in the market for a home purchase or mortgage refinance.  But the early gains for MBS largely evaporated as the morning has moved on.

With no economic data released today the focus of analysts and investors is squarely on the dual debt crises that are boiling on both sides of the Atlantic.  In the US it appeared that nothing happened constructively over the weekend with the debt ceiling talks between the White House and Congressional Republican leaders.  Regarding Europe, analyst reports were released suggesting that there was strong likelihood of defaults in Greece, Ireland and Portugal.

US Secretary of the Treasury, Timothy Geithner indicated in a television interview this morning that there actually was “much work behind the scenes” on the US debt ceiling and deficit crisis. Secretary Geithner stated that he was “encouraged that default has been decisively taken off the table by all parties.”  This assessment of the negotiations is counter to the widely held view by market participants.  Following the interview, mortgage-backed securities lost some value in early trading, diminishing the price improvement this morning.

Analysts examining the debt situation in Europe are now widely suggesting the inevitability of default on the debt of three nations: Greece, Portugal and Ireland.  Various analysts have suggested that the losses by holders of these nations bonds could be anywhere from 25% to 90%.  Such losses could then become the domino that pushes the crisis to the next level as it would compromise the soundness of many banks throughout Europe and require backstopping by already challenged governments.  As the analysis goes, this could then bring Italy, Spain and even Belgium to the brink of default.

Today appears to be setting up for a major drop in the stock market which usually brings with it better mortgage rates.  But today’s uncertainty about debt issues in the US and Europe are keeping rates from any definitive move.