Mortgage-Backed Securities Insights — Week of July 28, 2025

Hi. I'm Jerry Levy, Managing Director of Texas Capital's Mortgage Securities Sales & Trading.

The equity guys are excited this week because we get the rest of the Mag Seven reporting. Well for rate and MBSs, this is our biggest data week of the year. We are currently at the height of informational uncertainty as to tariff policy, trade agreement effects, the rate path, employment and job slowdown and inflation, yet volatility, the VIX, is at its year-to-date low. Perplexing.

OK, what do we have this week? We have the FOMC. No cut as expected, but, significantly, two dissenters are expected for the first time since 1993. Dissenters often come in when the Fed chairman is a lame duck, and this year that timing is no different. Market is pricing in one and three quarter cuts. That's 'til the end of 2025. We agree with a major G-SIBs rate forecast of at least two cuts in '25 and 125 basis points by May 2026. For those of us who watched President Trump's extraordinary visit with Chairman Powell last week and the emphasis he put on getting interest rates down and housing costs lower, do not be surprised to see a tweet at 2:15 on Wednesday by the president emphasizing that rates should be lower and renewing the pressure on Chairman Powell. The two-year tenure curve flattened last week exactly because the market was reassured that the president would not fire the chairman. Look for the curve to begin to re-steepen Wednesday on renewed speculation of such an event.

What else do we have? Jobs reports. We have JOLTS, ADP and of course nonfarm payrolls at the end of the week. Ironically the unemployment rate may be flat this month as there are less job seekers due to the current immigration policies of the administration. 

Inflation? We have PCE, the Fed's preferred inflation index. And that's expected actually to be higher at up +0.3, up from last month's +0.1. The market is looking to see if the PCE is going to see the pass-along of those tariff costs. 

GDP. Second quarter GDP is expected to have rebounded from the first quarter, which as you remember, was front loaded by all of those who were importing to try to front run the tariffs. That caused a subtraction from economic growth, which will now come back in as the inventories are sold off.

Tariff policy seems to be evolving into America's version of Europe's value-added tax or VAT. You saw over the weekend the trade agreement with Europe, which is centered around a 15% tariff. Compare that to Europe's 15 to 19% VAT policy, which is also collected in the supply chain before it gets the actual consumer. Europe is done, but China, Canada and Mexico remain before the August 1st deadline or August 15th in China's case, and Secretary Lutnick says we'll have "no flexibility." 

Finally, a comment on the housing slowdown. We have noted that the median age of first-time homebuyers is now 38, and that's up from 28 a generation ago. The median age of all home buyers is 56 today, and that's up from 46 just before the pandemic. And now, most startling, there are now more home buyers in the U.S. 70 and over than there are younger than 35. The CEO of the largest home listing firm commented that we have an affordability crisis, which is driven by an availability crisis. It is a supply side problem. Apparently, he has not been checking the number of his listings this year, nor noting that prices are now lower in a significant number of cities. In fact, we will see further evidence of the home price appreciation slowdown, with the Case-Shiller indices also coming out this week. We are in an affordability crisis, and lower rates are the fastest way to get potential homeowners and homebuyers back in the market and slow the housing slowdown. We have seen hybrid ARMs returning as the financing option, with seven-year ARMs being quoted 60 to 75 basis points lower than the traditional 30-year mortgage rates. Fed rate cuts would help this trend continue and bring us back to the old question: Fixed or floating?