As has been the case most of summer, there were no shortage of headlines this week: namely, shifting rate dynamics, mounting political risk to markets, and ongoing signs of consumer fatigue. As short-term interest rates declined more sharply than long-term ones, adjustable-rate mortgages (ARMs) have gained fresh momentum. Lenders, particularly banks and credit unions, report a notable rise in applications for longer-dated ARMs (5-, 7-, and 10-year products) reflecting a structural shift away from the 1- and 3-year ARMs that dominated during the mid-2000s. While institutional buyers remain hesitant to take on ARM exposure, depository institutions are content to keep this production on their books, especially in an environment where they’re borrowing cheaply and lending at spreads north of 5 percent. However, this renewed ARM appetite is also set against the backdrop of a housing market still struggling with elevated mortgage rates and limited affordability.
Housing data this week remained mixed (as has been the case lately). New home sales fell 0.6 percent in July, and pending home sales slipped for a second straight month, down 0.4 percent and underscoring persistent headwinds from high financing costs and broader economic uncertainty, despite earlier expectations of a rate-induced rebound in demand. The latest FHFA data showed U.S. house prices rose 2.9 percent year-over-year in Q2, though quarterly growth stalled. While home prices remain resilient, builders are facing pressures from rising inventories and a tepid buyer pool, which is likely to cap construction activity in the near term. Meanwhile, mortgage applications declined by 0.5 percent last week, indicating that demand for purchase loans remains soft, even as borrowers seek alternatives like ARMs to navigate high fixed-rate pricing.
Rate expectations, and I'm talking both the fed funds rate and mortgage rates, remain in flux as markets digest a softer labor market and tame inflation readings. Core PCE, the Fed’s preferred inflation gauge, rose 0.3 percent in July, in line with forecasts, while personal spending showed modest growth. Combined with falling initial jobless claims and a revised Q2 GDP of 3.3 percent, the data supports the view that while the labor market is cooling, it is not collapsing. Still, market participants now see two Fed rate cuts before year-end, one likely in September and another in December. The yield curve has steepened notably, with short-end rates falling in anticipation of these cuts, while long-end yields remain elevated, partly due to concerns about central bank independence and future inflation risks. Real consumer spending rose 0.3 percent in July and is now up 2.0 percent over the past year.
That brings us to the week’s most politically charged development: President Trump’s attempt to remove Fed Governor Lisa Cook. Though none of us would advocate for mortgage fraud, this move is widely interpreted as an effort to reshape the Federal Reserve’s composition in advance of FOMC confirmations in 2026. A Trump-aligned majority (four of seven governors) could block the reappointment of regional Fed presidents and potentially steer the central bank toward looser policy, regardless of underlying economic conditions. Any erosion of Fed independence could lead to a loss of investor confidence, upward pressure on long-term rates, and increased mortgage volatility. Moreover, the future of the GSEs (Fannie Mae and Freddie Mac) remains in limbo amid ongoing speculation about an IPO and possible merger into a so-called “Great American Mortgage Company.”
In terms of regulation, the CFPB proposed a new rule to define “risks to consumers” under Dodd-Frank, a move that could have lasting implications for how nonbank mortgage entities are supervised. The broader macro picture continues to evolve: tariffs are re-entering the inflation debate, and the University of Michigan sentiment survey showed a striking rise in unemployment expectations. All eyes now turn to the upcoming August jobs report and CPI release, both of which will heavily influence the Fed’s discussion and actions at the September 17 FOMC meeting.