It used to be that schools began after Labor Day and got a week off for spring break. Well, now they're "woke," and get a week off in the fall, much like the mortgage industry seemingly did this week due to the ongoing federal government shutdown, currently in its tenth day. While the data void left market participants with little hard news to digest, attention turned to Fed comments on monetary policy and inflation expectations, highlighted by Governor Barr’s cautious stance. Households are increasingly anticipating higher prices, not just from volatile items like food and gas, but also from tariffs on imported goods, raising concerns that inflation could remain above the Federal Reserve's 2 percent target for longer than expected.
Mortgage rates offered some relief, falling for the first time in three weeks. According to Freddie Mac’s latest survey, the 30-year fixed rate dropped to 6.30 percent, and the 15-year fell to 5.53 percent, reflecting improved pricing for borrowers despite ongoing economic uncertainty. However, the market was also rocked by a major legal development: Optimal Blue and nearly 30 mortgage lenders were hit with a lawsuit alleging rate spread collusion, potentially impacting millions of borrowers and raising questions about pricing transparency across the industry. The defendants are confident in their case.
On the capital markets side, the Treasury’s 30-year bond reopening showed lukewarm demand, and the 10-year note auction performed poorly, reinforcing the market’s cautious tone. Meanwhile, the Federal Reserve’s September meeting Minutes revealed a more hawkish stance than many anticipated, with several committee members divided on the path forward, though most ultimately supported a rate cut. Futures markets are now pricing in a 96 percent probability of another 25-basis point cut by month-end and are beginning to anticipate another in December.
Despite higher borrowing costs and tighter credit conditions, consumer spending has held up, driven by strong household balance sheets and significant home equity. Still, signs of strain are beginning to surface. Prepayment data showed higher-coupon refinancings picking up, while lower coupons suffered from seasonal factors. A rise in delinquency rates and tighter lending standards, especially for credit cards and auto loans, point to growing pressure on debt servicing, particularly among middle- and lower-income households now facing stronger inflation headwinds.
In the background, servicing trends revealed how aggressively large servicers are working to retain customers, with recapture strategies and excess IOs becoming increasingly embedded in pricing. Both GSEs are also steering sellers toward excess strip executions, highlighting a broader shift in how value is extracted from servicing. With the October Class A cycle underway and little fresh data ahead, market attention remains focused on interpreting Fed signals, inflation expectations, and evolving consumer behavior in a market full of uncertainty and transition.