Mortgage rates decline a bit
By Holden Lewis • Bankrate.com

Mortgage rates dropped this week on news of a slumping economy.

The benchmark 30-year fixed-rate mortgage fell 9 basis points, to 6.53 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.74 percent; four weeks ago, it was 6.26 percent.

The benchmark 15-year fixed-rate mortgage fell 10 basis points, to 6.09 percent. The benchmark 5/1 adjustable-rate mortgage fell 19 basis points, to 6.09 percent.

The latest bit of bad news about the economy came from ADP, the payroll processing powerhouse. Every month, ADP releases an employment report that anticipates the federal government's jobs survey that comes out a few days later. This week, ADP reported that nonfarm payroll jobs shrank by 79,000 in June -- worse than the 20,000-job reduction that Wall Street had expected. The May job-creation number was revised downward.

Weekly national mortgage survey

Results of Bankrate.com's July 2, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

According to ADP, construction jobs declined by 34,000 in June, and jobs in financial services -- think mortgage workers -- fell by 3,000. Those numbers probably won't come as a surprise to people who are shopping for mortgages.

Looking ahead to the more authoritative employment report from the Labor Department, economist Joel Naroff says, "Given all the other reports that have been pointing to a soft June labor report, this survey should be taken as a warning that the numbers could be really weak."

Rate increase in the cards?
That's the consensus among investors and economists, and so is the conviction that employment doesn't matter much to the Fed, whose members "expect weak numbers through the summer," Naroff says. "Views will not be changed even if the June employment report does indeed turn out to be ugly. They are talking about inflation, not economic growth. The members are waiting for an excuse to start raising rates, and while a return to job growth would be nice, that will not be the only factor."

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Indeed, the futures market in Chicago has priced in a high probability of at least one Fed rate increase by the end of October. The Fed's rate-setting committee has four meetings scheduled for the rest of this year: Aug. 5, Sept. 16, Oct. 28-29 and Dec. 16.

This news hasn't trickled down to some mortgage borrowers. According to the Mortgage Bankers Association, 8.5 percent of mortgage applications last week were for adjustable-rate loans. That's a low number by historical standards, but it raises the question of why people are getting ARMs when the Fed is itching to raise short-term interest rates, and the timing of a recovery in house prices is uncertain.