This week brings us the release of five important economic reports for the bond market to digest. Several of these reports are considered to be of high importance, meaning we will likely see volatility in the financial markets and mortgage pricing over the next several days. There are also plenty of corporate earnings releases scheduled for the stock market thi s week along with the recent geopolitical events in the Middle East that could add additional volatility to stocks and lead to changes in bonds and mortgage rates. Throw in a few days of Fed testimony and we have the makings for a very interesting week.

The first piece of data comes Monday morning with the release of June’s Industrial Production data at 9:15 AM ET. This data measures output and U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength. It is expected to show a 0.4% rise in production, indicating that the manufacturing sector showed moderate growth during the month. A smaller than expected increase would be good news and could help push mortgage rates slightly lower.

Tuesday’s big news is the release of June’s Producer Price Index (PPI). The PPI is very important because it measures inflationary pressures at the producer level of the economy. It is expected to show a 0.3% increase in the overall reading an d a 0.2% rise in the core data reading. The bond market should react quite favorably to weaker than expected readings, but a bigger than expected jump in the core reading could send mortgage rates higher.

Next on tap is Wednesday’s release of June’s Consumer Price Index (CPI). It is a mirror of Tuesday’s PPI with the exception that the CPI measures inflation at the more important consumer level of the economy. Analysts have forecasted a 0.2% increase in the overall index and a 0.2% rise in the core data. The core data is considered to be the key reading of both the PPI and CPI because they exclude more volatile food and energy prices, giving us a more stable measure of inflation. Higher than expected readings could raise inflation fears and push mortgage rates higher both days.

Also due to be posted Wednesday morning is June’s Housing Starts report. This data gives us an indication of housing sector strength, but is not considered to be of hig h importance. Analysts are currently expecting to see a decline in new starts of housing projects. With the CPI being posted at the same time, I don’t see this data having an impact on mortgage rates Wednesday.

Fed Chairman Bernanke will speak before the Senate Banking Committee Wednesday morning at 10:00am ET. His testimony will be broadcasted and will be watched very closely. Analysts and traders will be looking for the status of the economy and his expectations of future growth, particularly inflation concerns. This should create a great deal of volatility in the markets during the testimony and the question and answer session that follows. If he indicates that inflation is a threat to the economy, we will likely see the bond market tank and mortgage rates rise.

It is extremely difficult to predict what he will say. Regardless, I am expecting to see a fair amount of movement in mortgage pricing Wednesday morning and early afternoon. He will r epeat his testimony before the House Financial Services Committee Thursday morning, but is not expected to vary his speech much from Wednesday’s. This makes it likely that his testimony Thursday will have little impact on mortgage rates.

The only other report of any relevance scheduled for this week is June’s Leading Economic Indicators (LEI) at 10:00 AM Thursday. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of relative importance to the bond market. It is expected to show a 0.1% increase, meaning that we may see a slight increase in economic activity over the next few months. A decline in the index would be good news for the bond and mortgage markets.

Also worth noting is Thursday’s release of the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following their 2:00 PM ET release, espec ially if they show some divisiveness by its members when voting for the last increase to key short-term interest rates. Overall though, I think we will see the most movement in mortgage pricing this week on Tuesday or Wednesday due to the release of the inflation related indexes and Mr. Bernanke’s testimony.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

a la mode

The raising of interest rates on millions of adjustable rate mortgages over the next several years has all the makings of a classic horror story.

As home prices appreciated from ridiculously high to unbelievably higher, more Americans began using mortgages that allowed them to buy more house for less of a monthly payment. Next year, a large portion of those rates move up and homeowners who opted for the exotic mortgages could find their payments doubled. Talk about bloody. They need to find a way to minimize the pain.

Many will refinance their loans. But for others, whose mortgages now exceed the value of their homes or whose debt payments exceed 40 percent of their incomes, there may be no other solution than to get out of their houses. With the housing market cooling, selling it may not be easy. Some may default on their loans.

With more homes on the market, prices could begin to fall. That reduces home equity — the difference between the amount borrowed and the total value of the home — and could force people whose loans change in 2008 and 2009 to consider selling, further accelerating the drop in prices. Some of those cities with the highest proportions of interest-only loans are also at the greatest risk of falling prices.

Mortgage lenders, however, say they are not worried. Economists say even the worst-case outcome will not have much impact on the overall national economy. Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, points out that mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners’ equity of $11 trillion and a hiccup in the gross domestic product

On a personal level, however, there is going to be pain as homeowners struggle to make higher payments. In 2003, of all new mortgages, 10.2 percent were interest-only, meaning the homeowner paid only the interest for the initial period of the loan. According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month.

In some areas of the country where homes are expensive, these loans were highly popular. In most California cities, as well as in Denver, Washington, Phoenix and Seattle, interest-only loans represented 40 percent or more of all mortgages issued in 2005.

Traditionally, interest-only loans and adjustable-rate loans were used by people who expected to live in a house only a short time, but such loans have turned into “affordability products” as housing prices rose. The interest rate on the loans, while below that of conventional 30-year fixed-rate mortgages at the beginning, resets after 3, 5, 7 or 10 years, depending on the loan. So, homeowners who took out loans in 2004 could find, for example, that their initial 4.25 percent loan climbs to 6.25 percent or 7.25 percent next year.

Someone now paying $350 a month for a $100,000 interest-only loan could be facing payments of $680 both because of the shift to the higher rate and because the borrower would have to start paying off the principal as well as the interest.

“You need a couple of good pay raises in order to afford it,” said Mark Fleming, chief economist with CoreLogic, which develops risk models for the mortgage lenders. “It’s pretty hard to deal with a payment shock of 80 percent or 90 percent,” he said.

The mortgage industry is not worried about payment shock. Why?

“It offers an opportunity,” said Brad Brunts, managing director of portfolio management at Citi Mortgage, a unit of Citigroup.

He, like others in the mortgage industry, sees the higher payments as a boost to the flagging mortgage refinancing business. Lenders will adjust about $500 billion in mortgages this year and $700 billion next year, according to Freddie Mac, the quasi-government agency that repackages mortgages for investors. Expect to find the mailbox stuffed with refinancing offers.

Mr. Brunts said only a minority of mortgage holders will face real problems. Most will successfully refinance and though they will pay more, he thinks they will be able to make the payments.

Anyone with a rate that will increase in the next few years, however, ought to worry. If homeowners have an adjustable-rate mortgage, they can hope or pray that there is a recession severe enough for the Federal Reserve Board to lower interest rates. But they would also have to hope or pray that the recession was not so severe that they lost their jobs.

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