What Happens to Housing and Mortgage Rates if They Don’t Raise the Debt Ceiling?
29th July 2011
Though it seems inconceivable, it is looking more possible that congress could really fail to come to an agreement on raising the debt ceiling, and the US government could default on 
its debt. This was looked at as inconceivable because failing to raise the limit would be a self inflicted wound, and would trigger a downgrade in US debt, riling the investment markets and costing the government more in higher interest charges. But so far, no agreement is on the horizon. It is still likely that some last minute agreement will come around, but what happens if it doesn’t? If the debt ceiling isn’t raised, the government won’t have enough cash to pay all their bills, and will have to prioritize what bills they will pay. How will this affect the the mortgage industry and those who are financing properties while this is all playing out?
No one knows for sure, but there are some things we can expect. Here are some things that will be affected if the government fails to raise the debt ceiling:
Interest rates are likely to rise – Most experts agree that mortgage rates will go higher, but there is disagreement as to how much of an effect this will have. Mortgage rates move up and down based on what happens in the mortgage backed securities (MBS) market. MBS move up and down in close alignment with what happens to US treasury bonds, and like treasuries, mortgages are looked at as low risk investments. If the government defaults, even if they continue making payments on their bonds, the perception of risk will go up. Whether the increase is just a little, or a lot, expect higher rates.
Many government obligations will go unpaid – In general, this means there will be less money flowing into the market. Specifically it will mean that some people with government jobs or entitlements won’t be paid. No one knows how the government will allocate the payments they make, but without enough money coming in to pay everyone. If you are applying for a loan and rely on government payments, this may delay your loan approval or closing. This is also likely to deepen the recession.
There will be more uncertainty in the market – this is probably the biggest effect a default will have on the housing market and the economy in general. So much of what happens is based on perception. If people think that the government isn’t in control, more people will put off making decisions. Consumer confidence is the basis of so many buying decisions. If confidence ticks down, this will hurt the economy in general and the housing market in particular.
It will take longer to process loans – The mortgage industry is reliant on the government in many ways. As part of the loan process we check with the IRS for copies of tax transcripts on every file. We verify your social security number with the social security administration. FHA is a government program, and we need to get an FHA case number for every FHA loan before we can order an appraisal. We need to check with FEMA on every loan to see if the home is in a flood zone. If government workers are placed on furlough, all these services that we take for granted will take longer to get through.
The majority of loans are connected to the government – FHA loans are part of the Department of Housing and Urban Development. The government doesn’t directly make the FHA loans, it insures the loan program. They have the money in place to continue to insure loans, but if the government shuts down, they may not have the ability to continue, and some lenders may hold off on taking FHA loans as a precaution. This would be devastating if this happened, as about 40% of the purchase market relies on FHA financing. VA loans for qualified veterans also insures the loans, and the same logic applies here. Fannie Mae and Freddie Mac were taken over by the government after the housing collapse, but as long as the MBS market continues to trade, they should be able to continue to operate.
The clock is ticking, but so far the markets have avoided panicking. This means those who have the money still expect some kind of resolution to this problem.The odds are still on the side of finding a way to fix this problem, but something needs to be done, soon.
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it looked like a big agreement was coming together. President Obama and House Speaker Boener, the leading Republican in the House, were on the verge of a plan that would put in place big budget cuts with modest revenue increases, but no new taxes. This deal fell apart Friday night, right after the financial markets had closed, when it became clear that Boener didn’t have the support from his rank and file. So now all parties are scrambling to come up with something, but there is no common language to what an agreement could look like, so it comes down to a high stakes game of chicken where someone will have to blink or the results will be devastating for the entire economy.
chance of a compromise since both sides positions have been set in stone. The Republicans, pushed on by the newer Tea Party backed freshmen congressman, want deep spending cuts and no new taxes of any type. President Obama and the Democrats insist that taxes have to be part of the mix, and have drawn the line on deep entitlement cuts. Coming up with a real plan to make meaningful cuts and get both sides on board has become an exercise in magical thinking. The two party’s are looking at this from mutually exclusive view points. The Republicans believe that cutting taxes and slashing spending will be just what we need to get the economy moving again. The Democrats think that more taxes, mainly on corporations and the higher income earners, is the solution, and government spending to maintain a safety net is crucial. When world views are this far apart, a compromise is not a strong possibility. But the pressure for some solution has been growing, and most agree that a default will be horrendous for our economy. The Republican leadership is ready to make a deal, and as the freshmen congressman get more and more calls and pressure from businesses in their district, the likelihood is that they will get on board, if they have a way to save face. So the solution is going to be to kick this on down the road. There will some votes in congress this week on a balanced budget law that will require the government to live within its means. These won’t pass, but they will let everyone go on record saying they are for a balanced budget. After that, it looks like some agreement will come down to raise the ceiling but make Obama responsible for it. This just kicks the can further down the road, but it averts disaster and will calm the markets – as long as something passes.
on Friday showed a gain of 18,000 new jobs over the last month and a revision of last month’s report showing 34,000 less jobs than previously reported. The consensus expectations were for a gain of 90,000 jobs, and many expected that the numbers would come in stronger. It takes about 150,000 new jobs created each month just to keep up with new people coming into the market, so this was a real stinker of a report. In a separate survey, the unemployment rate increased from 9.1% to 9.2%. There was nothing optimistic in the report that could be spun with a silver lining. Monthly wages were down, the participation rate was down, if it was higher meaning more discouraged job seekers, (the unemployment rate would have increased more) and the number of people who’ve been jobless for longer than 27 weeks increased by 89,000 to 6.29 million, or a full 44.4% of those out of work are long time unemployed. This was a dismal report and shows that the economy is still very soft and fragile.
Greece. The Greek parliament approved the austerity program, a prerequisite for any bailout, and the European Union moved forward with the first step of support. But this is still just a temporary solution. In order for this package to work, private investors in Greek debt have to be on board, and the new deadline for an agreement on how this will work has been moved to mid September. As we get closer to this date, the markets will refocus on this and the dance will continue. The Greek debt is still a major problem, but it has been kicked down the road a little farther.