A New Threat To The Mortgage Market : Federal Debt
There is a new threat to the mortgage market, which is the federal debt debacle playing out in Congress. It all boils down to this. If the Congress cannot authorize the rise in the country’s debt ceiling then the United States of America will have to default on some of its payments. The whole economy would be adversely affected and that includes the housing market. That’s because a default will push up interest rates on every form of credit including mortgages. Some analysts are predicting that the interest rate increase could be as much as 1 percent.
Most of the mortgages in the States are involve securities guaranteed by Freddie Mac or Fannie Mae. What that means is that the government is securing those loans. The inability to raise the debt ceiling would mean that the value of these guarantees would decrease in a dramatic fashion.
When the risk factor increases, rates increase automatically in order to mitigate the riskiness of new mortgages. The results will be sharply higher interest rates passed on to the buyer.
This won’t be just a one time deal; the effects will be felt for many years. If there is a serious and extended problem, U.S. bond holders like China will demand higher interest rates. The entire economy will be affected and that of course includes the housing and real estate market. Of course, this, as well as problems in other markets resulting from such a move by bond holders will slow economic growth more and the results would be higher mortgage rates. The worst case scenario would entail a depression.
Furthermore, analysts say that the default could freeze the short term lending markets. Treasuries and other government-backed debt are used as collateral for loans and the value of these securities will be plummeting because rating agencies will downgrade U.S. debt. So lenders could demand that borrowers must provide more collateral which could force consumers to sell other investments
The issue is not just the federal deficit and debt. The repercussions of a U.S. government default will ripple through every nook and cranny of the U.S. economy affecting everything including mortgage interest rates.
The housing market has taken enough of a hit already due to the Great Recession, the rough economy and decline of home values. Another hit would truly be devastating.
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