Mortgage Charges Will Spike If U.S. Defaults On Debt, Moody’s Report Finds
Mortgage rates could rise if US Congress doesn’t raise the debt ceiling … [+]
Buried in a 10-page Moody’s Analytics report detailing the disastrous economic impact if Congress fails to raise the debt ceiling – for starters, a US default could wipe out 6 million jobs and $ 15 trillion in assets – is a line about the mortgage market and home loan interest rates.
“Yields on government bonds, mortgage rates and other lending rates for consumers and businesses will rise at least until the debt line is cleared and Treasury payments resume,” the report said on Wednesday, describing the impact of the US default on its debt.
And it wouldn’t be a short-term spike, said Mark Zandi, Moody’s chief economist and lead author of the report. Interest rates would remain high even after payments resumed as investors add a risk premium that would increase yields on both government bonds and the mortgage bonds that replicate them.
Home loan interest rates would “never go back to where they were before,” said Zandi. “With US Treasuries no longer risk-free, future generations of Americans would pay a heavy economic price.”
Higher mortgage rates would reduce the amount of mortgage loan borrowers can get, as lenders measure future monthly payments against income and other debts. More expensive home finance financing means higher monthly bills, which translates into smaller mortgages that could dampen housing demand.
So far, the bond investors, who control mortgage rates through the returns they are willing to get on their long-term investments, do not believe that the US will default on its debt. Despite the fact that Senate minority leader Mitch McConnell has promised that every Republican will vote against it.
The bond market often has an uncanny ability to predict the future. During the 2013 panic known as the “Taper Tantrum,” for example, when Wall Street went insane because it was concerned about the impact of the Federal Reserve’s suspension of its first bond purchase program, mortgage rates started weeks before the Fed’s announcement to rise.
The average US rate on a 30-year fixed-rate mortgage rose a quarter of a percentage point in the three weeks before then Fed Chairman Ben Bernanke made a speech that first mentioned the possibility of a cut. After Bernanke’s speech, the rate, measured by Freddie Mac, rose by almost another percentage point. 2013 also had a debt limit.
Now, a week before the October 1st debt limit deadline, mortgage rates are showing a subdued response. The average rate on a 30-year fixed-rate mortgage rose to 3.14% on Thursday after the US Federal Reserve announced on Wednesday that it would “soon” start reducing bond purchases by 3.07%, according to the Optimal Blue Mortgage Market Indices. gonna start on tuesday. This is the highest level since July 13th.
The 10-year government bond yield rose to 1.4% on Thursday, its highest level in about two months.
The increase in the debt ceiling would fund the federal government’s solvency for past expenditures, most of which accrued during the previous administration. Federal debt rose $ 5.4 trillion from August 2019 – the last time the line was suspended under President Donald Trump – to January 20, 2021, when Trump’s term expired, according to the non-partisan Congressional Research Service. Since President Joe Biden took the oath of office, it has grown another $ 675 billion, according to CRS analysis.
The government would close on October 1 and the US could stop paying its bills at some point in mid-October if the Senate doesn’t follow the House of Representatives lead in passing laws to raise the cap.
Treasury Secretary Janet Yellen said the Treasury Department would take “extraordinary measures” to pay off debts after this deadline, even though its funds would be depleted within weeks.
That would result in the US defaulting on its debts for the first time in history.
A US default “would likely cause irreparable damage to the US economy and global financial markets,” Yellen said in a letter to Congress earlier this month.
“At a time when American families, communities and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to compromise the full trust and creditworthiness of the United States,” she said.