“The U.S. debt crisis is likely to cost home buyers at least $122 per month,” says Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “Bonds issued by Fannie Mae and Freddie Mac will probably lose their AAA status if the US credit rating is downgraded.” This means that mortgage rates will likely go up. The monthly payment on a $200,000 30-year mortgage would increase by a whopping $240 per month if mortgage rates go up slightly from 4.51% to 6.43% like they were just 3 short years ago. Even if interest rates only go up by 1% it would cost an extra $122 per month.
If you have an adjustable interest rate tied to LIBOR or US Treasuries, your mortgage rate will probably fluctuate a little over the next few months as banks, investors and money market funds figure out what to do with the temporary loss of a AAA credit rating for US Treasuries.
“Many investment funds are only allowed to invest in AAA rated investments,” Nicholas says. “This means they will have to either (1) change their bylaws in order to keep their US Treasuries and mortgage bonds; or (2) sell their US Treasuries and mortgage backed securities. This will cause Treasury and mortgage bond yields to fluctuate considerably over the next few months, adding even more uncertainty to an already fragile mortgage and housing market.”
So how bad can this debt crisis get? Do you think it would be too risky to get a $150,000 mortgage if you were a homeowner making $150,000 per year? Most people would agree that you wouldn’t be over-extending yourself in that situation. In fact, your lender would probably consider you a very safe credit risk and be very eager to lend you the money.
“That’s exactly what the U.S. debt burden would be like if the debt ceiling was increased,” says Nicholas. “Our country generates around $15 trillion dollars per year in economic activity, and all we are asking for is a total ‘mortgage’ or debt burden of around $15 trillion. If this was such a high risk proposition, nobody would be loaning us money and we’d be paying much higher interest rates on our debt.”
Now, switch hats for a minute and go back to the homeowner making $150,000 per year. How would the scenario change if they suddenly were at risk of no longer generating $150,000 in annual income? What if their debt was simultaneously growing by about $15,000 per year (meaning they’d owe $165,000 next year, $170,000 the year after, etc.)?
“That’s what the current crisis is all about,” Nicholas says. “The U.S. debt burden is growing by about $1.5 trillion per year and our elected officials are jeopardizing even the $15 trillion in economic activity that we do have as a nation. That’s why the rating agencies are probably going to temporarily downgrade our credit rating. The bottom line is that we don’t have a ‘debt crisis’, we have a ‘credibility crisis.’ There will be some temporary negative consequences because of all this even if the debt ceiling is increased at the last minute.”
For more information, visit www.cmpsinstitute.org.