How The Federal Debt Will Affect Mortgages And Real Estate

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					How The Federal Debt Will Affect
Mortgages And Real Estate
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.

It is said that 95 of every 100 home loans being written today are put into mortgage-backed
securities that are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. When they
guarantee securities, that guarantee is coming from the U.S. federal government. The inability
to raise the debt ceiling would mean that the value of these guarantees would plummet
because the U.S. government would have to default on some payments.

The way the system works is that when the value of the securities drop, then the securities
market would immediately demand a much larger rate premium on new mortgage backed
securities to compensate for the greater risk. The results will be sharply higher interest rates
charged to new borrowers.

The adverse effect on borrowing will not just be one immediate reaction by the markets.
Instead, it will be spread out for years. If there is a serious and extended problem, U.S. bond
holders like China will demand higher interest rates. This will ripple through all the markets
and cause the further increase of interest rates in the mortgage 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, a double dip recession or -- the
worst result of all -- a full scale depression.

As previously mentioned, the increase in interest rates could be as much as 1 percent. This
could cause a 1 percent decrease in economic growth and the loss of 800,000 jobs a year.

Moreover, many analysts are saying that it won't be just the higher interest rates that would
be impacting the U.S. economy. As this crisis plays out stocks, bonds and the dollar itself
could plummet and all of this will continue to buffet the mortgage market. as it affects
everyone's ability to borrow money regardless the reason.

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. Analysts say that this could cause a selling cycle that
would spread chaos across markets much like the Lehman Brothers collapse did in 2008.
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 record
rate of foreclosures, the plummeting value of homes and the reluctance of buyers to take the
plunge and buy a home. It certainly doesn't need more problems caused by a small group in
the U.S. Congress who demand that "It is our way or the highway!"

				
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posted:4/22/2012
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