Unintended consequences of default would impact on rates and loan availability, warns expert
Nerdwallet’s housing market expert has echoed the views of treasury secretary Janet Yellen, warning of potentially catastrophic effects on the US economy if Congress fails to raise the debt limit by October 18.
The Treasury Department last week warned that lawmakers needed to address the debt ceiling before October 18, the estimated date the country will no longer be able to honor its bond payments.
And President Biden this week accused Republicans of blocking efforts to raise the country’s borrowing limit, thereby increasing the risk of default – the first ever in US history.
Holden Lewis (pictured), fintech company Nerdwallet’s expert on home and market trends, told MPA that if this were to happen “you’re going to start seeing really unpredictable reactions in the markets”.
He said: “I really have no idea how realistic it is, except for the fact that (a default) has never happened.
“I’m really hoping they raise the debt limit. If not, I think that you will see pretty big increases in mortgage rates and real challenges with mortgage availability, especially the longer they hang on.”
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Lewis made the comments after publishing his monthly mortgage forecast on Nerdwallet’s website, warning that mortgage rates were also likely to go up because the Federal Reserve “was getting ready to end a pandemic-era policy of keeping them artificially low”.
Over the default issue, he cited Yellen who last week told the Senate Banking Committee that it was imperative Congress address the debt ceiling or the country would face “an economic catastrophe”.
The Federal debt is the money the government already owes on social security, military salaries, Medicare, and tax refund payments. Raising the debt limit is akin to increasing the country’s credit balance (on August 01, the debt limit was reset to $28.4 trillion).
Lewis went on: “Yellen says we can juggle the books until October 18, and then after that we have to start making hard choices, which will begin with continuing to pay US treasury bondholders and delaying payments on things like social security and the child tax credit. But she has not estimated how long that could last.
“Would they be able to do that for a day, or would it be weeks? That is something I’m really curious about that we don’t have any answer to.”
Failure to raise the debt limit could result in the loss of up to six million jobs, and government IOUs would effectively be worthless.
The impact on the US economy would also cause “huge ripples” across the global economy. “That’s another reason to believe and to hope that the debt limit will be raised in time,” Lewis noted.
He added that the current problems being experienced in many countries, such as soaring inflation, the threat of collapse in supply lines, higher energy prices and a crisis in the labor market, were largely transitory and would be worked out as long as an agreement was reached in time to raise the debt limit.
Lewis nonetheless stressed that in a worst-case scenario, and if the government defaulted, “borrowers might find it hard or impossible to get mortgages”. (Ivy Zelman, CEO of housing sector research firm Zelman & Associates, also warned about the effects of even a moderate rate rise of 4%, saying it could dampen housing demand and result in a significant market slow down).
Lewis said the mortgage industry was jittery about a rate rise because most mortgage buying (between 63% and 68%) was for refinance loans.
“When rates rise and those refinances dry up, then you’re just going to have lower mortgage volume,” he said.
The only beneficiaries in such a market would be investors “as they are always looking for higher yields and better returns”, he said.
He said the other dates to watch out for were November 02 and 03, when the Fed was next due to meet and possibly begin tapering (the ending of asset purchases).
He said: “Once the debt ceiling issue is resolved, then the mortgage industry is going to start turning its attention to the Fed. We just don’t know how fast they’ll taper. We don’t know for sure if they’ll actually do it in November, because they could push it off until the middle of December, but I kind of doubt it.”