If you watched the “Sunday Morning Meet the Press Shows” over the weekend, you know that we are not passed all of the Shutdown and Debt Ceiling threats. Last week, Congress and the President really just bought us some time, and extended the treat of further shut downs until January 15th. Most people we talk to understand what the Budget Continuation means, but many folks don’t know what the Debt Ceiling debate means for Mortgages.
The US Budget is made up of 13 parts – they are called Appropriations Bills. The USDA Home Loan program falls under the Farm Bill. Because there’s been no balanced budget for the US – a decision about USDA Eligible Area Map Changes will NOT be made until a FARM Bill passes both the Senate and the House of Representatives. You can see the Future USDA Maps shown – but that’s really more so that Congress knows who in their area will be affected, and so that as folks buy homes – they can consider if it’s going to be harder to sell, when the maps change.
FHA loans have their own “funding” so there should be no furloughs affecting any part of the FHA system, no matter who the Congress sends home. The VA Home Loan program is considered vital – if the Veteran’s Administration needs for you to move, they must stay open… Fannie Mae and Freddie Mac are really “bank backed” mortgages, and Conventional loans are not affected by any government shut down at all – same with Jumbo loans.
What The Debt Ceiling Debate Means for Mortgages
If we get to January 15, and Congress goes through the same debate – then the Debt Ceiling Debate is the one to really watch. Jack Lew is the Treasury Secretary, and he’s in charge of paying Federal Employees, Contract, Social Security – he’s the guy writing the Checks for the US. If Congress does not extend our Debt Ceiling – then Secretary Lew is faced with only two choices: prioritize obligations or borrow more money… We have laws that require a Balanced Budget, and there are laws that limit the amount of debt we can be in.
So when we discuss the Debt Ceiling, Congress is discussing where we can cut future spending, raise taxes, get rid of “Obama Care” – as a way of forcing the a conservative prioritization of spending – since there’s no Budget in place.
If the pattern we just watched in repeated then Congress will again have to decide if we are going to raise the debt ceiling and continue borrowing to pay for every last bit of government spending or it defaults.
There is a third alternative: Congress and the President agree to prioritize what gets paid.
Here is a short prioritized list of government spending:
- Interest payments on the United States’ debt;
- Mandatory spending – Social Security and Medicare;
- Discretionary spending of the executive branch, including spending of the departments of Commerce, Defense, Energy, Education, Housing and Urban Development, Transportation, and Homeland Security; and
- Discretionary Spending of the independent agencies of the U.S. government like the Environmental Protection Agency, the CIA, TSA, NSA, FBI, SEC and the Postal Service.
If we go into this again, then Secretary Lew could be forced to have the President figure out which of the payments will be made, and what departments stay open. This is not likely to happen – but then again, there’s an election happening in some parts of the country, and Senators and Congressmen from various districts could be changing.
However one characterizes nonpayment of Social Security, Medicare and food stamps, their nonpayment coupled with nonpayment of U.S. debt obligations would be an economic disaster. Therefore, in the event that Congress refuses to raise the debt ceiling, it’s hard to imagine that the President will willfully refuse to pay interest on the debt and Social Security and Medicare obligations first.
If this happened – rates would undoubtedly go up, very quickly, because no one would be buying US Treasury Bonds (if we don’t pay our bills). And the 10 year US Treasury Bond is what we typically look at as an indicator of which direction mortgage rates in NC are headed.
Another possible option would be for Congress to write and pass a bill that says, if we don’t have a balanced budget, this is how our bills will be paid. Meaning, Congress would say we are keeping the debt ceiling cap in place – and if we don’t have enough money to pay our bills – this is who gets paid first. This essentially would result in a balanced budget.
This scenario is unlikely because when politicians want more money they never threaten to cut unnecessary spending that the public is either unaware of or would fall low on their priorities; rather, they threaten the loss of services the public wants and or relies upon the most to get the whole budget passed. It would be out of character for Congress to take the time to start eliminating portions of the military budget, canceling foreign aid, and curtailing funding for the arts, farm subsidies and environmental grants to keep spending under the debt ceiling.
If Congress does this – they should know by now that we are not fully recovered from the last Fiscal Disaster – and any immediate / sharp cut in government spending would, at least in the short-term, have a dramatic adverse negative impact on the economy. In this situation – the US Economy would likely go into another dip, and it would likely mean that we keep adding QEIII for most of next year, and rates are pushed back LOWER.
What if SOME kind of deal is worked out to raise the debt ceiling and avert a default?
According to the folks on the Sunday Morning Shows yesterday – this is the most likely scenario.
We currently have no balanced budget, and the Debt Ceiling has just been extended. So to get a REAL deal – we need some longer term agreement on the Budgets, taxes and Spending Limits.
The Stock Market rallied on the news of a short-term agreement – but if we do this the second time, every Economist says that Foreign Investors will be spooked, and that’s what is driving the Housing Market in many parts of the US hurt by the Real Estate Meltdown.
The stock and real estate markets appear to be the only bright spots in the current economy, and so if Congress figures out a longer term agreement – spending reductions move capital from the public sector (Treasury Bills) to the private Sector. The US Government has been the main “buyer” of mortgage-backed Securities since Obama went in office. If Congress demands a change to system, then it means higher interest rates. Especially if the budget is another band-aid that only gets us to July (for instance).
Private Investors would demand higher rates given the potential of the U.S. to default again. Higher rates would mean the U.S. would have higher costs of borrowing and would have to cut its borrowing and spending further, and short-term the economy would experience a sharp decline.
In the past few months the mini housing recovery started losing steam as a result of higher interest rates and a lackluster labor market. The government shutdown is now also starting to wear away at the housing recovery. Unfortunately, in many price points in NC, the momentum in the housing market appears to be lost. This is especially bad news as we going into the slower fall season.
If mortgage interest rates go up quickly, as they did this summer when we move over a point higher in one week – the economic activity and interest in real estate drop to near zero. If this happens again, especially so soon after the slow fall – not only would the housing recovery be over but a decline in home prices would be likely.
Unfortunately, at certain price points the slow down since June (caused by a spike in Mortgage Rates) and the recent Government slow down has taken the “steam” out of the uptick in prices that we saw last Spring. If Congress only passes another “short-term” agenda – then we believe it will take more than just low rates and a continuation of quantitative easing to push the housing market higher.
Silver Lining for First Time Home Buyers
There are some potential “silver linings” for First Time Home Buyers in NC. In January there are additional Congressional Mortgage Guidelines set to go into place. These could make it even more difficult to buy a home, because of strict debt to income ratios.
If home prices move lower – or we end up with lower mortgage rates due to a slow down, that could be good news for those who missed the “bottom” in the market last Spring.
If Congress does offer a balanced budget – it’s unlikely that during the first half of next year The Fed would raise mortgage interest rates significantly – because we are already below their target numbers. What we’ve seen since June (when rates went up and then slowly came back down) was an EASING by Banks in their credit restrictions.
Does this mean Sub Prime mortgages are back? NO! And it won’t ever be a “No Income” verified loan offering in NC – however, FHA recently came out with a program that helps folks who had a short sale buy a house two years earlier – and our Bank started offering loans to folks which meet the FHA credit score guidelines from 580 to 620.
If you are interested in Buying a house – DO IT NOW. We just watched what Congress did. Round two is just around the corner, and what the Debt Ceiling Debate Means for Mortgages, is great news. NOW is the time to buy a house, or at least decide to get your credit straighten out so that you can!
Call Steve and Eleanor Thorne 919-649-5058 to get pre-qualified! First Time Home Buyers check this out! A Google Hang-out is right around the corner! Connect with us on Facebook or Google Plus – we want to help you buy your dream house!