In an article by Josephine Nicholas of National Mortgage Professional Magazine, “How the Debt Crisis Impacts Homeowners and Buyers,” Gibran Nicholas talks about the ramifications of the U.S. debt crisis for borrowers.
As I read this, I can’t help but picture a kid trying to talk his mother into seeing these problems as “reasonable" ...you know, "no worries!" He’s got an answer for everything...
“The U.S. debt crisis is likely to cost homebuyers at least $122 per month,” said 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 U.S. 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 percent to 6.43 percent like they were just three short years ago. Even if interest rates only go up by one percent it would cost an extra $122 per month."
“No worries, Mom. The boss’s been talkin' about giving you a raise.”
If you have an adjustable interest rate tied to LIBOR or U.S. 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 U.S. Treasuries.
“Money market funds don’t want to be caught with their pants down as they did during the last panic in 2008,” Nicholas said. “Many investment funds are only allowed to invest in AAA rated investments. 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.”
“But it’s only for a coupla months, Mom!”
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 US debt burden would be like if the debt ceiling was increased,” Nicholas said. “Our country generates around $15 trillion per year in economic activity, and all we are asking for is a total ‘mortgage’ or debt burden of around $15 trillion.
Oh, is that all? That’s like a full year’s allowance for you!
"It's no big deal, Mom."
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. The rest of the world understands this.
“Everybody else is doing it!”
In fact, compared to our peers, we are probably the lowest risk borrower in the world.”
“Everyone else’s is way higher’n ours, Mom!”
And so that makes it ok? Would you jump off a cliff if somebody told you they were going to?
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 became unhealthy and 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 said. “The U.S. debt burden is growing by about $1.5 trillion per year and our elected officials seem to be so incompetent that they 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. We are acting like we are mentally unstable with no long-term plan for improving our financial situation. There will be some temporary negative consequences because of all this even if the debt ceiling is increased at the last minute.” The bottom line is that we don’t have a ‘debt crisis’, we have a ‘credibility crisis.’
Call it what you will, son…it’s still 15 trillion dollars .