“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."
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.”
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. 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. That’s why they are so eager to buy our bonds and lend us money; and that’s why our interest rates are so low. In fact, compared to our peers, we are probably the lowest risk borrower in the world.”
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 mentally unstable 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. 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.”
Click here to watch a five-min. video illustration of the U.S. Credibility Crisis and how it impacts homeowners and buyers. Click here to register for a free CMPS Institute Webinar set for Monday, Aug. 1 at 1:00 p.m. ET (Noon CT, 11:00 a.m. MT, 10:00 a.m. PT)
titled "America's Debt Crisis: How It Impacts You, Your Clients, and Your Referral Partners."
Homeowners and buyers should find and contact a CMPS professional in their area to discuss their options and what the US Credibility Crisis means for their situation.
About CMPS Institute: The CMPS Institute administers the Certified Mortgage Planning Specialist (CMPS®) designation through an extensive curriculum that focuses on suitability of various mortgage options, a comprehensive examination process, an enforceable code of ethics, and annual continuing education requirements. Recognized for its preeminence within the industry, the CMPS curriculum goes above and beyond the minimal licensing requirements, and represents the core knowledge expected of residential mortgage professionals. For more information or to find a certified professional near you, please visit the CMPS Institute or call 888.608.9800.