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What Impact Will Moody's Negative Outlook On U.S. Debt Have On Mortgage Market?

Christine Stuart
Nov 13, 2023
Congress 2023

Mortgage market experts weigh in on Moody's decision, highlighting complexities in debt rating and potential impacts on long-term mortgage rates amidst Congressional gridlock and unsustainable fiscal paths.

It's complicated. That's the sentiment from two mortgage market experts who weighed in Monday on Moody's Investors Service lowering its outlook for the United States' government debt. 

On Friday, Moody's said it was lowering its outlook from stable to negative, but it didn't downgrade government debt, like Fitch did in August, which was followed by a downgrade of the GSE's

“Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability," the Wall Street rating agency said in a statement. 

Congress has until Friday to adopt a short-term spending measure to avoid a partial government shutdown. 

“Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” the ratings agency said.

Two mortgage industry veterans describe the country's current fiscal policy as unsustainable.

Phil Mancuso, president and chief investment officer at EPM, said "Things are very complex. We've gotten to a point where things aren't as easy as they used to be in terms of rating debt, trading debt, and to some extent predicting where rates are going to go." 

He said this could have a long-term impact on the trajectory of long-term mortgage interest rates, but all of this is subject to change in an instant with a change in fiscal policy. 

He said the largest driver of rating U.S. debt is "fiscal not monetary policy." He said the U.S. has an "unsustainable trajectory on our balance sheet," even though it's a "confirmation of what the bond market already knows." 

At some point, Mancuso said, "folks are going to pay attention to the repayment of that debt." 

Bill Bodnar, chief revenue officer of Tabrasa and star of NMP's "Master the Markets," said Moody's change in outlook "is just another reminder we're headed down a really unsustainable fiscal path."

He said it doesn't really have an impact on mortgage interest rates, which he predicts will stay below 8%. However, it actually allows folks in the market betting on higher rates to win. 

"The problem with our interest rate short term is our debt, the fact that the Fed's not buying, the quantitative tightening that's a whole other problem that we have," Bodnar said. "Now you add this debt noise -- it is a little noisy -- it just allows folks who are betting on higher rates to win." 

He said only a small number of people in Washington D.C. are yelling about the debt. 

"It's like an addict. In order to get off whatever addiction you have, you have to first admit you have a problem," Bodnar said. "We're a mess." 

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