How Does the Debt Ceiling Affect Mortgage Rates?

This debate is unavoidable, so I won’t try to establish any context for this blog post.  I’ll just try to keep this very simple for those of you who are searching for some quick perspective on how this current debt ceiling debate might impact residential mortgage rates and fees.

***DISCLAIMER*** I am not an economist.  I have 9 years of mortgage lending experience and a Bachelors degree in communications from NC State University (Go Wolfpack).

Mortgage rates are directly derived from FNMA mortgage bond offerings.  This bond is sold just like any other bond, and competes with other municipal and corporate bond offerings.  The yield of this bond changes from day to day.  When the overall economy is “good,” this yield generally comes UP to attract investors (competing against stocks)… when the economy is poor, this yield comes down, as investors want to buy these bonds for “safety” (bonds are considered safer investments than stocks)… and when investors want the safety, the bond makers don’t have to offer much yield to get a purchase right?  Mortgage rates are based on this specific bond yield… yield goes UP, rates go UP… yield goes DOWN, rates go DOWN.

Regarding this current political debate on the debt ceiling, my thought is this: If the United States goes into default, this could trigger a ratings downgrade for our government bond offerings.  This downgrade would undoubtedly pressure bond yields AND mortgage rates higher, and this change could happen quite rapidly, to the tune of .375-.625% swing in RATE.

Conversely if we somehow make a “grand deal” to raise this ceiling and avoid a downgrade, we could see markets normalize, and even improve (in terms of mortgage rates).  Global economic news is all extremely “bond friendly” still, and once we get the ceiling raised, I would expect continued, steady and stable and VERY low mortgage rates.

Leave a Comment