Debt ceiling dilemma may push Treasury yields, mortgage rates higher
A failure to raise the nation's debt ceiling by Tuesday could cause Treasury yields to drift higher and adjustable-rate mortgages tied to U.S. Treasurys to fluctuate over the coming months, real estate professionals say. Despite having some concern about Treasury yields in the wake of a U.S. default, residential real estate investor Bruce Norris said he's not expecting an immediate, "exaggerated spike" in interest rates if lawmakers fail to raise the ceiling by Tuesday's deadline. "I think the world is looking at this arm-wrestling contest as very frustrating, but not taking it to the level that the United States will stop actually paying its bills," Norris said. If the U.S. does default on its debt, Gibran Nicholas, chairman of the CMPS Institute that trains mortgage brokers, warns "bonds issued by Fannie Mae and Freddie Mac will probably lose their triple-A status if the U.S. credit rating is downgraded." Nicholas said in the wake of a default, the monthly payment on a $200,000, 30-year mortgage could go up as much as $240 a month if rates increase from around 4.5% to 6.4% or so. A smaller, 100 basis-point increase in rates would push monthly payments up by $122, Nicholas said. He further warned that mutual funds can only invest in triple-A rated investments, which means they will either have to change their bylaws to continue holding U.S. Treasurys and mortgage bonds or they will have to offload their mortgage-backed securities and Treasurys, Nicholas explained. "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," he said. Paul Bishop, vice president of research for the National Association of Realtors, said a U.S. default could force mortgage interest rates higher in a market already battling weak demand, while also causing consumer confidence to plummet in the face of economic uncertainty. "It would depend on how the financial markets react (to a default)," Bishop said. "If rates increase, of course, that would filter into mortgage rates." Bishop said it's too early to know how much rates will be impacted by a failure to raise the ceiling on time or an actual default. "It would depend on how much the financial markets react to missing the deadline," he said. But Ron Phipps, president of NAR, issued a warning to lawmakers. "The indecision in Congress is paralyzing progress on other fronts, and it is harming homebuyer confidence and negatively affecting home sales," Phipps said. Write to Kerri Panchuk.