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Why isn’t my lender calling me back this week?

Maybe their mom taught them if you don’t have anything nice to say, don’t say anything at all.

Too bad that’s not a strategy – because this week has been ROUGH for mortgage rates. So if your lender is ghosting you, now you know why. I know you’ve all heard about the debt ceiling issues. I always find this to be kind of fake news because eventually both sides stop posturing and figure out a solution. Maybe not a good one but the dooms day worst case scenario usually gets blasted out on headlines and talk shows for 5-10 days even though everyone really knows it’s not going to happen. Yet people love drama, so we forget recent history and basic logic.

What would actually happen if the debt ceiling debacle played out?

So let’s pretend the US government had a budget. (haha, yes, I’m being facetious) Tax Revenue funds this budget but it only brings in about 75 cents per dollar needed – so the remaining 25% has to be borrowed. If the government isn’t able to borrow the money it needs, because it’s hit its debt ceiling – then some bills can’t be paid. I’ve seen some estimations that Social Security, Medicare/Medicaid, defense, and civil service salaries—would need to be cut by roughly 27% so we could prioritize the payment of other debts.

Usually this kind of uncertainty would be good news for mortgage rates. It hasn’t been. Banks have had a rough go the past two months, and consumers are not coming in hot with deposits. They are choosing treasuries and money market accounts for a little extra security right now. So in all this uncertainty and to raise capital, bank are offloading bonds. When there is an oversupply of mortgage bonds, mortgage rates jump up. The FDIC assumed $114B in treasuries and mortgage-backed securities after SVB and Signature went down and so that is also extra supply of bonds, because they are selling those assets.

It will be important to watch what kind of deal is made in order to avoid the debt ceiling crisis. If that deal involves a lot of spending, that’s inflationary and won’t be great for mortgage rates.

The next potential crisis for the banking sector is in commercial loans.

I actually owe you an apology that I haven’t brought this up sooner.

Commercial real estate prices are down significantly, and commercial lending standards have been tightening up. Many smaller banks – regional and community banks – have a good portion of their loan portfolio held in commercial real estate loans. As a recession unfolds, this could bring bad news for those banks if more of those loans go into default. Remember when we talk about a housing crash and why it’s not likely to happen, one of the main reasons is because of homeowner equity. Folks are not upside down in their homes, their home is their nest egg and their equity in it is their little forced savings account that they are not likely to forfeit to the bank. The opposite could be true for a lot of commercial loan holders if the value of their assets, their commercial real estate is upside down.

So what to watch and what to do?

Again, it’s still pretty unlikely that the worst possibilities will come to fruition. But these banking issues, credit tightening and even the debt ceiling debacle (as long as it’s resolved without a shit ton of spending built into the deal) are all actually anti-inflationary. If you’ve been watching these updates religiously, then you know that anti-inflationary is good news for the real estate market. How? Inflation is the mortal enemy of interest rates. So even though at the initial face value of all this news, mortgage bonds are throwing a bit of a tantrum – long term, these could be (read: should be) favorable events for mortgage interest rates.

Now, I hope someone brings up the debt ceiling around you this weekend. You'll be ready to educate them on the impact all of this week’s news plus what it could mean for the real estate market.

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