Leaders signed an agreement on a debt ceiling. What does that mean for mortgages?

The debt ceiling deal signed by President Joe Biden and House Speaker Kevin McCarthy on Saturday represents temporary relief for the mortgage market as it reduces the chances of a federal default. But it’s just the first step in an ongoing effort to avoid chaos.

The agreement is subject to prior congressional approval. U.S. Treasury Department I will be out of cash by Monday. And even if approved, it would not solve the problem of high debt levels, which means other risks, such as a downgrade of US sovereign debt, still exist.

As for the mortgage market, meanwhile, the debt ceiling agreement put an end to the recent upward trend in mortgage rates to two-month highs. Meanwhile, student loan payments resume, affecting potential homebuyers.

according to daily mortgage newsThe 30-year fixed rate on traditional loans hit a level of 7.14% on Friday amid the drama over the debt ceiling. It fell to 7.02% after leaders announced a tentative deal on Tuesday.

“In the short term, significant damage has already been done as mortgage rates have risen significantly over the last 10 days,” said Melissa Cohn, regional vice president. william lavais mortgagesaid in an interview.

“And now the question is whether the debt ceiling deal that McCarthy and Biden agreed to this weekend will get voted on. There are a lot of people who don’t agree with some and say they won’t vote, and every day after that is a bad day.”

of analysts goldman sachs We also recognize the challenges associated with congressional approval. The House of Representatives is scheduled to vote on the deal on Wednesday, while the Senate is scheduled to vote on Friday, but procedural delays could push the vote back to the weekend.

Analysts at Goldman Sachs said in a report, “Achieving a deal between leaders is the highest hurdle, and this deal removes most of the uncertainty about the impending debt ceiling deadline. The bill still needs to pass the House and Senate.” “In any event, it now seems very unlikely that Congress will allow the June 5 deadline to pass without doing anything.”

What does the agreement say?

Biden and McCarthy’s Fiscal Responsibility Act will suspend the $31.4 trillion U.S. debt limit until January 2025, with the cap set at the level reached when the suspension ends. Economists say the problem will actually be postponed until after the next presidential election.

Meanwhile, non-defense spending in 2024 will be capped at current levels and will increase by 1% in 2025. The spending deal is likely to cut spending in 2024 and 2025 by 0.1-0.2% of GDP year-on-year. Goldman Sachs sets the standard that money grows with inflation. analysts write.

The agreement also introduces some policy changes. Some older Americans receiving food stamps need to find work.stop funding for new hires Internal Revenue Service agents; introducing new measures to get approvals for energy projects faster; And in particular, it could save billions of dollars on unused COVID-19 relief and more.

But one of the bill’s agenda items is to end the moratorium on student loans by the end of August, which could indirectly affect the mortgage market.

The current Fiscal Responsibility Act prohibits: U.S. Secretary of Education Any power to stop payments or waive interest is prohibited. Biden’s student-loan forgiveness plan, meanwhile, would relieve most borrowers from $10,000 to $20,000 in student-loan debt and is expected to be decided by Congress. supreme court.

“All this year, banks have included that liability when determining a borrower’s eligibility in hopes that student loan payments will resume in the fall. said Mr.

“So, obviously, if student loan payments were deferred for a long period of time or were forgiven, there would probably be a positive impact. of purchasing power, which is especially important in a high-rate environment,” Cohn added.

pressure from various sources

While the deal has brought some relief to the mortgage market, there is still pressure from various quarters. Inflation remains resilient at double target, of the Federal Reserve (Fed) continued monetary tightening. In addition, banking crises still plague financial markets.

Logan Motashami, Principal Analyst housing wire“The debt ceiling problem is over for now barring any surprises, but the banking crisis and mortgage stress are still there,” he said.

“Bond yields and mortgage stress may ease in the short term.” [resulting from the debt agreement]‘ said Mr Motashami. “But spreads between 10- and 30-year mortgage rates have deteriorated since the banking crisis began. .”

Scott Olson, Executive Director community housing lender America (CHLA) has not acknowledged any direct link to Fiscal Responsibility Act policies affecting the mortgage industry.

“However, mortgage rates have been steadily rising in recent weeks due to uncertainty. So an agreement that would reduce the deficit and remove the uncertainty over default would be a positive development for the mortgage industry. I have no choice,” Olson said in an interview.

The deal represents a fiscal policy bailout. But pressures from monetary policy still exist. “As far as Fed monetary policy is concerned, inflation seems to be negative and persistent,” Olson said.

The Fed will meet on June 13th and 14th to decide on a new federal funds rate.

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