Why Did the Debt Crisis Affect Mortgage Rates If It Didn’t Actually Happen? - Quicken Loans Zing Blog

Well, one thing’s for sure. The recent turbulence in Washington D.C. over the government shutdown and debt limit has caused some volatility in the financial markets. This should be a surprise to no one, as pundits and predictors from all sides of the political spectrum warned this would be the case.

As a result, mortgage rates have been a little unpredictable over the past couple of months. This is bad news for people looking to buy a home, but there is a silver lining. Now that the two sides have reached a temporary deal to reopen the federal government and raise the borrowing limit, financial markets have quieted a bit.

This means lower mortgage rates!

According to Mortgage News Daily, the real driving factor behind the recent ups and downs was the threat of a government default as a result of the debt ceiling debate. While the government shutdown has certainly impacted confidence in the U.S. government, its impact on financial markets wasn’t as measurable as the prospect of the treasury running out of funds to pay the nation’s bills.

Economists predicted that a government default would cause interest rates to rise because it would hurt the creditworthiness of the United States and increase the treasury’s cost of borrowing money. Since the interest rates on consumer loans are tied to the treasury rate, a default would cause all interest rates to rise, including mortgages.

But, that didn’t happen.

To understand why the default debate had a real impact on mortgage rates, despite the crisis being averted, we must understand the short-term funding market, something that rarely makes the news. The short-term funding market offers just what the name implies, short-term borrowing but in massive quantities.

The closer we got to the deadline to raise the debt ceiling, the more nervous the markets got. As a result, spikes in these short-term borrowing rates came into play as markets prepared for the possibility of increased interest rates. The magnitude of the increased interest rates in short-term markets started impacting longer-term borrowing like mortgages, and thus rates went up.

When it comes to financial markets perception can be reality. Just the rhetoric and threats of a government default had a strong and real impact on how much it costs to borrow money.

That being the case, let’s hope our elected representatives can find a speedy and permanent solution to the debt issue. At the very least, maybe they can keep their voices down so the financial markets can’t hear them. All of this fighting is scaring the mortgage rates.

 

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