Long-term default deadline consequences

October 15, 2013

Click Image to view larger

As the deadline over the nation's debt limit creeps closer at an alarming rate, the consequences of a default have become clear.

Fed taper
Multiple news sources have reported that the Federal Reserve will not taper its monthly bond-purchasing levels of $85 billion in stimulus if the nation defaults on its debts. In fact, it would be near impossible, as the effects of the default would have far-reaching economic consequences affecting unemployment levels and the value of the American dollar.

While economic data has not been reliable during the government shutdown, Federal Reserve officials have noted that they feel better prepared in the case of a default than they were in 2011, when the debate over the debt ceiling led to a downgrade from the nation's AAA credit score.

"I'm more confident that we, my colleagues and I, are better prepared than we were in 2011," Richard Fisher, Dallas Fed president, told Reuters.

Mortgage rates
MarketWatch reported that if the nation were to default on its debt, mortgage rates would be impacted immediately, rising as the value of American currency drops. However, rates may not increase in a way that would majorly affect homebuyers and the housing market in the long run.

Several factors would have to occur for rates to spike for longer than a few days and impact the mortgage market. Default is unprecedented in the nation's history, and most economists believe Congress will vote to extend the debt limit at the last minute. It is unlikely that no action will take place. Mortgage rates might jump initially if there is a default, but Congress will probably take steps to quickly address the debt ceiling after the deadline. The only way rates would remain high is if there is no action to reverse a default, MarketWatch reported.

The stock market doesn't appear to be anticipating a default, as prices have not dropped, but seemed to have a positive outlook before the debt ceiling deadline. Treasury bonds would be affected by a default by decreasing in value as they become riskier investments.

"In the event of an actual default, Treasury yields and other borrowing costs would probably rise and remain higher," Julian Jessop, Capital's chief global economist, told NBC News.

Borrowers and first-time homebuyers have been expecting rates to rise in the next year, as the Federal Reserve has been waiting on certain economic indicators to improve before tapering and influencing rates to increase. Investors might be fearful that the U.S. will be unable to pay on its short-term treasuries, but debts that are due later may be safer. Long-term treasury yields would be the most protected, and 30-year fixed mortgages would therefore be less likely to be affected than loans with shorter terms.

Contact the Federal Savings Bank, a veteran owned bank, to explore mortgage refinance options.