Industry NewsMarkets & Economy

Debt default could cripple mortgage markets

Commentary: Industry trade groups should sound warning bell
Published on Jul 26, 2011

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by CareyBot

"How would a debt default by the federal government impact the home mortgage market?"

We can only guess about the extent of the impact, but it would range somewhere between ugly and catastrophic. Ugly might be a doubling of interest rates and a drop of 50 percent in loan volume. Catastrophic would mean an almost complete shutdown.

About 95 of every 100 home loans being written today are placed into mortgage-backed securities that are sold in the market with guarantees by Fannie Mae, Freddie Mac or Ginnie Mae. These are federal government guarantees, the value of which would drop like a rock with a default.

At best, the securities market would immediately demand a sizable rate premium on new guaranteed mortgage-backed securities to compensate