3 biggest headaches for real estate if government defaults

If House and Senate leaders can’t work out even a temporary solution to the debt-ceiling crisis by Thursday’s deadline, the impact on the overall economy is likely to be felt not with a bang but a whimper, at least at first.

As Congress dickers, there are many strategies to delay the impacts of a government default.

The government can prioritize payments, delaying defaults on Treasurys, and banks will likely be willing to advance funds to many companies and even citizens that are owed money by the government as the standoff continues, CNBC’s John Carney reports.

JPMorgan Chase, for one, says it’s willing to fund as much as $8 billion in government benefits that it processes every week for clients.

But the impacts to housing markets — already limping from the government shutdown that preceded the current crisis — could be more immediate.

Among the top concerns:

1. Homebuyer sentiment

In a climate of uncertainty, would-be homebuyers are likely to keep shopping, but wait to head to the closing table until it becomes clear that the debt-ceiling showdown isn’t snowballing into the worst-case scenario — another financial market meltdown on a 2008 scale. Consumer confidence was already at a nine-month low in October, in part because of worries about the budget impasse.

“So far, for me, it has been stressful having a closing with a farm loan being delayed till Lord knows when,” said Angie Scarborough, an agent with McGraw Realtors in Broken Arrow, Okla. “Just trying to keep both buyer and seller interested in keeping it held together and not having answers is a challenge. Meanwhile, if not for cash investors, I would be job hunting.”

2. Mortgages, mortgages, who needs a mortgage?

The government shutdown has already hindered mortgage lenders’ ability to get records they need to verify borrower income from the IRS and the Social Security Administration. Banks have come up with “workarounds,” including following the example of Fannie Mae and Freddie Mac in requiring IRS verification of income only when borrowers finance multiple properties, CBS Moneywatch reports.

FHA has put nearly half of its workers on leave during the shutdown, but loan applications by owner-occupants can still be routed through automated underwriting systems.

The big question is, with so many mortgages relying on some kind of government backing, what happens to secondary mortgage markets in the event that the debt ceiling is reached?

Although rates on some adjustable-rate mortgage (ARM) loans are tied directly to Treasury yields –which could rise sharply in the event of a default — fixed-rate mortgages will have some cushion.

That’s because despite having required billions in bailout assistance during the downturn, Fannie Mae and Freddie Mac are now generating surplus revenues from guarantee fees they charge lenders, and have been unaffected by the shutdown.

Investors who fund most mortgage loans by purchasing mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae (which securitizes loans insured by the FHA) may expect to see better returns on their money, but are unlikely to flee secondary mortgage markets altogether.

John Lonski, chief economist with the capital markets group at Moody’s Analytics, estimates that if the current 1.53 percent spread between 30-year fixed-rate mortgages and 10-year Treasurys grows to 2.8 percent, rates on 30-year mortgages would be at least 5.5 percent, Marketwatch reports.

3. It’s the economy, stupid

The long-term impacts of a government default are hotly debated, with some conservatives claiming the potential economic harm has been overstated in order to pressure Republican House members into backing down from their demands.

An analysis by Reuters concludes that many people would not notice much right away if the government hits the $16.7 trillion debt ceiling on Thursday.

“The 17th will come, the lights will still be on and everything will look normal for 99 percent of Americans,” budget expert Steve Bell with the Bipartisan Policy Center in Washington, D.C., told Reuters.

The government would start by slashing spending by about a third, which would quickly have noticeable impacts on the economy.

One of the first milestones of serious concern is a $12 billion payment due Oct. 22 to the Social Security pension program. If the government missed debt payments due on Oct. 24 or Oct. 31, “there would be a greater risk of a financial crisis because the value of U.S. government debt could be called into question,” Reuters said.

Forecasting firm Macroeconomic Advisers estimates that the combination of government spending cuts and a severe credit crunch could lead to 3 million layoffs, pushing the jobless rate to close to 9 percent.

– See more at: http://www.inman.com/2013/10/15/3-biggest-headaches-for-real-estate-if-government-defaults/#sthash.QlCM8FwQ.dpuf

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