The budget battle is a wild card for mortgages

February 28th, 2013

Thirty-year mortgage rates closed February with their first weekly decline since mid-January. However, against the backdrop of the latest Washington budget battle, the big question is not about what mortgage rates have done lately, but what they are likely to do if the sequestration budget cuts become reality.

Recent developments

According to mortgage finance firm Freddie Mac, 30-year mortgage rates closed February at 3.51 percent, down 5 basis points from the week before. Though mortgage rates have been fluctuating recently, they have been doing so within a fairly tight range. Therefore, the big news is not about mortgage rates, but about the federal budget.

A stand-off between the White House and Congress made it increasingly necessary that a series of automatic budget cuts known as sequestration would take effect, beginning March 1. Even if a compromise is worked out, the bigger problem isn't going to go away -- the Federal budget deficit is going to require spending cuts at some point. On top of the direct impact of those cuts, continued uncertainty over fiscal policy has a dampening effect on the spending plans of consumers and businesses.

Implications

Some implications of sequestration you can readily measure with a mortgage calculator -- for example, continued softness in the economy is likely to prolong the current low level of mortgage rates.

However, broader implications are beyond what a loan calculator can measure. For example, as continued economic weakness takes its toll on the credit ratings of consumers, what will that do to the difficulty of obtaining a mortgage?

The consequences of sequestration may be particularly tough on homeowners looking to refinance. Tighter budgets in Washington could put a damper on future mortgage assistance for homeowners. Also, a generally soft economy could put a halt to the recent recovery in home prices, leaving some homeowners with their loans still stuck under water.

The outlook for the future is such that if a loan calculator tells you conditions are right for you to act now, you may be wise not to delay. The wild card of sequestration means that there's no telling how long the right conditions might last.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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