|Senate Majority Leader Harry Reid, Sen. Charles Schumer and Senate Majority Whip Richard Durbin take part in a debt-ceiling news conference on Capitol Hill in Washington on Friday.|
Those looking to take advantage of the drop in housing prices may find they would do best to ride out the debt crisis for a bit longer. Even with a resolution to the debt ceiling debate, the nation's debt crisis could still lead to a downgrade in its creditworthiness that will potentially make getting a loan more expensive in the weeks ahead. "Bonds issued by Fannie Mae and Freddie Mac will probably lose their AAA status if the U.S. credit rating is downgraded," says Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. "This means that mortgage rates will likely go up." The monthly payment on a $200,000, 30-year mortgage would increase by $240 per month if mortgage rates go up slightly to 6.43% from 4.51%, as they were just three short years ago, he says. Even if interest rates go up by 1% it would cost an extra $122 per month. Nicholas adds that those who have an adjustable interest rate tied to LIBOR or U.S. Treasuries will likely find that their mortgage rate will fluctuate as banks, investors and money market funds figure out what to do with the temporary loss of a AAA credit rating for U.S. Treasuries. "Many investment funds are only allowed to invest in AAA-rated investments," he says. "This means they will have to either change their bylaws in order to keep their U.S. Treasurys and mortgage bonds or sell their Treasurys and mortgage-backed securities. This will cause Treasury and mortgage bond yields to fluctuate considerably over the next few months, adding even more uncertainty to an already fragile mortgage and housing market." "The U.S. debt burden is growing by about $1.5 trillion per year and our elected officials seem to be so incompetent that they are jeopardizing even the $15 trillion in economic activity that we do have as a nation," Nicholas says. "We are acting like we are mentally unstable, with no long-term plan for improving our financial situation. The bottom line is that we don't have a 'debt crisis,' we have a 'credibility crisis.' There will be some temporary negative consequences because of all this, even if the debt ceiling is increased at the last minute."
A survey released last week of TD Ameritrade ( AMTD) clients found that 72% of retail investors are "extremely dissatisfied" with Congress' management of the debt ceiling issue. Nearly half (48%) called the debt ceiling debate "very" or "extremely" influential on their decision to engage in the markets. "Policy uncertainties make markets jittery, but these kinds of macro-economic uncertainties are out of retail investors' control," says Lule Demmissie, managing director of retirement at TD Ameritrade. "This is an opportunity for retail investors to evaluate their investment portfolios and make sure they are diversified in line with their current risk tolerance and investment objectives." "Stay focused on long-term investment strategies and avoid short-term reactions that are motivated purely by fear," he adds. Keep saving, invest wisely
Bob Phillips, managing Partner at Indianapolis-based Spectrum Management Group, fears the focus on the debt ceiling debate may have diverted attention from the broader economic dangers that exist globally. Even once the debt ceiling is resolved, the U.S. faces a staggering debt and spending problem, as well as uncertainty over taxes and regulatory efforts. And all this comes amid the backdrop of the European debt crisis. "The government debt problem is a universal problem around the world," he says. "The debt ceiling is kind of the symptom; the real problem is the underlying fundamentals of the economy." Phillips points out that in many of the recent conference calls that accompanied earnings reports, numerous CEOs and CFOs said they are not making business moves due to Washington's uncertainty.