A failure to raise the debt ceiling could have a detrimental effect on the slow, yet steady housing recovery, financial experts warned Tuesday.
Representative Maxine Waters, D-Calif., held a bipartisan discussion on the debt ceiling Tuesday. The congresswoman suggested a default could trigger a financial crisis unlike any other, sending the U.S down a dangerous course.
As the economy continues to slowly gain momentum, housing continues to be a bright spot for positive growth. Nonetheless, a default would send the housing industry into a tailspin, ultimately reversing five-years of progress, Waters claimed.
"Treasury rates are the benchmark for housing, mortgage rates and consumer debt," said Rob Toomey with the Securities Industry and Financial Markets Association.
He added, “It’s important to follow because those types of fluctuations bleed into the economy.”
American Bankers Association chief economist Jim Chessen argued that such a default would have a severe effect on interest rates, consequently making it harder for borrowers to obtain credit.
Another concern is the impact on small businesses in communities housing a large number of furloughed federal employees.
"If banks and businesses are uncertain about costs and what the government is planning on doing, they will not make decisions to expand or hire," Chessen stated.
A government default will inevitably mean a spike in interest rates, forcing borrowers to increase payments on mortgages, which limits the amount of spending cash available.
"They’ll be hit by a doubly whammy: less cash and less assets," said Scott Talbott, senior vice president of public policy for the Financial Services Roundtable.
He added, “A real default would reverse economic progress and be a recovery killer.”
Mike Williams from the American Securitization Forum asked lawmakers to picture a mortgage market where current government-sponsored enterprise reform proposals are in motion.
If the private market was the only entity taking on credit risk during a potential default, Williams is confident investors would not be willing to withstand such a mass hit without government backing.
As a result, he asked policymakers to take into consideration how important the Federal Reserve’s role is in purchasing mortgage-backed securities.
"From a mortgage perspective, the market is artificially propped up because the Federal Reserve has extended its bond-buying program," Williams noted.
He continued, "If we didn’t have the infusion of federal cash and we were in a situation of default, you would have a very debilitated mortgage market across the country."
All experts agreed that while the debt ceiling debate mirrors a similar scenario that surfaced in 2011, the big difference is the politics surrounding today's standoff.
When investors look at the U.S., they are aware the government has the financial funds to pay off its debt, but refusing to compromise across the aisle forces Congress to lose credibility, Williams said.
"If I lived in a house, but chose not to pay my mortgage, even though I told my bank that I had a lot of money, my bank wouldn’t continue to let me default on my payments," Williams said. "It’s the same with the government. They are choosing to strategically default for political reasons."
