THE BLOG
10/12/2013 12:15 am ET Updated Dec 11, 2013

Shutdown Squeeze Play May Cause Mortgage Fallout

Mortgage rates slipped downward for the third consecutive week; but before would-be refinancers and home buyers cheer too loudly, they may want to ponder the reason why. The federal government shutdown is creating a dark cloud that overhangs all aspects of finance.

On October 3, Freddie Mac announced that 30-year mortgage rates had declined for the third straight week, reaching their lowest level since late June at 4.22 percent. With coverage of the government shutdown dominating the news media, you don't have to look far to find the source of the economic pessimism that has spurred a drop in mortgage rates.

Fallout from the shutdown

The standoff over Obamacare, the debt ceiling, and partisan politics in general has led to the shutdown of some parts of the federal government -- and the specter of a default on US debt obligations. Here is some of the fallout that may result:

  • 800,000 paychecks missing in action. That's the number of federal workers who have been sidelined, removing a significant number of jobs from the economy.
  • Related jobs in jeopardy. Some government contracts, as well as some business and leisure activities that are reliant on the government will be delayed or canceled, putting more jobs at risk.
  • Uncertainty leads to inaction. When businesses don't know what's going to happen, they tend not to do anything -- especially when it comes to hiring.
  • A potential credit squeeze. A default by Lehman Brothers in 2008 triggered a global financial crisis.

What do you suppose will happen if the US government defaults?

Fine-tuning your mortgage calculator

This environment is tricky enough to require some fine-tuning on your favorite loan calculator. Falling rates might immediately benefit both would-be home buyers and people looking to refinance, but that benefit may be short-lived. If your mortgage payment calculator or refinancing calculator indicates rates have met your target, you'd be wise to act quickly. The longer-term fallout might include a credit squeeze where loans become harder to qualify for at any price, which would shut home buyers out of the market. Also, in a damaged economy, falling home prices could push some mortgages back under water, thereby precluding refinancing.

Lower mortgage rates seem appealing in isolation; but if they are a function of a fiscal showdown that becomes an economic crisis, there would be many other prices to pay.

This article originally appeared on Calculators4Mortgages.com: "Shutdown Squeeze Play May Cause Mortgage Fallout"