Deficit Is Bad News

After three years of record refinancing, with interest rates repeatedly scraping up against four-decade lows, mortgage servicing professionals can be forgiven for breathing a sigh of relief as interest rates edge up this year. But in the long run, low interest rates promote housing affordability and mortgage lending activity. Without a smooth flow of funds into the housing finance industry, mortgage companies could find themselves starved for new business. Not to mention what a credit crunch could do for homeowners.

Why worry about such a remote possibility today? Because choices being made in our nation's capital today are likely to have an impact on the mortgage industry's business environment.

The Bush administration has proposed a 2005 budget that would push a one-year deficit of $521 billion, using the most optimistic of assumptions and failing to take into account the cost of military operations in Iraq and Afghanistan. That's a big chunk to add to our already substantial national debt.

The likely long-term ramifications of structural deficit spending by the U.S. government have been well documented in the mainstream press. But what is often neglected, are the near-term consequences. When the federal government goes into the capital market and borrowers more than $500 billion of credit, that's a half-trillion dollars of capital that is no longer available for private sector investment. With the government competing with private interests in the capital markets, that will put steady, upward pressure on interest rates, especially if the economy is growing and business start making more capital investments. Few industries are as dependent upon the capital markets as the mortgage business. You probably remember, during the surplus years of the late 1990s, reading about outstanding mortgage debt exceeding the volume of outstanding Treasury debt. With the return of budget deficits, it's the Treasury market that is growing now..

Anything that diminishes or disrupts the private sector's access to capital is bad news for lenders, and federal budget deficits on the scale of what is anticipated next year pose that threat. Without fiscal discipline, the environment that has allowed the mortgage industry to thrive may not persist.

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