Fed Rate Increase Would Make It Harder for Some to Pay Debt

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A potential 25-basis-point increase of short-term rates at the Federal Open Market Committee meeting this week would affect 4.1 million mortgage borrowers' ability to meet their total monthly debt obligations.

Overall 9.3 million consumers would not be able to handle all of their monthly debt payments, a study from TransUnion found.

TransUnion used its CreditVision aggregate excess payment algorithm to look at the entire universe of consumer debt obligations, including both variable- and fixed-rate products. "To really understand the true impact of the rate increase, you have to look at the consumer not from a product perspective but look at what they have in their wallet," said Nidhi Verma, senior director of research and consulting, in an interview with National Mortgage News.

"You may think as a mortgage lender that 'I really don't do any adjustable-rate mortgages.' Sure, but you have consumers who have credit cards who may not be able to absorb a payment shock coming from those 25 bps," she said, and that affects their ability to pay mortgages.

Up to 92 million consumers overall could see an increase in their monthly debt service payments if the Fed moved to increase short-term rates, but about 90% should be able to handle the higher payments.

However, for those that are looking to obtain a new mortgage — purchase or refinance — the increased monthly payment for their credit card debt could bring some of them above the conforming total debt-to-income ratio limit.

Only about 4% of outstanding first-mortgage debt is variable rate and would be directly affected by a Fed increase. There is $327 billion of variable-rate first-mortgage debt plus an additional $445 billion of home equity line of credit debt outstanding at the end of last year, according to TransUnion. This compares with $776 billion of variable-rate credit card debt.

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