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The Debt Crisis and Mortgage Rates

Monday, 16 May 2011 | 2:39 PM ET
Jonathan D. Colman

If you're not talking about the head of the IMF today, then the only thing left really is the debt ceiling, which we officially reached today ($14.294 trillion for anyone who's counting).

While estimates are that it will take until August for the US to actually default on its debt obligations, the concern in the short term is how Wall Street sees the situation and how that will be reflected in the bond market and in mortgage interest rates.

So I asked a few experts:

Michael Barr/Fmr. Asst. Treasury Secretary for Financial Institutions

"If the US continues to bump up against the debt limit but Treasury uses "extraordinary measures" to keep the US from exceeding the limit, then the damage is likely to be modest and short-term. I would expect rates to rise, temporarily, by up to low single-digit basis points.

It is a bit hard to forecast exactly what the effect will be. Prior experience suggests low single digit bps, but there are a number of factors in play today that were not present in previous debt ceiling crises: fragile economy, fragile housing finance sector, fragile home prices and sales, F/F in conservatorship, no securitization to speak of, higher debt to GDP ratio, turmoil in Europe (exacerbated by DSK's arrest), extremely high levels of US dollar reserves already in China, extremely low Treasury rates.

Long term, if we actually default, it is simply devastating, and permanent."

Peter Boockvar/Miller Tabak:

"I think the market has spoken and the almost 50 bps drop in the 10 year note yield since mid April is clear evidence that the debt ceiling debate has had zero impact on market psychology. Everyone assumes that a deal of some sort will occur and the market impact will be nothing. More impactful in the direction of lower yields has been concerns with growth and a flight to safety due to renewed concerns with Europe."

Glenn Kelman, CEO Redfin

"We see people being very sensitive to the cost of money; they're very concerned about the debt crisis, they're very concerned about all these rumors that the US could have a money supply problem, so we think that interest rates are the real X factor to watch."

Treasury Secretary Timothy Geithner made it clear what would happen should the U.S. ultimately default:

"Because Treasurys represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs. Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale."

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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