Rising Debt Is the White Elephant
Stalking the Economy
The potential impact of this mounting liability on homebuyers
should be on the mortgage industry’s radar
By Dick Lepre
In 2018 we learned the extent to which mortgage rates can affect the amount of business mortgage originators do. Rates went up about 1 percentage point over the year, and refinance volume sank to
an 18-year low.
Higher rates combined with higher home prices negatively impacted the purchase market as well. If mortgage business volume is so sensitive to a 1 percentage
point increase in rates, what would have happened
if rates went up much more? It serves mortgage originators well to consider what could provoke a drastic
increase in rates.
One thing that those who are concerned about
mortgage rates never think about is the supply of lendable funds. It is very large, but not infinite. We could
be approaching a time when the demand for borrowing of all types strains lendable funds, causing all interests rate to rise. The effect could be triggered if the
accumulation of debt is not met with an equivalent
increase in savings.
Debt is residue of money spent in the past that
cannot be spent at present. Domestic debt can be
divided into four sets: Federal government debt and
obligations; state and local government debt and obligations; corporate debt; and individual debt. Federal
obligations, apart from Treasury debt, stem from the
social safety-net programs of Social Security and Medicare. State and local government obligations, apart
from debt, stem from pensions.
The national debt
It’s important to distinguish the U.S. budget deficit
from the increase in the national debt. The national
debt increases faster than the deficit because money
also is borrowed to make student loans, Small Business Administration loans, Export-Import Bank loans
and more. These loans have offsetting assets and only
student loans have significant default rates.
The biggest problem by far is the amount of debt
that the federal government has accumulated. This
consists of the national debt of $22 trillion (which is
growing daily), plus the present value of the underfunding of Social Security and Medicare — which
combined is about $75 trillion over a 75-year window.
The size of our borrowing is not yet painful because
low interest rates have made it more affordable.
The extent to which the amount of federal debt is
a problem depends on two things: interest rates on
Treasury debt and the national debt to gross domestic product (GDP) ratio. If interest rates rise, it is more
expensive to service the interest on the national debt.
Interest payments on the national debt represented
Dick Lepre is senior loan adviser for RPM Mortgage of Alamo,
California, a division of LendUS. He has been in the mortgage
business since 1992 and has been writing a weekly e-mail
newsletter on macroeconomics, mortgages and housing
since 1995. Lepre (NMLS #302379) is from New York City, but
he has lived in the San Francisco Bay Area since 1968. He
has a degree in physics from Notre Dame. Follow him on
Twitter @dicklepre. Reach him at (415) 244-9383 or
LendUS, LLC — NMLS No. 1938. Licensed by the Department
of Business Oversight under the CA Residential Mortgage
Lending Act. Equal Housing Opportunity.
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