OurBroker Logo
Have A Real Estate or Mortgage Question?   Please Click Here.
Will debt to China raise US mortgage rates? - OurBroker : OurBroker

Will debt to China raise US mortgage rates?

feature photo

Our growing debt to China is much in the news, so will it lead to higher mortgage rates?

Worries about what we owe to China are much more of a problem at this point for the Chinese then for us. To understand why let’s take a look at some facts.

First, we owe the Chinese a lot of money — about $1.1 trillion. No doubt this is a big sum but we are a very big country and we owe a lot of people. The fact is that our debt to China equals just 8% of our national debt.

Second, unless we agree to pay there is no method for the Chinese to collect.

The hard fact is that lenders can only collect when they have leverage. If you don’t pay your car loan the lender takes back your vehicle. Don’t pay your mortgage and your home will soon be foreclosed.

Now imagine what would happen if the United States decided not to repay its loans.

No doubt Wall Street would plummet in the short term and bankers would go crazy. But, how would China actually collect? To what court would they take us? Would they seize Oregon?

No less important China is not in a position to impose some sort of trade embargo.

Think about the new factories being built in China. If they can’t sell to the US then roughly a quarter of the world market is no longer open to them. It doesn’t do much good to have a nice, shiny factory if you can’t sell the goods that it’s capable of producing. In effect cutting off the US market is as good as gutting the Chinese economy.

Greek Debt Settlement

At this point someone will no doubt bring up the issue of Greek debt. There now appears to be some sort of settlement which will allow lending to Greece to continue.

Greece has made major concessions which will impact the economy of that country — but lenders have lost 53.5% of their investment. Think of it as a big-time principal reduction.

The Greek government had to make concessions because the entire economy of Greece is so small. The total Greek domestic product is just $312 billion. That compares with the US economy which has a GDP of more than $15 trillion. In other words, the banks have leverage and Greece doesn’t. That situation simply does not apply to the US.

The odd reality is that the huge debt we owe China gives us more leverage than if we owed less.

Mortgage Rates

Would mortgage rates rise in the US if we defaulted on our debts to China or to any other country?

The answer is certainly yes but the increase would be only part of the problem. Another issue to consider is that loans would only be available if borrowers were prepared to put down more money.

For instance, in Greece the most recent rates for a 10-year fixed-rate mortgage loan are about 7%. There does not seem to be longer financing available, such as the 15-and 30-year mortgages we have in the US.

For American home buyers the thought of 7% financing is not particularly unusual; for many years 7% would have been a great rate. The bigger problem in the event of not paying our debt to China is that lenders would want much more up front. This contrasts with the low-down payment mortgages which are entirely common in the US. Think of FHA loans which now require 3.5% down, conventional mortgages with 5% up front and VA loans with nothing down.

So not paying our debt to China would be bad — but weirdly it would be terrible for the Chinese. The bottom line is that China has a considerable interest in making sure that the US has a healthy and functioning economy — and that includes a housing sector with access to low-cost financing and little down.

Technorati Tags: , , , , , , , , , , , ,

Post a Response

CAPTCHA Image
*