The country hitting the debt ceiling would mean the government can no longer borrow money to pay bills (deficit spending). With no money or ability to borrow more debt, the country would default on their payments or in common vernacular, be ‘late’ paying their bills. Just like you and me, if we’re late we get dinged on our credit and our score or rating goes down. It’s the same situation with the US government.
How does this relate to you? Remember the hassles of getting your clients files through underwriting over the last few years. This was because the US lost the faith and trust of the foreign investors that buy this stuff. So when the rating agencies rated Sub-Prime loans as AAA when they were really FFF, investors lost faith and stopped buying them, which caused our system to seize up and companies began to fail (2007-2008). To offer the relief or liquidity the Fed stepped in and started buying these securities – and here’s the key point – until faith is restored in the US secondary market.
The tight guidelines, though annoying, produced cleaner loans with less probability of default which would allow the Fed to taper back Quantitative Easing (QE1, QE2, QE3, etc). If the debt ceiling is hit and the US begins to default, the cycle is reversed and guidelines instead of easing revert to tightening again as the Fed would remain the primary buyer of US securities.
So bottom line, if this happens, it may become even harder it close loans or get construction funding. Of course they always seem to work it out before it’s too late. Let’s hope that happens again.
All The Best!