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The Federal Debt Ceiling and Its Impact on Affordable Housing

What is the debt ceiling?

The debt ceiling is the maximum amount that the federal government can borrow. It is similar to a corporation fully tapping its operating line of credit. To pay expenses, the corporation needs to increase its line of credit.

When will the debt ceiling be reached?

X Date is the day the debt ceiling is reached. This week, Treasury Secretary Yellen said tax collections came in lower than expected and the debt ceiling could be hit as soon as June 1st. While June 1st is still an estimate the timeline for approval is now more compressed.

What is Washington doing about the debt ceiling?

President Biden and the Democrats want to pass a clean debt ceiling bill which only raises the debt limit. Speaker McCarthy and the Republicans want to pair budget cuts with raising the debt ceiling. The House narrowly passed the Republican version which would raise the debt ceiling by $1.5 trillion and cut $4.8 trillion in spending over the next ten years.

President Biden has invited the four Congressional leaders, Schumer and McConnell from the Senate and McCarthy and Jeffries from the House, to the White House on May 9. While both sides continue to stand firm on their positions, realistically they will need to meet in the middle.

Will the debt ceiling be breached?

The debt ceiling has never been breached though it came close in 2011. It’s hard to imagine a breach this year, but there does not seem to be an easy path to avoid this. A lack of time, split Congressional control and Senate and House rules are all going to make getting a deal finished hard to happen. On the other hand, it is optimistically possible for Biden and the Congressional leaders to thread the needle on the debt ceiling and budget, and all declare victory. They could pass a clean debt ceiling bill with the agreement to certain cuts in the upcoming annual budget discussions.

What happens if the debt ceiling is breached?

The federal government will have to prioritize what payments are made. Most likely, the government will continue to pay interest payments in order to keep the government’s credit rating. Any residual dollars would go to cover existing commitments including payroll.

How would this impact affordable housing?

If the debt ceiling is breached, then Section 8 and other rental assistance contracts paid directly by the federal government to property owners could be delayed. For payments that flow from the federal government to a local entity (such as a housing authority), the local payer may or may not have a cushion of funds to keep rental assistance flowing. In 2011, in preparation for a potential debt ceiling breach, many local agencies built a cushion to ensure funds were available for owners.

Will the government shutdown if the debt ceiling is not raised?

A federal government shutdown occurs when Congress does not pass a budget to fund government operations. During a shutdown, only employees deemed essential report to work, and this limits what happens at HUD or USDA with regard to affordable housing operations and lending. In the past, deals in underwriting were halted during a shutdown. While breaching the debt ceiling is not a government shutdown, it is unclear how it would impact the day to day operations of departments vital to affordable housing.

What does a breach mean for interest rates?

As X Date approaches, the rates on the Treasuries are expected to increase especially amid the impending DC saber rattling. Investors moving towards the safety of cash will sell off Treasuries thereby driving rates higher. It is possible that this will look similar to Spring of 2020 when investors went liquid at the start of the pandemic. At that time, the Fed had to step in and help calm markets. It is unknown what role the Fed could play in the debt ceiling breach, if any.

How long would a debt ceiling breach last?

Who knows? Once the troops do not receive their pay, senior citizens do not get their Social Security checks and the stock market drops significantly, then there will be an uproar from the public.

BWE will continue to monitor the debt ceiling negotiations. Please reach out to your BWE originator if you have any questions or want to understand how this could impact your properties.



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