The "One Big, Beautiful Bill" (OBBB) passed the House on May 22 and is due to be considered by the Senate in the coming days. Some say it could add trillions in debt to the nation's metaphorical credit card over the coming decade, although the government disagrees.
So much extra debt, if it materializes, could certainly exert upward pressure on mortgage rates. But, besides that, there is Section 899 of the bill. Some on Wall Street are freaking out about that, fearing it could add to borrowing costs for the government, businesses and consumers, including those wanting new mortgages.
What is Section 899 and How Might It Affect Mortgage Rates?
Section 899 seeks to tax foreign holders when they hold U.S. assets. It's meant to counteract similar taxes by foreign entities when U.S. companies hold assets in their jurisdictions.
The potential problems for mortgage rates are: 1) rates are driven by a U.S. asset called mortgage backed securities, or MBS, and; 2) foreign entities are large investors in MBS.
If foreign governments start to be taxed on MBS bonds, the bonds become less valuable to them. Interest rates on those bonds must be higher for these governments to keep investing, translating to higher mortgage rates for consumers.
In short, taxing foreign MBS holdings could drive up U.S. mortgage rates.
Wall Street fears that Section 899 could spook many foreign governments, businesses and individuals who do not wish to see their income and gains taxed at source. They could stop new investments in America and, worse, withdraw existing ones.
A big enough retreat could send U.S. stock indices tumbling and bond yields (aka mortgage rates) soaring.
As of June 2022 (the most recent data available), foreign investors owned about 13% of U.S. MBS from government agencies says Ginnie Mae. A major pullback in foreign investment could sway rates.
Potential Revisions to the Bill That Might Protect Rates
On June 1, The Wall Street Journal carried an editorial under the headline, "Wall Street Stages a Weird Tax Bill Freakout."
It said, "We can reassure you that it isn’t an anti-investment, protectionist 'sledgehammer.'"
Reuters seems to agree, saying that there would likely be "negotiations to seek exemptions for Treasuries and agency mortgage-backed securities." Such a carve-out reduces risk of skyrocketing interest rates on MBS and U.S. Treasuries.
Legislators still have ample opportunity to amend the OBBB. A clearer version of Section 899 that's less open to interpretation might calm all fears.
