S&P downgrade could affect your mortgage rate -- but probably not soon
Standard & Poor's downgrade of the United States' credit rating late Friday, followed by downgrades of financiers Fannie Mae and Freddie Mac on Monday, might not affect the mortgage rate you can get right this instant. But it probably will down the road, Bankrate.com warns.
Zillow, meanwhile, expects basically no impact on rates for now but a housing-market hit of another sort. More on that in a moment.
Bankrate's Greg McBride, chatting with me on Monday, said the Fannie and Freddie downgrades from AAA to AA+ matter more for borrowers than the country's debt downgrade.
"The downgrade of Fannie Mae and Freddie Mac debt is what could lead to greater spreads between Treasury yields and those on mortgage-backed securities, and the rates borrowers pay," McBride said.
"Investors that buy mortgage bonds often buy them because they're guaranteed by Fannie Mae and Freddie Mac. The yield they're getting is only as good as the guarantee. If Fannie Mae and Freddie Mac have been downgraded, then those investors may command a higher premium for holding that debt, and that would translate into higher mortgage rates."
How long it might take to see the effect is anyone's guess. Right now, McBride said, the weak economy is helping keep mortgage rates low -- and certainly the Federal Reserve has no interest in seeing them rise. What might happen for a while is that rates could stay where they are rather than falling when Treasury yields fall, he said.
But a pickup in the economy would put upward pressure on mortgage rates, he said.
"The significance of the downgrade is in the long run, Uncle Sam, consumers and businesses will pay higher interest rates, even if only slightly higher rates," McBride said. "But that additional interest is money that's not being spent elsewhere in the economy."
LendingTree said lenders in its network were offering the same rates on Monday that they had on Friday -- 4.125 percent for a 30-year fixed mortgage.
"Although that's an increase of one-eighth of a point above Thursday's record lows, rates have held steady over the weekend and today," the company said Monday afternoon.
Consumers were apparently nervous: LendingTree said it had one of its "biggest days ever" over the weekend in the number of borrowers locking in loans.
Zillow's Stan Humphries wrote in a blog post Monday that Zillow Mortgage Marketplace saw an almost 20-basis-point increase in rates over the weekend, "but intraday rates have falling today and are back down to their Friday levels."
Consumers can expect "almost zero impact on mortgage rates" in the near term, he predicted.
"With European sovereign debt fears and renewed signs of a slowing economic recovery (which was already moving in slow motion before), there's a real flight to safety in the markets right now, leading global investors to snap up U.S. bonds," Humphries wrote. "The reality is that, even with a downgrade, U.S. debt is still one of the safest bets around relatively."
But he's not saying there will be no impact on the housing market overall. He's pretty sure there will be, and not a good impact, either.
"In periods of economic turmoil, many consumers tend to hunker down, making it less likely they will engage in high-priced transactions like home purchases," he wrote.
The damaging effect on the stock market also means people have less money on hand.
"This makes it even more difficult to call the bottom," Humphries wrote.
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Comments
As of Oct 2008, Fannie and Freddie have an explicit government guarantee. It is inaccurate to say that the GSEs have a credit worthiness that is separate from and lesser than that of the government. If anything, due to the fact that mortgage bonds are secured by real property, and a nominal income stream that will become more credit worth with inflation, you could argue that they are actually more secure that Treasuries, due to the fact that it would take homeowners defaulting + the government defaulting to lose principal, whereas Treasuries would only require the government to default to lose principal.
Also, to attribute some future increase in mortgage rates to S&P's downgrade does not make sense. Such an increase would be due to other factors as McBride states in your interview. It is clear that the immediate effect of the downgrade was to lower interest rates by igniting a panic induced flight to safety, and that safety is still US government debt. The yield on the 10 year has fallen almost 4/10ths since Friday.
Posted by: Josh Dowlut | August 9, 2011 4:37 PM
If anything, due to the fact that mortgage bonds are secured by real property, and a nominal income stream that will become more credit worth with inflation, you could argue that they are actually more secure that Treasuries, due to the fact that it would take homeowners defaulting + the government defaulting to lose principal, whereas Treasuries would only require the government to default to lose principal.
That's an interesting point, Josh. I'm very curious to see what happens to rates in the next year or two.
Posted by: Anonymous | August 9, 2011 4:47 PM
If you have a printing press, you can't default. Doesn't mean the money doesn't have any strong value, but you do get paid.
Posted by: Flair | August 9, 2011 9:57 PM