The ripple effects from Standard & Poor’s downgrade of the U.S. last week continued on Monday as the rating agency also cut the credit ratings of mortgage lenders Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt to AA+ from AAA. “The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government,” Standard & Poor’s said in its announcement.
Fannie and Freddie own or guarantee about half of all U.S. mortgages, valued at more than $5 trillion. The downgrade, which was widely expected, could mean higher mortgage rates for consumers and it has the potential to shake the housing market, which has struggled to stand on its own two feet since the housing collapse some five years ago.
“The downgrading heightens the risk that the nation ends up back in recession, as the selloff ends up feeding on itself,” said Celia Chen, economist with Moody’s Analytics. “If the nation double-dips, housing’s fledgling recovery will be squashed.” Chen added she doesn’t believe there will be a sustained negative impact on the U.S. economy or on the housing market from the downgrade.
Experts say it’s unclear if the cut to the government’s credit rating will have an immediate impact on mortgage interest rates. So far, it doesn’t appear to have done much to upset the mortgage markets. The 10-year Treasury note is considered the basis for all other interest rates and one in which mortgage interest rates closely follow. Even with the 635-point drop in the Dow Jones Industrial Average on Monday, Treasury yields dropped and investors bought bonds at record-low rates, indicating they are not as worried about the U.S. as a safe haven for their cash as previously forecast, experts said.
Home owners with fixed mortgages rates would be immune from any changes, but potential home buyers shopping around for a loan may see a rise in interest rates, the National Association of Realtors said.
Further Fall in Mortgage Rates?
The bigger issue could be a further fall in mortgage rates after the recent sharp declines in Treasury yields, said Paul Dales, economist with Capital Economics. “In theory, that could boost the housing market,” Dales said. “In practice, it won't make much difference as high unemployment and tight credit conditions prevent households from taking advantage.”
If mortgage rates do rise, it could hold back potential growth for the already beleaguered housing market. Mortgage rates plunged to an eight-month low last week, with 30-year fixed-rate mortgages averaging 4.39 percent, according to a survey by Freddie Mac. However, some experts note that even with the low interest rates, there hasn’t been a significant an increase in home buying demand.
Home buying has been relatively stable, but at a low point over the last 18 months, said Lawrence Yun, chief economist with the National Association of Realtors. Home sale activity is trending near the 5-million annual home sales range, but given the larger population in the U.S., closer to 5.5 million is considered healthy.
“Indirectly it could have a negative impact in terms of damaging consumer confidence,” said Yun. “They [the consumers] can still tap mortgage rates cheaply, but consumer confidence may be impacted by the downgrade.”
Anika Khan, economist with Wells Fargo, said at least in the near term she isn’t concerned about the impact of the downgrade on the mortgage market and hasn’t seen upward pressure on mortgage interest rates. “Where else are we going to go to get mortgages backed?” she said. “It doesn’t change the story, just a different rating.”
Many experts are still waiting to see if the other two major credit rating agencies — Moody’s and Fitch Ratings — will follow in Standard & Poor’s footsteps and also downgrade the U.S.
In September 2008, shortly after the financial crisis began, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac, both government sponsored entities, into conservatorship as a way to avoid further negative repercussions to the economy should either of the firms default.
