Last Friday, S&P took the unprecedented step and downgraded the U.S. credit rating from AAA to AA+. In the history of the U. S. credit rating there has never been a downgrade, though most economists were not surprised by the move from S&P, just what does the credit downgrade mean for the average American mortgage?
Like any credit rating the U.S. credit rating is an indication of our ability to pay our debts. Just as an individual has a credit rating so does our country. When we, as individuals, get downgraded for lack of payments or slow payments our ability to borrow is hampered and when we do borrow our interest rates are higher. It isn’t much different for a country and the U.S. may see an increase in interest rates which would then be passed on to consumers in higher interest rates on car loans, mortgages, really any borrowing.
While most economists believe interest rates will increase they also believe the government will try to take steps to minimize the impact on an already fragile economy.
According to an article on the Boston Globe by D.C. Denison:
…A credit rating downgrade does not automatically translate into a rise in interest rates. Treasury bonds are still considered among the safest and most liquid investments in the world, so even if the cost of borrowing goes up, financial planners say, the don’t expect dramatic increases. In fact, the demand for Treasurys was so strong yesterday – as investors sought refuge for their money – interest rates on those bonds went down.
“The Federal Reserve is going to do everything it can to keep interest rates low, and it has more influence than Standard & Poor’s,” said Bill Driscoll, owner of Driscoll Financial, a financial planning firm in Plymouth.
And from Jim Guido at Trulia.com:
…A lowered credit rating would trigger U.S. Treasury rates, the basis for mortgage rates, to go up. What’s more, rates onFannie Mae and Freddie Mac securities also would increase and investors would have less confidence in the ability of the government to backstop the guarantees of timely payment made by the companies on their securities.
Some experts said the expected mortgage rate hikes range from 0.25 percentage points to 3 percentage points.
Mortgage rates are historically low. The average 30-year fixed rate was last calculated by Freddie Mac officials at 4.52 percent and reached a 2011 high of 5.05 percent in February.
It’s is still too early to know just how the downgrade will impact everyone but the stock market has certainly felt the impact dropping by more than 500 points yesterday.