Mortgage Talk
What Standard & Poor’s credit downgrade means for mortgages
October 2011
What Standard & Poor’s credit downgrade means for mortgages
October 2011
It’s been since early August that Standard & Poor’s downgraded the U.S. credit rating. This historic downgrade has since quietly slipped into media obscurity. What was all the hype and how does it impact mortgage rates?
Good and Bad News
The bad news first: As we all know, Standard & Poor’s downgraded the U.S. credit rating for the first time in history to one notch below the top tier, AAA, to AA. This is equivalent to a drop in one’s personal credit score. The good news: It’s been nearly two months, the markets have responded, and frankly, no one seems to care what Standard & Poor’s thinks anymore.
Why the Concern
Standard & Poor’s downgrade translates to their opinion that U.S. Treasury bonds carry a higher risk of default. Investor confidence in U.S. Treasury bonds is crucial because bond prices determine interest rates. As bond prices go up the corresponding rates and yields go down and vice versa. While conforming mortgage rates are tied to the price of mortgage bonds, U.S. Treasury bonds and mortgage bonds will generally move in the same direction. Hence the concern over this downgrade was that it could have resulted in higher rates on business loans, credit cards, financing of government endeavors, and of course mortgages – all of which might hurt our economic recovery.
How S&P Got It Wrong
The Monday morning after Standard & Poor’s downgrade, stock market woes caused money to hemorrhage out of stocks, and in search of safe parking it landed in U.S. Treasury bonds – exactly what Standard & Poor’s had just downgraded one business day earlier. The simple fact is they simply got it wrong … again. Recall Standard & Poor’s rated Lehman Brothers in the top tier just a week before their bankruptcy.
Standard & Poor’s also failed to differentiate the risk factors of mortgages, making it impossible to isolate “toxic assets” during the liquidity crunch. In this case Standard & Poor’s U.S. credit downgrade is shockingly void of an understanding of monetary policy. The United States will never default on its debt because it can and will simply print more money. Just ask the man in charge, Ben Bernanke. It’s true that printing more money is inflationary and this is an important concern, but as far as the credit worthiness of U.S. Treasury bonds the United States is still a good bet.
At the end of the day Standard & Poor’s U.S. credit downgrade proved to be little more than the opinion of a firm’s dwindling credibility.
What Affects Mortgage Rates
Despite the U.S. credit downgrade we have seen investors continue to regard U.S. Treasury bonds as the safest parking for capital. This is precisely why rates remain near all-time lows. Considering that a 1 percent change in a mortgage rate can equate up to a 10 percent swing in a home price, this is very good news for home affordability.
Going forward, watch two key factors that will determine how mortgage rates trend: inflation and the stock market. Higher inflation is bad news for mortgage rates, and rising stock prices will pull money from bonds, also pushing rates higher.
Ephraim Schwartz is a partner and mortgage consultant at O’Dette Mortgage Group, 1842 Union Street, 415-931-2129.
Good and Bad News
The bad news first: As we all know, Standard & Poor’s downgraded the U.S. credit rating for the first time in history to one notch below the top tier, AAA, to AA. This is equivalent to a drop in one’s personal credit score. The good news: It’s been nearly two months, the markets have responded, and frankly, no one seems to care what Standard & Poor’s thinks anymore.
Why the Concern
Standard & Poor’s downgrade translates to their opinion that U.S. Treasury bonds carry a higher risk of default. Investor confidence in U.S. Treasury bonds is crucial because bond prices determine interest rates. As bond prices go up the corresponding rates and yields go down and vice versa. While conforming mortgage rates are tied to the price of mortgage bonds, U.S. Treasury bonds and mortgage bonds will generally move in the same direction. Hence the concern over this downgrade was that it could have resulted in higher rates on business loans, credit cards, financing of government endeavors, and of course mortgages – all of which might hurt our economic recovery.
How S&P Got It Wrong
The Monday morning after Standard & Poor’s downgrade, stock market woes caused money to hemorrhage out of stocks, and in search of safe parking it landed in U.S. Treasury bonds – exactly what Standard & Poor’s had just downgraded one business day earlier. The simple fact is they simply got it wrong … again. Recall Standard & Poor’s rated Lehman Brothers in the top tier just a week before their bankruptcy.
Standard & Poor’s also failed to differentiate the risk factors of mortgages, making it impossible to isolate “toxic assets” during the liquidity crunch. In this case Standard & Poor’s U.S. credit downgrade is shockingly void of an understanding of monetary policy. The United States will never default on its debt because it can and will simply print more money. Just ask the man in charge, Ben Bernanke. It’s true that printing more money is inflationary and this is an important concern, but as far as the credit worthiness of U.S. Treasury bonds the United States is still a good bet.
At the end of the day Standard & Poor’s U.S. credit downgrade proved to be little more than the opinion of a firm’s dwindling credibility.
What Affects Mortgage Rates
Despite the U.S. credit downgrade we have seen investors continue to regard U.S. Treasury bonds as the safest parking for capital. This is precisely why rates remain near all-time lows. Considering that a 1 percent change in a mortgage rate can equate up to a 10 percent swing in a home price, this is very good news for home affordability.
Going forward, watch two key factors that will determine how mortgage rates trend: inflation and the stock market. Higher inflation is bad news for mortgage rates, and rising stock prices will pull money from bonds, also pushing rates higher.
Ephraim Schwartz is a partner and mortgage consultant at O’Dette Mortgage Group, 1842 Union Street, 415-931-2129.
