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What the debt downgrade means for your mortgage
By Allan Chernoff
CNNMoney
August 9, 2011
New York (CNNMoney) --
At least one fear was not realized amid Monday's meltdown: the concern that
mortgage rates would immediately shoot higher in response to Standard &
Poor's downgrade of Fannie Mae and Freddie Mac, the government-sponsored
entities that are the 800-pound gorillas of the mortgage market.
HSH Associates, which surveys lenders,
quoted the average 30-year fixed rate mortgage at 4.44% Monday. "We expect
to see rates go into the 4.30's by noon tomorrow," said Keith Gumbinger,
of HSH Associates.
In fact, the initial response to
Frannie and Freddie getting cut to AA+ from AAA was precisely the
opposite. Mortgage rates were poised to continue declining.
Mortgage rates are set off of the
interest rates on U.S. Treasury notes and bonds. Even though Standard
& Poor's pulled its AAA rating of the United States Friday night, investors
still rushed into U.S. Treasury securities Monday as a safe haven, believing
more in the "full faith and credit of the United States" than in the
opinion of Standard & Poor's credit analysts. As investors snapped up
Treasury notes and bonds they pushed down interest rates on those securities,
which move inversely to prices.
Late Monday afternoon, the 10-year
Treasury note traded at a yield of 2.34%, down from 2.56% on Friday and 3% just
two weeks ago, a huge move. That 10-year yield is the benchmark used to set
30-year fixed mortgages.
"The flight to quality effect is
dominating," said Walt Schmidt, senior vice president of FTN Financial
Capital Markets. "The net effect is lower mortgage rates."
Stock market plunge: Not just a rich guy's problem
Fannie Mae and Freddie Mac, now
80%-owned by the U.S. government after receiving more than $150-billion in
federal bailout funds, purchase bundles of mortgages from banks, providing
lenders with fresh cash to make new loans. Frannie and Freddie then
package those mortgages into securities that are sold to investors, most of
which went sour during the financial crisis.
Indeed, on Monday investors demanded
slightly higher interest rates for such mortgage-backed securities, increasing
the difference- or spread- between mortgage securities and Treasuries. But that
increased spread, which normally would result in higher mortgage rates, was
more than made up for by the drop in Treasury security yields.
Your money in a AA-rated world
"That flight to safety is
completely overshadowing any increase in rates that the downgrade might have
brought," said Gumbinger of HSH Associates.
Auto loan rates may also slide lower
since they too are tied to Treasury yields. The yield on 3-year Treasury
notes dipped Monday to .45%, which is likely to pressure down 48-month auto
loan rates. The national average auto loan rate was 5.6% Monday, according to
bankrate.com.
Analysts warn the drop in interest
rates may not last. If investment flows were to move back into stocks and out
of bonds, interest rates on Treasury securities, and consequently mortgages,
would rise.
"Over the long-term, if the U.S.
has to pay more in interest rates, consumer rates will likely go up," said
Greg McBride, senior financial analyst for Bankrate.com.
For now, lower mortgage rates may offer
only limited benefits to American consumers. Banks' lending standards have
been tough recently, and consumers need the wherewithal to qualify for loans.
That appears increasingly difficult as the economy continues to sputter.
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