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Downgrade helping rates?

By Polyana da Costa · Bankrate.com
Monday, August 8, 2011
Posted: 4 pm ET

If the United States loses its triple-A credit rating, mortgage rates will spike -- or so you were told.

Economists repeatedly warned Congress of a supposed catastrophe for interest rates in the event of a downgrade of the U.S. credit rating. But guess what? After Standard & Poor's downgraded the U.S. debt rating late Friday, mortgage rates fell, remaining near historic lows. This morning S&P announced the downgrade of mortgage finance giants Fannie Mae and Freddie Mac, which own or guarantee about half of all U.S. mortgages.

You would think mortgage rates would have started increasing by now, says Michael Becker, a mortgage banker at WCS Funding Group in Lutherville, Md.

"The worst didn't happen" (yet), Becker says. "I was really worried when I first heard about it, but it seems concerns over Europe and the weakness in the economy are trumping the downgrade."

Believe it or not, despite the downgrade, as the European debt crisis worsens the United States is viewed by investors as a safe haven. Yes, the stock market tumbled as anxious investors pulled their investments. But that money has to go somewhere and right now, it's going into Treasury and mortgage bonds. And that's great for mortgage rates.

Demand for Treasuries continues to increase and that's pushing yields to historic lows. The yield on the 10-year Treasury is 2.33 percent as of Monday afternoon. That's the lowest level since October. The yield on Freddie Mac bonds is 3.84 percent, 6 basis points lower than Friday at closing and 39 basis points lower compared to two weeks ago.

"The U.S. is still a relatively safe place to invest," Becker says.

Plus, it's not like the downgrade came as surprise to investors. S&P announced its intent to downgrade the U.S. credit rating in April and last month warned that a downgrade likely would trigger a downgrade of Fannie and Freddie. Oh, and it doesn't hurt to remind you that the downgrades come from the same agency that rated lousy mortgage-backed securities as good stuff during the housing boom. As you may recall, that little mistake helped trigger the financial mess we're in today.

That said, it doesn't mean S&P's downgrade of the U.S. rating won't impact investors and mortgage rates.

The downgrade does create uncertainty in the financial markets and uncertainty can always cause rates to spike in minutes.

"It's scary times," Becker says. "Rates are good now, but things could change at any moment. So don't take a chance. Lock now if you can."

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3 Comments
Marie
August 09, 2011 at 8:53 am

i really wouldn't be surprised... i don't think the credit downgrade will have as many harmful effects are the experts tell us... its really just a more accurate representation of the country's financial status