When the uncertainty over raising the U.S. debt ceiling finally ended, the mortgage markets responded by dropping interest rates to new 2011 lows. The future path of these rates remained clouded, however, by another unresolved issue: Would the rating agencies follow through with threats to lower the U.S. credit rating?
The United States always had enjoyed AAA status but as the debt ceiling debate dragged on, three of the largest rating agencies — Moody’s Investors Service, Standard & Poor’s and Fitch Ratings — warned that could change unless the country made a serious effort to reduce its debt. A downgrade would immediately make Treasury notes less desirable as an investment and rates would rise accordingly. Any increase would eventually resonate throughout the system, raising the cost of all borrowing, including credit cards and mortgages.
| About credit ratings |
| » Credit ratings are to corporations and governments what credit scores are to people. Both reflect an estimate of how likely a borrower is to repay a loan. The lender translates that into a price for taking the risk. While a credit score is a number, such as 725, credit ratings are expressed in letters and AAA is the most desirable. |
Almost as soon as the debt ceiling issue was resolved by Congress, Moody’s reaffirmed the country’s AAA rating but added a “negative outlook.” That means that while Moody’s did not downgrade, it continues to watch the situation carefully.
A few days later, however, S&P downgraded the nation’s debt rating to AA+, saying that the “political brinkmanship of recent months” had highlighted what it saw as “America’s governance and policymaking becoming less stable, less effective, and less predictable.”
The ultimate impact of S&P’s decision remains unclear.
The other two big agencies, as well as many smaller ones, are holding firm with their AAA ratings, and the S&P rating is still high enough that regulated investors like pension funds will not be forced to sell their Treasury holdings.
Critics of the decision, including the White House, have questioned S&P’s analysis and math. Those who disagree with the rating also point out that the firm gave dubious ratings to hundreds of mortgage-backed securities before the housing crisis.
Lenders weighing all of these perspectives may decide to simply ignore S&P’s action. In fact, the interest rate picture so far appears positive. Deryck Cheney, branch manager of Fairway Independent Mortgage in Haymarket, Va., is looking for record low rates by summer’s end.
The markets, he said, priced in the fear of both a U.S. default and possible downgrade in late July and mortgages bumped up accordingly.
Once these two economic factors “become Page 2 news,” he said, “rates will go back down.”
Fallout from this period of uncertainty will continue through August, he said, and he advised home loan borrowers not to lock in interest rates too early.
Gary A. Lieb, vice president of Apple Mortgage Corp., agreed and said if the government really does reduce spending, and thus the need to borrow, rates could remain at this low level even for the very long term.
“The economy is so fragile, there are no inflationary pressures and the government is nowhere near ready to raise rates,” he said.
Indeed, the Federal Research said Tuesday it would keep rates “exceptionally low” until at least mid-2013.
Cheney said a recent assessment by top economists at the Wharton School said there is an 80 percent chance mortage rates will stay in the 4.5 percent range through the year.
“The economy is on such shaky ground,” he said, “that higher rates are not sustainable. Between the Federal Reserve and private money willing to buy bonds, the factors are in place to keep rates down. We are also going to see more weakening of the economy which will put more downward pressure on rates.”
Lieb put it another way. There will always be a demand for Treasurys, he said, “because there is no place better for foreign investors to put their money.”
