BAP Blog U.S. Credit Downgrade Could Effect Mortgage Rates

With the nation closely watching whether the U.S. government's credit rating will be lowered and as debt-ceiling talks continued on Tuesday it appears their may be some effects on interest rates. A downgrade of the country's AAA rating could lead to hikes in interest rates and later increases in mortgage rates, which would mean higher costs for potential homebuyers. That, local mortgage experts said, would have significant consequences on an already fragile housing market and consumers who are on the fence about buying a home. A downgrade would be very detrimental to the mortgage industry. A lowered credit rating would trigger U.S. Treasury rates, the basis for mortgage rates, to go up. What's more, rates on Fannie 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. Freddie Mac historical data show spring 2002 was the last time the 30-year fixed rate was in the 7 percent range, where rates could fall if the worst-case scenario were to play out. Speculation on whether mortgage rates could go up immediately or over time is mixed. Some say it may take a couple of years for that to happen as investors would keep "parking money" in mortgage-backed securities, as they're historically safe investments. Some experts say if our credit downgrade happens, mortgage rates would go up drastically in a short period of time. Either way it could be a real problem for the already fragile economy. Lets hope our leaders understand this and try work together for a proper solution for our country.