None of us really saw it coming but earlier this week, we all heard about the downgrade of America’s credit. Since then experts have been debating non-stop about the significance of this event and the affect that it will have on the global economy.
One possibility is higher mortgage rates. The reason for this is because investors are less likely to be attracted to U.S bonds. Lower bond prices lead to higher mortgage rates. Strangely enough, investors are still buying tons of U.S bonds. As a result mortgage rates will stay the same or even go lower.
You might find it rather odd that some folks would want to invest in bonds from a country with a lower credit rating. One reason is because bonds are safer than stocks, especially since many investors have lost a lot of money in stocks recently. There is still plenty of cash to be made from buying American debt. One reason is that the U.S. has so much debt compared to other countries around the world who are operating with debts. Moreover, countries that have debt now have even lower credit ratings than the United States. China, with all its talk about how the U.S. should get it financial house in order, has a lower credit rating than the U.S.
The U.S has never had its credit downgraded before so none of us quite know what to expect yet. Since this is the first time the U.S. credit rating has been downgraded, then we, including the so-called analysts who have knowledge about these things, cannot really predict what the total impact of the downgrade will be. Many analysts say that when the stock market settles down, the investors will flock to it causing a drop in price of the bonds and the rise of interest rates.
Major mortgage entities such as Freddie Mac and Fannie are also reeling and feeling the side effects of the downgrade. The U.S. government has been funding the institutions. A large percentage of American mortgages are owned by these two companies. It’s only natural that they are also affected since they are backed by the government. As a result, these companies along with many others also had their credit downgraded. It is quite plausible that this situation may not affect interest rates. It will be even more difficult for consumers to qualify for a home mortgage.
Even the stock market has been affected as well. The Dow Jones Industrials declined 634 points on Monday, August 8. That’s 5.5 percent of the DJI. The price of Fannie Mae and Freddie Mac stock has declined quite rapidly.
Earnings report were released by Freddie Mac just as the price of stock went down. It said that the downgrade could mean a reduction in the supply of mortgages. The worst case scenario would mean a higher number of foreclosures in the nation. We are still in the early days after this shocking announcement. It will be interesting to see what the long term effects will be.
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