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Ask any person whose credit scores have gotten chopped and they would most likely warn you about the consequences of exorbitant borrowing and the difficulties of accessing credit. With this cautionary tale in mind, what are we to make of the credit downgrade of the U.S. government – the first time in the country’s history - announced by Standard & Poor’s over the weekend? Some panic and plenty of anxiety were thrown about by the media in discussions over the weekend before the opening of the bond market. Well, Monday morning is here and the market is open. The U.S. government borrowing rate has fallen to approximately record lows. Simply put, never in the history of the U.S. has the cost of borrowing been this cheap.
My thoughts are that the rates may be impacted by 30 basis points at maximum. Mortgage rates will most likely move in the same direction as the government borrowing rate, because there is government backing of mortgages on nearly all mortgage originations in today’s market.
It is also possible for the rating downgrade to have absolutely zero impact if global bondholders do not care for S&P’s opinion. After all, information about this country’s future deficit is freely accessible and not proprietary to S&P. Furthermore, S&P as well as other rating agencies like Moody’s and Fitch are still cleaning the egg off of their faces after having awarded the best triple-A ratings to subprime mortgage bundles during the housing bubble years, driven by perverse incentives to get paid by mortgage bundlers (just think how Roger Ebert and other Hollywood movie critics would rate a film if they were to get paid by the movie’s producers, for example).
Even if rates were to rise because of the downgrade, this fact is less important in light of the current overly-stringent underwriting standards and the general lack of consumer confidence about the economy. A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.
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