No one expected this and many Americans were in shock as America’s credit was downgraded to AA+. This is the very first time in history that that America had its credit downgraded.
Many experts believe that the downgrade will affect all markets including the mortgage market and interest rates eventually. Investors are less likely to buy U.S bonds and as a result, interest rates are likely to decline.
You may be wondering why someone would want to buy bonds from a country with a less than stellar credit rating? The not so obvious answer is that people are getting pounded in the stock market and so they are desperately looking for a safe investment. Believe it or not, U.S. treasury bonds are a safe investment.
Purchasing debt is actually attractive to many investors, especially 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.
Prominent companies in the mortgage business affected by this downgrade include Fannie Mae and Freddie Mac. The U.S. government has been funding the institutions.
Almost half of all mortgages in this country are owned by these two companies. The assumption is that since the federal government is incapable of paying the bills then neither can Freddie Mac and Fannie Mae.
As a result, they too had their credit downgraded. A grand total of thirty two major companies have also had their credit rating downgraded.
Analysts say that this situation may not affect interest rates. However, they added that banks could execute tougher lending standards for home buyers as a result of the downgrade.
Even the stock market declined and saw major drops in the aftermath. The Dow Jones Industrials declined 634 points on Monday, August 8. That’s 5.5 percent of the DJI. Analysts point out that Fannie Mae and Freddie Mac’s stock is now almost worthless.
This is all new because the U.S. government has never had its credit rating downgraded before. So, we have to let it play out and adjust to any changes.
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