Will the S&P Downgrade Affect Interest Rates?
Standard & Poor downgraded the U.S.’s credit rating on Friday, despite Congress reaching a deal in the final hours on the debt ceiling crisis last week. And now many of your customers may be asking: What does this mean for interest rates?
“The impact on your wallet of the Standard & Poor’s downgrade of the nation’s credit rating is similar to what would happen if your own credit score declined: The cost of borrowing money is likely to go up,” the Washington Post explained in the aftermath of S&P’s decision.
S&P downgraded the U.S.’s top-notch AAA credit rating for the first time in history, moving it down one notch to AA+; the rating reflects a downgrade in S&P’s confidence in the U.S. government’s ability to repay its debts over time. It’s not clear, however, whether S&P’s downgrade will instantly effect rates, analysts say.
The 10-year Treasury note is considered the basis for all other interest rates. And “the downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money,” the Washington Post article notes. “Many consumer loans, such as mortgages, are linked to the yield on Treasurys and therefore would also rise.”
While consumers who have fixed interest rate mortgages will be immune to any changes in borrowing costs, home buyers shopping for a loan or those with mortgages that fluctuate may see a rise in rates later on, some analysts say.
Mark Vitner, senior economist at Wells Fargo Securities, told the Associated Press that he doesn’t expect the downgrade to drive up interest rates instantly since the economy is still weak and borrowers aren’t competing for money and driving rates higher. However, he expects in three to five years, loan demand will be much higher and then the downgraded credit rating might cause rates to rise.
Analysts are still waiting to see if the other rating agencies, Moody’s and Fitch, follows S&P’s lead in its downgrade of the U.S. credit rating. If so, the aftermath could be much worse, analysts say.
The debt deal reached by Congress last week was expected to save the U.S. from any credit rating downgrade. However, S&P said lawmakers fell short in its deal. Congress’ deal called for $2 trillion in U.S. deficit reduction over the next 10 years; S&P had called for $4 trillion.
Source: “5 Ways the Downgrade in the U.S. Credit Rating Affects You,” The Washington Post (Aug. 8, 2011); “Questions and Answers on Standard & Poor’s Downgrading of U.S. Federal Debt,” Associated Press (Aug. 6, 2011); and “S&P Downgrade Will Shake Consumer and Business Confidence at a Fragile Time, Economists Say,” Associated Press (Aug. 6, 2011)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC
Federal Reserve Leaves Rates Alone
The Federal Reserve issued a statement on Tuesday saying that it will hold off on further efforts to stimulate the economy and keep the federal funds rate at or near zero, but signaled that it was ready to step in with further action if necessary.
The Open Market Committee said in a release,“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
The Fed apparently debated resuming securities purchases aimed at driving long-term interest rates even lower. Those who were opposed said it is likely this approach won’t work.
Source: Bloomberg, Craig Torres (09/21/2010)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
Fed: Low Rates Likely Through 2010
Interest rates are likely to remain low into 2011, Federal Reserve policymakers hinted this week in at least two presentations. These indications came one week after the Fed shut down its program to buy mortgage-backed securities, which had kept rates at or near record lows in recent months.
In a speech Thursday, Fed Governor Daniel Tarullo said, “The relatively modest pace of recovery, the continued high rate of unemployment, subdued inflation trends, and well-anchored inflation expectations together suggest that the need for highly accommodative monetary policies will not diminish soon.”
Likewise, Donald Kohn, Fed vice chairman in a speech in San Francisco, said the Fed would raise rates, “in due course,” but he also noted that low rates “help offset the lingering restraining effects on economic activity and prices.”
So far, rates have risen modestly, but analysts speculate they will likely become much more volatile down the road.
“It’s an uncertain type of market,” says Keith Gumbinger of HSH.com.
Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, predicts that the Fed will have created a situation where there are days or weeks of low-rate opportunities, and other days and weeks when rates rise significantly.
Sources: The Wall Street Journal, Nick Timiraos (04/08/2010), and The Wall Street Journal, Jon Hilsenrath (04/09/2010)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
Fed: Interest Rates to Remain Low
Investors breathed a sigh of relief Wednesday when Federal Reserve Chair Ben Bernanke told Congress that interest rates are likely to remain low for an extended period. The economy, he said, “still requires support for recovery.”
Investors see these low rates as a boon to a recovery of employment and business.
Bernanke’s announcement also took the edge off the news Wednesday that housing sales hit a new low in January.
“Even though nothing he said was particularly new, it was just enough to calm the ruffled feathers that were out there,” said Jim McDonald, chief investment strategist at Northern Trust in Chicago.
Source: The Associated Press, Tim Paradis (02/24/2010)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
Cutting Mortgage Principal Decreases Defaults
Borrowers whose loan modifications reduced their loan balances – not just their interest rates – are most likely to avoid re-defaulting on their mortgages, according to a new study by the Federal Reserve Bank of New York.
These findings contradict the government’s recommendation, which focuses on reducing monthly payments by lowering interest rates and extending the loan terms.
The New York Fed concludes that a borrower’s probability of defaulting within one year when interest rates are lowered is reduced by 11 percent. But when the loan balance is reduced by 25 percent and the interest stays the same or is reduced slightly, the borrower’s probability of default within one year is reduced by 26.5 percent.
The New York Fed also found that borrowers who owe 15 percent or more than their homes’ values have a 51 percent greater risk of defaulting in any given month.
Source: The Wall Street Journal, Nick Timiraos (01/04/2010)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
Fed Commits to Holding Down Interest Rates
The Federal Reserve said Wednesday that it would keep short-term key interest-rate target between 0 and 0.25 percent for an “extended period” – interpreted by many analysts to mean months.
Officials said in a statement after the close of its December meeting that the economy has “picked up,” unemployment is “abating,” and financial conditions have “become more supportive of economic growth.”
The Fed also said Wednesday that it will complete its purchase of up to $1.25 trillion in mortgage-backed securities by March, a decision that could negatively affect the availability of mortgages.
Source: The Wall Street Journal, Jon Hilsenrath (12/17/2009)
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
Homeowners opt to refinance and save.
The reasons to refinance your home, or buy a new one, just keep getting better.
This week, the Federal Reserve announced it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. It also left the short-term bank lending rate at a record low of between zero and 0.25 percent.
Those announcements have the phones ringing at local banks with people now locking into rates.
“If you can save a point on your mortgage, it’s time to do it,” said Andrew Siders, president of Vista Bank. “Things are moving.”
The anticipation of lower interest rates, coupled with a better week on the stock market, is raising optimism, Siders said. “As government gets more positive, the consumer is going to get more positive.” Full Story.
Front Gate Properties, We’re selling the BEST Real Estate in Aiken, SC.
How Much House Can You Afford?
Determining how much home you can afford, or what payment you feel comfortable with, can be a trying process. Calling lenders, looking at mortgage loan programs and interest rates can be confusing, to say the least. There is an easy way to get started, and give yourself an idea of where you stand. The first [...]