Wednesday, April 20, 2011

How Does U.S. Debt Rating Impact Mortgage Rates?

This week Standard & Poor's (one of the ratings agencies that used to rate subprime mortgage backed securities as triple-A) downgraded the U.S. governments fiscal outlook to "negative." Uncle Sam kept its triple-A rating (the best available). The reason for the outlook downgrade was sited as the apparent inability of Democrats and Republicans to come to an agreement to eliminate deficits and begin reducing the national debt.

If Standard and Poor's is correct and Congress continues us on a path of financial mismanagement, then eventually the Government's debt (in the form of Treasury Securities) will be downgraded to a lower rating. The result of this action would be that investors who buy these securities will require a higher yield (aka interest rate).

If the rates on Treasury Securities that are guaranteed by the full faith of the U.S. government rise, then the yields of mortgage backed securities will also have to go up, as those securities are of higher risk to investors. Therefore the interest rates that homeowners will have to pay on their mortgages will be higher. The result is more money out of pocket for homeowners.

The conclusion is that paying down the national debt will lead to lower interest rates and therefore more affordable housing. That is good for everyone.