US credit downgrade could adversely affect mortgage market

The US mortgage market, which has been supported by the government, could be affected by the country’s recent credit downgrade, with the possibility of a hike in borrowing costs for consumers.

Karen Shaw Petrou, Managing Partner of Federal Financial Analytics, said that the “sufficiently perilous” status of the US mortgage market and the downgrade “can do nothing but harm the market”.

Standard & Poor’s cautioned in July that a downgrade of the credit rating will trigger a downgrade of major mortgage-finance players Fannie Mae and Freddie Mac — the firms that were nationalised three years ago and have maintained their triple-A rating since the government guaranteed their debt.

Currently, no one knows the extent of the impact of the downgrade on the mortgage market, even if the market is primarily intertwined with the federal government.

As a direct result of the government’s rating, the securities issued by the government-owned corporation Government National Mortgage Association, or Ginnie Mae, have been given a triple-A rating.

Approximately 90 percent of new mortgages are backed by Freddie, Fannie or Ginnie.

If the company’s ratings are to be downgraded, borrowing costs will increase, which will translate to an increase in mortgage rates or losses to the firms.

The US$4 trillion in mortgage-back securities guaranteed by Fannie and Freddie and held by investors are not rated and traded as safe investments, as they are government assured.

The combination of the downgrade, Euro-zone debt crisis and roller-coaster nature of the US economy could lead to greater volatility in the mortgage market.   

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