The news reeled across the world as it was announced that America's credit was downgraded by the S&P. It's hard to image since America is considered one of the world's economic superpowers. How could this have happened?
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 wonder why any investor would want to buy bonds from a country with a lower credit grading. 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. American bonds are still considered a sound 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.
Even though America's credit worthiness has been lowered, many nations have even less credit worthiness. Currently, China's credit rating is even lower than America's.
What about Freddie Mac and Fannie Mae? The federal government rescued Freddie Mac and Fannie Mae along with other Wall Street businesses during the Wall Street Meltdown in 2008. The U.S. government has been funding the institutions.
Moreover, Freddie Mac and Fannie Mae own about half of all U.S. mortgages, and just about all the new mortgages. The thinking goes that these two companies will not be able to pay their bills since their primary backer can't pay its bills either.
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.
Moreover, analysts say that the downgrade of Freddie Mac and Fannie Mae contributed to the sharp decline of the stock market. 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.
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 wonder why any investor would want to buy bonds from a country with a lower credit grading. 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. American bonds are still considered a sound 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.
Even though America's credit worthiness has been lowered, many nations have even less credit worthiness. Currently, China's credit rating is even lower than America's.
What about Freddie Mac and Fannie Mae? The federal government rescued Freddie Mac and Fannie Mae along with other Wall Street businesses during the Wall Street Meltdown in 2008. The U.S. government has been funding the institutions.
Moreover, Freddie Mac and Fannie Mae own about half of all U.S. mortgages, and just about all the new mortgages. The thinking goes that these two companies will not be able to pay their bills since their primary backer can't pay its bills either.
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.
Moreover, analysts say that the downgrade of Freddie Mac and Fannie Mae contributed to the sharp decline of the stock market. 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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