Posts Tagged ‘Standard & Poor’s’

Sell first. Ask questions later.

August 8, 2011

First, I must give credit where credit is due. That title is in a CNN Money article from a quote by Paul Zemsky, who is the head of asset allocation with ING Investment Management. Zemsky’s full quote was “investors are having one reaction to the downgrade: sell first and ask questions later.”

Over the course of the day, I received several calls and emails from clients concerned about interest rates rising. In actuality, it has been a good day for interest rates as they have improved over the course of the day. Why would interest rates improve when stocks plunge?

That reaction is typical- as stocks surge, rates rise… as stocks plunge, rates get lower. Why? As money leave stocks, it usually heads for the safe haven of bonds. Then mortgage backed security bond prices improve, and interest rates improve.

Now I know what you may be thinking, “why would investors put money into US Bonds after the downgrade by the S&P?” It is a great question, and there are a couple of logical reasons for this:

  • During times of financial strife, money often leaves riskier (but higher rate of return) investments such as stocks. That money is moved into the safer (but lower of return) investments like bonds. Viewed at that angle, today’s events followed a logical pattern. If you don’t believe me, ask this guy for a second opinion.
  • The Euro is not a safe bet right now either. With the continued strife and more plans to rescue and/or bolster countries who are struggling, investors don’t have a great choice with the Euro right now. If investors don’t like the Dollar since the downgrade, are they in a hurry to invest in a currency that might become insolvent?
  • The Dollar is still being viewed as a safe haven currency. Even though the Dollar is not a part of the “AAA Club” anymore, it is still a safer bet (for now) than the Euro or any other currency in the world. With the size of the GDP, most investors feel at some point things will turn around.

Bringing this all back to the mortgage world, if you are out looking for a home or thinking about refinancing, what should you do?

  • If thinking about refinancing and have been waiting, now is the time to jump. Interest rates have improved into the low 4’s after being in the mid 4’s most of the year.
  • If you are looking to buy a home, you could consider using the Lock n’ Shop feature we offer. Lock in a rate now for 60 days. That gives you 30 days to make an offer, and then 30 days to close.
  • Buying a short sale property? This one is trickier because you never know how long it will take to get an approval letter from the bank that owns the propety you wish to buy. The Lock n’ Shop wouldn’t exactly fit that scenario. Even so, I wouldn’t panic. Even if interests rates rise, it will probably be only an increase back to the pre-downgrade levels, which were in the mid 4’s.

Remember, investors may be selling now, but they will ask questions at some point in time. When they do begin to think about and question their actions, the markets will more than likely correct themselves and move back to where they were prior to the recent panic attack. That is a typical and logical response. So… logically, you should take advantage of the lower rates while they are available!

Downgraded. Now what?

August 6, 2011

It is official. Standard & Poor’s officially downgraded the United States credit rating from AAA to AA+. So… what’s next?

There are plenty of opinions out there. Some that feel the downgrade will cause investors to reconsider long-standing fundamental market assumptions. Others imply the S&P is possibly overstepping their bounds and made an illogical decision. A great article by The Economist insinuates investors have an interesting dilemma on their hands-purchase a currency that may default (downgrade), or the one that could disintegrate.

While there will surely be a wide range of impacts due to the downgrade, The Mortgage Blog attempts to keep its focus in the mortgage industry. What might we expect? Honestly no one knows.

  • Could their be another slow down in the housing industry? That depends on the economy. For now, some believe the threat of a double dip has been pushed off thanks to an encouraging jobs report for the month of July. However, should that outlook change and businesses get conservative in hiring/spending, who knows what would happen. A wild card like the downgrade could be the catalyst that continues the downward trend of stocks and sour the country’s economic outlook. When that happened in 2008, the resulting impact on the housing market was quite severe.
  • Could interest rates rise? Mortgage rates significantly rose on Friday after rallying for the first part of the week. With the downgrade taking place, one might assume bond prices would decrease as the Dollar’s credit rating has been reduced. When bond prices decrease, interest rates increase.
  • Could interest rates improve? One could argue that point of view too. If the downgrade has a negative impact on stocks, money typically flows from stocks into bonds. That helps increase bond prices, and causes interest rates to improve. Of course, this could also be a situation where both bonds and stocks suffer from the events of Friday afternoon.
For now, the markets are down… shut down for the weekend. We won’t know anything for sure until they come back online this Monday morning. Guess we will have to wait and see what happens. It could be a bumpy ride. In the immortal words of Samuel L Jackson in Jurassic Park…

Impact of the potential ratings downgrade

April 26, 2011

A week ago, Standard & Poor’s (known as S&P) downgraded the U.S. credit rating to a negative. The U.S. did not loses its AAA rating, but the downgrade makes it increasingly likely it could occur if government doesn’t get deficit spending under control.

Does the downgrade mean good news for interest rates? Bad economic news is typically good news for mortgage rates. The initial market reaction to the S&P decision would back this up as stocks took a dive, and bonds barely moved on the announcement.

What does this mean in the long term if the U.S. loses its AAA rating? Easy answer – losing the AAA rating would negatively impact everyone.

The damage to stocks is obvious… losing the AAA rating is bad for business. Bad for business = bad for the economy. When the economy drags, stocks tend to follow (as evidenced over the last couple of years).

Combating a downgraded rating would also hurt interest rates. If you read the previously linked Wall Street Journal article, possible scenarios could include:

  • the U.S. not defaulting, but becomes more difficult to borrow money
  • an option to pay off debt could include printing more money/lowering the value of the U.S. Dollar

Both of those options for dealing with deficit spending and a rating downgrade hurt interest rates. The U.S. would still find funding sources, but not at the favorable rates we see today. An increase in the rates for the U.S. to borrow money would cause all rates to increase.

Second, printing more money leads to inflation. There is no way around it. Bonds HATE inflation. The higher the rate of inflation goes, the faster bonds lose their value. As we all know from reading this blog, as the value of bonds go down, interest rates go up!

Losing the AAA rating would be bad for everyone… the government, investors, stock prices, bond prices, retirees, home buyers… you name it, and it will probably be impacted. This is one thing that both sides in Washington agree on – we don’t want to lose the AAA rating. Now, let’s see if they can agree on a way to prevent a potential ratings downgrade!