Rates Near Lows as Dow Sells Off in Wake of U.S. Debt Downgrade

Mortgage & Real Estate

The yield on the benchmark 10-year Treasury fell to 2.35% Monday morning, nearing its all-time low as stocks sold off in the wake of SP’s historic debt downgrade on the U.S.

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Not only was the U.S. downgraded, but so too were Fannie Mae, Freddie Mac and the entire Federal Home Loan Bank system. Fannie and Freddie, wards of the U.S. for almost three years, supply liquidity to 70% of the mortgage market. 

While government and agency securitizations generally have not been subject to ratings (because investors consider the U.S. government’s backing sufficient) the new SP downgrade could change all that, particularly in the international market. (Prior to SP’s downgrade of the U.S. long-term debt, resecuritizations of agency RMBS, HECMs securitized in the private market, and securitizations of reperforming FHA/VA collateral have been rated.)

At press time, an SP spokesman had not returned a telephone call about the matter.

Mortgage rates usually follow the lead of the 10-year. Late last week some lenders were already reporting increased application volume, mostly tied to refinancings.

In early afternoon trading the Dow was off well over 325 points with banking and mortgage-related stocks suffering along with the rest of the market. The share price of Bank of America, the nation’s largest residential servicer, crumbled by 14% to just under $7 per share, reaching a new 52-week low.

Mortgage stocks suffering the most include: MGIC (-24%), Impac Mortgage Holdings (-11%), Genworth Financial (-10%), and PHH Corp. (-8%).

In contrast to the SP action, a Moody’s spokesman confirmed its equivalent highest investment grade rating for U.S. debt. It also confirmed its Aaa ratings of structured finance securities with government-linked debt as their primary collateral, including MBS backed by the government.

However, both Moody’s and SP have negative outlooks on their long-term U.S. debt ratings, which means there could be a negative rating action taken over the next year or two.

Fitch, at press time, still had not taken a rating action in reaction to the debt ceiling agreement, according to a spokesman. Traditionally, market participants use two rating agencies in transactions.

KBW analysts, proponents of agency MBS REITs despite their dropping prices and U.S. debt uncertainty, reiterated in a report Monday morning that they believe the SP downgrade will have a limited impact on agency MBS.

–Paul Muolo also contributed to this report

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