WASHINGTON, July 27 (UPI) -- A downgrade of the United States' triple-A credit rating would affect rates of home loans and student loans, but not credit cards, experts said.
A downgrade from the lofty perch of triple-A would create a "rush to sell U.S. debt," The New York Times quoted Cameron Findlay, chief economist at LendingTree.com, as saying.
That would cause prices of U.S. bonds to fall, which causes yields to rise.
Long-term, fixed-rate mortgages are tied to these yields, which means as they rise, so do rates for borrowing.
Related
"So the question then is by what magnitude," Findlay said. He then suggested rates would likely rise from a half percentage point to a full percentage point. But that would only last as long as the budget debate in Washington remains stalled.
The higher rates would be expected to slow lending, but the 30-year rates are currently at 4.52 percent.
Home-equity lines of credit and credit card loans could be affected down the road, but rates for these loans are tied the U.S. Federal Reserve's key lending rates -- the federal fund rate -- which is currently set at the historically low rate of zero to 0.25 percent.
The Fed is not likely to react to a downgrade in the U.S. credit rating, but the central bank would react by raising rates to keep inflation under control.
Student loans, meanwhile, are tied to the London Interbank Offered Rate or Libor, which is tied to yields on treasury notes, so they likely would rise with a rating downgrade, said Mark Kantrowitz, publisher of the FinAid Web site.
A downgrade would be expected if lawmakers in Washington fail to reach a budget agreement by Aug. 2.
In Washington at a congressional hearing Wednesday, Senior Deputy Controller and Chief National Bank Examiner David Wilson said state and municipal debt would also be affected, although it would be "manageable in the short term."
Asked how difficult it would be if the United States lost its high rating, Wilson said, "I think you're right to worry. It could happen."
