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WASHINGTON — As the stock prices of the big banks cratered on Monday, particularly for Bank of America Corp., pundits and industry observers began worrying that a second financial crisis was in the offing, including the possibility of the failure of a large financial institution.
August 8
Housing industry executives awoke on Monday to a world reshaped by the U.S. downgrade, but for their corner of the financial markets the pain is mostly psychological.
Standard & Poor's Corp.'s decision on Friday to lower the U.S. debt rating could, in theory, push up interest rates and the prices consumers pay for new mortgages, further slowing originations.
But mortgage lenders and analysts said on Monday that a sudden jump in rates is unlikely.
Instead, the biggest immediate costs to the housing market will be in terms of morale.
"The consumer psyche is really what it comes down to, and consumers are going to continue to withdraw," said David Lykken, managing partner of KLS Consulting, which does business as Mortgage Banking Solutions.
The U.S. debt downgrade, coming amid economic uncertainty, is "going to make consumers want to stay put. … Until we get to the bottom of this economic reset, we're not going to have any housing growth," Lykken said.
Investors are increasingly shuttling money from stocks to Treasuries, which is likely to keep interest rates near historic lows.
"It doesn't appear that this is going to have a big impact on interest rates, which is not surprising. The world is just very depressed about the economy going forward," said Richard Green, director of the University of Southern California's Lusk Center for Real Estate.
The average fixed 30-year mortgage rate actually fell 15 basis points last week to an average of 4.65%, a 2011 low, according to HSH Associates, which tracks fixed-rate mortgages on a weekly basis.
S&P on Monday also downgraded the government-sponsored agencies Fannie Mae and Freddie Mac.
It cited "their direct reliance on the U.S. government."
Kurt Noyce, the chief executive of the Providence, R.I., lender Embrace Home Loans, called the Fannie and Freddie downgrade "equally concerning for us." They are an example of the "trickle-down effect" of the U.S. downgrade, he said.
"We're seeing fairly competitive interest rates compared to a year ago and yet production is lagging," Noyce said.
"You put those together and deduce that any rise in interest rates would have a devastating effect," he said.
Mortgages are the most vulnerable to economic blows, but analysts also said that the U.S. rating downgrade could dampen some slim gains in other consumer financial products.
The downgrade came halfway through a year in which banks had started to see nonmortgage loan balances inch up.
Amid amplified fears of a double-dip recession, even that small increase in consumer loan demand could flatline, warned Ali Raza, executive vice president of Speer & Associates Inc., a consulting firm.
"We were just getting to see a very tiny uptick in consumer spending, a bit of an uptick in card balances. We'll start to see some slowdown in that," he said.
