Mortgage markets in the U.S., which remain on government life support, could be rattled by the downgrade of the U.S. credit rating, potentially raising borrowing costs for consumers. Given the "sufficiently perilous" state of the U.S. mortgage market, a downgrade "can do nothing but harm the market," says Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. "The question is how much?" To be sure, no one knows for certain the impact of the unprecedented downgrade on the mortgage market, even if that market is fundamentally intertwined with the federal government.

One concern is that downgrades may trigger forced selling by mutual funds or foreign investors to comply with investor-specific capital requirements restricting them to assets rated triple-A. But analysts said that most institutional investors' rules for investing in government-backed mortgage debt aren't contingent on ratings. And with investors seeking traditional safe-haven assets such as Treasury and government-backed mortgage securities, "there just doesn't seem to be much else to invest in," says Andrew Davidson, a mortgage-industry consultant in New York. "What would people put
their money in if they sold their agency mortgages? It's hard to see what the trade is."

Mortgage rates are closely tied to yields on the 10-year Treasury note. Rising demand for Treasurys pushed down yields over the past two weeks, even as the threat of a U.S. default from the debt-ceiling debate in Washington dragged on, because investors looked for less risky assets amid concerns over the European debt crisis and the sluggish U.S. economy. Mortgage rates dropped to an eight-month low last week, with 30-year fixed-rate mortgages averaging 4.39% for the week ended Thursday, according to a survey by Freddie Mac. Still, the uncertainty created by the downgrade has nvestors on edge. The interplay of a downgrade, on top of the euro-zone crisis and renewed fears over a double-dip recession in the U.S., could lead to increased volatility in mortgage markets. "There are so many moving parts to this that no one really knows how it will go," says Mr.Simon.