S&P downgrades Fannie, Freddie

August 08, 2011 12:32 PM

Standard & Poor’s today downgraded Fannie Mae and Freddie Mac to AA+
from AAA+ following its downgrade of the U.S. credit rating this past Friday
night, the New York Times reported. The S&P explained that the
newest downgrade was a result of the agencies’ “direct reliance on the
U.S. government,” that they are under government conservatorship since
the the 2008 financial crisis. The New York Times noted that the
agencies’ role is more important now than ever because mortgage bond
investors are not buying many securities that contain loans without
the guarantee coming from the government through the agencies. S&P
also downgraded 10 of the 12 federal home loan banks. Since the
agencies would turn to the federal government if they become short of
funding, the S&P is worried that the U.S. would be less likely to
step in to help because of its own downgrade, according to the New
York Times.

Earlier, the Wall Street Journal reported that another fall out of the U.S.
downgrade and a possible Fannie Mae and Freddie Mac downgrade would be
higher mortgage rates. That is because the downgrade of the agencies could
increase their borrowing costs, which could lead to higher mortgage
rates or cause losses for the agencies. But some analysts doubted that
outcome, in part because the underlying government support for the
agencies has not changed.

Robert Litan, a former Clinton administration budget official who is now vice president for research and policy at the Kauffman Group, told ABC News that the domino effect would likely continue with upcoming downgrades of states’ and localities’ credit ratings.
[NYT] and [WSJ] and [ABC News]. 

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