Standard and Poor’s Rating Services (S&P) recently downgraded Fannie Mae’s and Freddie Mac’s credit rating from AAA to AA+ because it’s linked to the long-term debt of the U.S. S&P previously downgraded the U.S.’s credit rating to AA+ as well.
The creditworthiness of Fannie and Freddie is directly linked with the government’s ability to pay its own creditors. S&P says it has a lack confidence in political leaders to make choices needed to avert long-time fiscal crisis.
The downgrade of Fannie and Freddie reflected their direct reliance on U.S. government, said S&P, according to LATimes.com.
Fannie Mae and Freddie Mac own or guarantee about half of all U.S. mortgages – nearly 31 million homes worth more than $5 trillion, and in addition, nearly all new mortgage loans. The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities.
The downgrade of the two’s mortgage credit score creates the possibility for a hike in mortgage rates, which will make it harder for people to purchase homes. It might also become costly for companies to borrow and trade.
Fannie and Freddie reported over $5.2 billion in losses in the second quarter, and Fannie Mae sought an additional $5.1 billion from taxpayers just before the downgrade. To stay solvent, the companies have received about $169 billion in bailout money from the government.