S&P Downgrades Fannie and Freddie, but Housing Market’s Problems Go Deeper than That

Print Share on LinkedIn More

August 8, 2011; Source: National Journal | It is difficult in these quarters to sympathize with Fannie Mae and Freddie Mac, but Standard & Poor’s can get you there. S&P followed up its downgrading of the credit rating of the U.S. by also lowering the credit ratings of Fannie Mae and Freddie Mac, the nation’s largest mortgage lenders. This was primarily because the obligations of the two mammoth government-supported enterprises (GSEs) are more or less backed by the full faith and credit of the United States. If the U.S. drops from AAA to AA+, so must the entities whose lending is tied to the nation’s fisc. If they were fully private entities not dependent on U.S. Treasury backing, they might not have lost their triple-A ratings.

S&P also explained that since 2008, when the U.S. government bailed them out, the government’s already big obligation to Fannie and Freddie has deepened. The GSEs hold about $1.5 trillion in mortgages on their balance sheets and they are now 80 percent owned by the U.S. government; that is, you and me.

Maybe it’s bad optics, but Fannie and Freddie followed up on the S&P move by asking for $7 billion in additional federal funding (Freddie alone has taken $65.2 billion in federal bailout money since September 2008). With over $100 billion between them in federal bailout subsidies, Robert Kuttner of Demos (and The American Prospect) argues that continued subsidization of the two should occur only if they become fully public corporations as they were prior to 1969.

Does the S&P action hurt the housing market? Initially, it doesn’t look like it will, as mortgage rates are low and going lower. What hurts most is the prolonged recession, which dampens demand for mortgages, exacerbated by the unwillingness of lenders to lend. The S&P action makes “(t)he mortgage giants…no riskier…than they were before,” one expert said. At worst, the downgrade will cost Fannie and Freddie only a couple of basis points.

Small consolation to Secretary Tim Geithner and the heads of Fannie and Freddie, but also losing their triple A ratings were the Knights of Columbus, New York Life, Teachers Insurance & Annuity Association (TIAA), Northwestern Mutual Life Insurance and the United Services Automobile Association (USAA). Tax-exempt state and municipal bonds that were clobbered included the City of Los Angeles General Pool, the Georgia Extended Asset Pool and the Palm Beach County Investment Portfolio. Among double-A entities whose outlooks shifted from stable to negative was Warren Buffett’s Berkshire Hathaway.

The odd thing about the S&P downgrades is not that they whacked the U.S. economy, but that they have made pundits and the public reexamine their assumptions that the recession was somehow “over” and the nation was returning to normalcy. There’s no compelling reason to trust S&P if you remember that they maintained an A rating on securities backed by subprime mortgages until the very end of 2008. But the S&P report does tell us that our lawmakers were acting quite stupidly in their negotiations. The American public gets it: 72 percent of people surveyed in a Pew poll were negative about the debt deal, with some calling it “ridiculous, disgusting, stupid and frustrating” and only 2 percent viewing it as a positive development.

Our guess? Looking at the millions of people out of work before and after the credit downgrade and the potential homeowners who can’t possibly qualify for home mortgages in this economy, nonprofits might tell lawmakers, “It’s the recession, stupid!” – Rick Cohen