NEW YORK (MainStreet) -- Those rascals from Standard & Poor’s are at it again. After rocking the global financial markets by cutting Uncle Sam’s creditworthiness from “AAA” to “AA+” on Friday, S&P set its sights on the fragile U.S. housing market - especially mortgage giants Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE).
This morning, S&P downgraded the credit ratings of both agencies, signaling that any financial entity with close ties to the U.S. government faces increased scrutiny from credit agencies.
The downgrades, from AAA+ to AA+, are a reflection of Fannie and Freddie’s close financial dependence on Uncle Sam, S&P says. "The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government," S&P noted in a statement released today.
So what’s the fallout going to feel like for Main Street home loan borrowers, and the homeowners who are counting on Fannie and Freddie to guarantee the loans that will be used to buy their houses? Let’s take a look at three key points:
Their link to the government hurt both agencies. Fannie and Freddie practically own the U.S. home loan market. Currently, both agencies have taken $141 billion out of the housing market from U.S. taxpayers, and together they control up to 80% of the nation’s mortgages. What S&P is saying is that its debt leaves both agencies vulnerable financially, and that any further economic deterioration could leave the federal government open to further downgrades if it doesn’t meet its debt obligations, taking Fannie and Freddie down with it.
So far, no real panic. While the Dow fell 635 points in Monday trading, the bond market – which is closely tied to the national housing market via interest rate levels – held up fairly well. Instead of Treasury yields rising, indicated a flight out of bonds, those yields fell, as millions of investors near and far gorged on safe-haven investments as the stock market fell. So if the there was a near-term takeaway from the Freddie and Fannie news, it was much ado about nothing to big bond market investors. Apparently, the “full faith and credit of the U.S. government” still means a great deal to investors.