Mortgage Giants Go Down with the Country

August 08, 2011

The affects have begun.

Last week, the American people held their breath as Congress and the President managed to agree on a debt deal hours before a blown deadline would have destroyed our economy.

But the deal offered little assurance as to how the government is going to fix the nation’s debt crisis, so last Friday, Standard & Poor‘s downgraded the United States’ top-ranked AAA credit rating one notch to AA+ for the first time in history.

Nothing that is going on in our economy right now is helping to revive the struggling housing market.

The first entity to feel the backlash: The mortgage companies.

On Monday, S&P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac to AA+ as well, in addition to 10 of the 12 Federal Home Loan Banks that were bailed out by the federal government during the 2008 financial crisis.

“The downgrades of Freddie Mac and Fannie Mae reflect their direct reliance on the U.S. government,” said S&P in a statement.

Combined, Fannie Mae and Freddie Mac guarantee or own about half of all U.S. mortgages. That comes out to about 31 million home loans worth more than $5 trillion. They also account for almost all new mortgage loans.

So, what does this mean for the housing market? Some worry that mortgage rates will spike as a result of the downgrade, while others believe they won’t be affected, since rates are closely tied to the 10-year Treasury note, which is at an all-time low.

But mortgages continue to get more difficult to obtain, and lenders are demanding higher down payments. The stock market has reacted to the economic crisis as well, falling so far last week that it lost all its gains for the year. The lower credit rating also means it will cost more for companies to borrow money, meaning few new jobs for a country whose unemployment rate is hovering above 9 percent.

The psychological damage is there as well. Consumer spending is down as Americans are cutting back on even minor purchases amidst economic concerns. Can’t imagine too many of them are going to get up today and say, “I’m going to buy a house!”

Next up to be affected by the downgrade: State and local governments. That probably won’t bode well for Illinois, which is in more debt than any other state in the country.

“No matter what some agency may say, we’ve always been and always will be a triple-A country,” said President Barack Obama on Monday.

Good words. Now we need some action.

Categories: Economy

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