Credit Rating Agencies Downgrade Fannie Mae, Freddie Mac and US Government Debt

Strategic Insights -

The recent move by credit rating agencies Standard and Poor's and Fitch Inc. has led to a downgrade in the credit ratings of government-sponsored enterprises Fannie Mae and Freddie Mac, as well as the US government's debt. This downgrade impacts all Guaranteed Notes (NGN) issued by the National Credit Union Administration (NCUA), totaling $50.5 billion in sales. The GSEs' dependence on the US government has been cited as a key reason for the downgrade. Finance industry representatives have called for the government to transition away from Fannie Mae and Freddie Mac, but legislation to create a new mortgage finance system is unlikely.

Key Takeaways:

  • Standard and Poor's downgraded Fannie Mae, Freddie Mac, and the US government's credit rating to AA+ from AAA, citing the government's reliance on the GSEs.
  • The downgrade impacts all NGNs issued by the NCUA, totaling $50.5 billion in sales, with these investments receiving a zero risk weight due to federal government backing.
  • Fitch Inc. warned that Fannie Mae and Freddie Mac require continued capital injections from the Treasury Department to avoid being unwound.
  • The downgrades have not caused an immediate impact on Treasury interest rates, according to Credit Union National Association Chief Economist Bill Hampel.
  • Legislation to create a new mortgage finance system is unlikely, but a bill requiring the director of the Federal Housing Finance Agency to determine critical assets held by the GSEs has been discussed.
  • Fannie Mae reported $2.9 billion in losses during the second quarter of 2011.
  • The Market Transparency and Taxpayer Protection Act (H.R. 2440) and the Fannie Mae and Freddie Mac Transparency Act (H.R. 463) have been introduced to address concerns about the GSEs.

Statistics:

  • $2.9 billion: Fannie Mae's losses in the second quarter of 2011.
  • $50.5 billion: Total sales of Guaranteed Notes (NGN) issued by the NCUA.
  • 2008: The year the GSEs were held under US government conservatorship.
  • AA+ and AAA: The credit ratings of the US government and GSEs before and after the downgrade, respectively.

Sources:

  • Credit Union National Association (CUNA)
  • Standard and Poor's
  • Fitch Inc.
  • US Senate subcommittee hearing
  • Federal Housing Finance Agency
  • Rep. Robert Hurt (R-Va.)
  • US House Financial Services subcommittee on capital markets and government GSEs
  • Fannie Mae