S&P downgrades Fannie and Freddie, US-backed debt
Monday, August 8, 2011
WASHINGTON (AP) — Standard & Poor's Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other entities linked to long-term U.S. debt.
S&P also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.
All the downgrades were from AAA to AA+, reflecting the same downgrade S&P made of long-term U.S. government debt on Friday.
The downgrade of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said.
The U.S. government rescued the two mortgage giants in September 2008 and has funded them since the financial crisis. Fannie and Freddie own or guarantee about half of all U.S. mortgages and nearly all new mortgages. So if the U.S. government can't pay its bills, neither can Fannie and Freddie.
It's unclear how the lower credit rating would affect consumers. The downgrade applied only to corporate bonds, not the mortgage-backed securities that Fannie and Freddie issue.
Banks could adopt tougher lending standards for homebuyers, if they felt there was a greater risk because of the downgrade. But it is unlikely to affect mortgage rates, which are already near record lows. Investors are shifting more money out of the stock market and into Treasury bonds, which has forced yields lower. Mortgage rates tend to track the yield on Treasurys.
The downgrade to the long-term U.S. government debt, which was announced late Friday, sent stocks tumbling Monday. The Dow Jones industrial average closed 634 points lower for the day, or 5.5 percent. The S&P 500 stock index closed down nearly 6.7 percent.
The lower ratings for Fannie and Freddie contributed to the sell-off, analysts said. Fannie and Freddie stocks are almost worthless — neither trade on major exchanges. Still, both declined Monday. Fannie fell a nickel to 25 cents per share. Freddie dropped six cents to 27 cents per share.
Freddie Mac declined to comment on the lower rating.
Fannie Mae said in a filing Monday to the Securities and Exchange Commission that it "cannot predict the ultimate impact" of the downgrade.
Edward DeMarco, chief of the Federal Housing Finance Agency that oversees Fannie and Freddie, said the entities will meet their financial obligations because the government will continue to fund them.
Ten of the country's 12 Federal Home Loan Banks also were downgraded from AAA to AA+. The banks of Chicago and Seattle had already been downgraded earlier to AA+.
S&P also downgraded four clearinghouses: National Securities Clearing Corp., Fixed Income Clearing Corp. Depository Trust Co., and Options Clearing Corp
Clearinghouses perform crucial tasks for the markets. They connect sellers and buyers and ensure that both parties hand over the money or investments that they promised.
Unlike Fannie and Freddie, clearinghouses don't have explicit backing from the U.S. government.
S&P said it downgraded clearinghouses because their revenue is tied to U.S. trading activity, which would slow considerably if the economy soured. Such downgrades are routine when S&P downgrades the host nation's debt.
The downgrade of long-term U.S. debt affects the banking and lending industries because many interest rates are pegged to Treasury yields. In addition, many companies use the securities as collateral that they would surrender if their trades lost value.
The clearinghouses said the downgrade would not change how they value securities used as collateral.
"The fundamental strengths of our company are the same today as they were prior to this recent revision," said The Depository Trust & Clearing Corp., which owns National Securities Clearing Corp., Fixed Income Clearing Corp. and Depository Trust Co.
Options Clearing Corp., said the change will not harm its ability to execute trades for customers.
AP Business Writer Martin Crutsinger contributed to this report.
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