New Liabilities May Damage United States’ AAA Credit Rating

Since the subprime mess rocked the mortgage world early this year, the government has authorized the quasi-governmental agencies, Fannie Mae and Freddie Mac, to lessen their qualification requirements and allow more homeowners to refinance into conforming loans. In doing so, these agencies have taken on a greater risk in an effort to alleviate some of the pressure on the market. According to a recent report published by Standard & Poors, these “Government Sponsored Entities pose a greater fiscal risk than brokers^1.”

According to S&P, the government will let Fannie Mae and Freddie Mac “replace some of the lost credit from private-label mortgage packagers,” many of which disappeared along with the subprime mortgage market. But the moves “increase both the likelihood of government support and the potential cost of providing such support.¹”

According to an S&P analyst, the recent policy decisions aimed at supporting the U.S. mortgage market have made GSEs commitment even larger than before. If these commitments turn into government debt, it could actually damage the United States’ AAA credit rating.

GSEs Take on Greater Liability

At the end of last year, GSEs and related enterprises held a total of $7.3 trillion in debt, representing over half of the U.S. economy. According to Forbes.com, GSEs had 80% of mortgage-backed securities in January of 2008, a huge increase over the 46% of the second quarter 2007. According to Fannie Mae’s January 2008 monthly summary, their portfolio cap of just under $800 million, although the highest it’s ever been, will be removed completely in March 2008.³

Forbes.com also reports that the Federal Housing Administration is pushing for changes that would increase the governments role in housing even further². According to the same report from Standard & Poors, “financial cost to the government of maintaining aggregate financial system stability during a deep and prolonged recession could be even more substantial, possibly adding as much as 25% of gross domestic product to government debt.¹”

Sources:

1. Fannie Mae’s And Freddie Macs Liquidity Role In The U.S. Mortgage Markets Faces Uncharted Waters - Standard & Poors
2. Bailout Now, Pay Later - Forbes.com
3. Fannie Mae January 2008 Monthly Summary - Fanniemae.com
   

Related Articles:

Countrywide Stock Falls to Lowest Level Since 2000
Mortgage News - AM Edition - Sunday, April 27^th, 2008
What's Happening in Mortgages - AM Edition - Monday, February 11^th, 2008
As If A Mortgage Wasn’t Expensive Enough - New Fannie, Freddie Fees Will Cost Homeowners Even More
NINA, No Doc, & No Ratio - The Less Common Mortgage Doc Types