""Standard & Poor's"":http://www.standardandpoors.com/SPComIPResolver continued a bold streak it started Saturday by deflating debt credit ratings for mortgage giants ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/ Monday, scaring investors and adding velocity to a late-day 630-point plunge by the Dow Jones Industrial Average. Sparing Black Monday sensationalism, a question looms: What will the downgrades mean for mortgage markets, housing ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô and thus the economy ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô at large?[IMAGE]
Analysts and news reports suggest that the downgrades will eventually lead to higher borrowing costs and mortgage rates, with more potentially in store for a debt-ridden federal government if rumors of a double-dip recession prove true in coming months.
Quelling few fears, Freddie released earnings for the second quarter that revealed a net loss of $2.1 billion over the second quarter this year, with news that the GSE would request $1.5 billion from the ""Treasury Department"":http://www.treasury.gov/Pages/default.aspx to buttress sagging numbers. After posting $2.9 billion in net losses for the same period, Fannie said Friday it would go hat-in-hand to taxpayers for $5.1 billion.
The earnings reflect continuing trends for the GSEs, which back about nine in 10, or roughly 90 percent, of mortgage-backed securities across the country. Their federal conservatorship, the result of $170 billion in Treasury bailouts during the recession, led S&P to yank their AAA debt ratings as U.S. debt ratings dipped to AA+ over the weekend.
In its ""filing"":http://phx.corporate-ir.net/phoenix.zhtml?c=108360&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDEyOTk5MzMtMTEtMDAyNDU4L3htbA%3d%3d with the ""Securities and Exchange Commission"":http://sec.gov/, Fannie cast further doubt on the implications of its downgrade by saying the company ""cannot predict the ultimate impact of the S&P downgrade on our access to or cost of debt funding, or on our business, liquidity, results of operations, financial condition or net worth.""[COLUMN_BREAK]
A spokesperson for Freddie declined to comment on the downgrade.
""The downgrade doesn't surprise anybody,"" says Greg McBride, a senior financial analyst with ""Bankrate"":http://www.bankrate.com/?ec_id=m1077677. ""Uncle Sam has been bleeding red ink for decades.""
The markets felt the most immediate effects Tuesday as yields expanded relative to Treasuries in the biggest sweep in two years.
According to ""_Bloomberg News_"":http://www.bloomberg.com/news/2011-08-08/agency-mortgage-debt-spreads-widen-to-most-in-two-years-after-downgrades.html, Fannie Mae's rates for 30-year securitized loans leapt to 1.22 percentage points, 0.14 percentage points above 10-year U.S. Treasuries ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a new high from April 2009.
McBride explains that investors rushed to Treasury debt Monday since even less credible government debt remains a safe bet in global markets.
By picking up mortgage-backed bonds, he says, investors expanded yields relative to Treasuries. He credits the flood of investors to debt with still-low mortgage rates despite widespread worries to the contrary. Still, he says, fallout from the downgrades will reach wider areas in the economy.
""Right now the downgrade is taking a backseat to broader economic concerns, but there's no disguising the fact that the downgrade will result in higher mortgage rates eventually,"" McBride adds.
His real worry? ""The hub on the wheel is jobs,"" the financial analyst says, citing the still-pale 117,000 jobs added by the economy over July. ""People aren't going to buy houses if they're nervous about their job security.""
Celia Chen, senior research director and housing specialist with ""Moody's Analytics"":http://www.moodysanalytics.com/, echoes his concerns about capital movements and losses in the wider economy that could reflect and feed off downward trends in the housing market.
""Mortgage rates will not be much affected by the downgrade,"" she agrees. ""The downgrading does, however, heighten the risk that the nation ends up back in recession, as the selloff ends up feeding on itself. If the nation double-dips, housing's fledgling recovery will be squashed.""
Paul Dales, senior U.S. economist with ""Capital Economics"":http://www.capitaleconomics.com/, takes issue with notions that mortgage rates will rise anytime soon in response to the downgrades.
├â┬ó├óÔÇÜ┬¼├àÔÇ£I think we├â┬ó├óÔÇÜ┬¼├óÔÇ×┬óre going to have very low mortgage rates for a few years"" until the economic recovery improves, he says.