S&P Downgrades Fannie Mae, Freddie Mac, Others

Published: Monday, 8 Aug 2011 | 10:53 AM ET
By: Associated Press with CNBC.com

Standard & Poor's downgraded the ratings of government-sponsored enterprises Fannie Mae and Freddie Mac Monday, citing their reliance on U.S. government.

Both Fannie and Freddie were lowered to AA+ from triple-A. The Federal Home Loan Banks were also cut to AA-plus.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.

The downgrade came amid a number of other ratings actions that are rippling from S&P's decision late Friday to cut the credit rating of the United States one notch from triple-A to AA+.

S&P also cut ratings for several of the main arteries of the US financial system—the Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp. and the Options Clearing Corp.—were cut one notch to AA-plus.

These institutions, previously rated AAA by S&P, clear and process trades and are crucial to the daily workings of the U.S. financial markets.

In issuing the downgrade, S&P explained it was not the result of any company-specific event.

"We have not changed our view of the fundamental soundness of their depository or clearing operations," S&P said.

S&P said its decisions were based on what it called shifts in the macroeconomic environment and the long-term stability of U.S. capital markets. The U.S. stock market fell in the first day of trading after S&P's historic downgrade of the United States, while Treasurys rallied.

S&P gave the four depository and clearing institutions negative outlooks.

Officials at S&P said they plan to indicate how local and state governments and insurers will be affected by the rating agency's downgrade of long-term U.S. debt .

The credit agency now rates 13 states at AAA.

S&P is looking at the impact of the country's debt consolidation plan agreed on Aug. 2 on the budgets of states and municipalities, David Beers, the head of the agency's sovereign ratings group, said on Monday.

There is little doubt that S&P will downgrade the six insurers it still rates AAA, including the military-focused insurer USAA and the teacher-centric TIAA. New York Life, one of the six, told Reuters last month it had been told by S&P it could not have a higher credit rating than its sovereign.

Even so, the downgrade is unlikely to affect the six in any substantial way, just as the government's lower credit rating is unlikely to hurt the insurance industry in general.

"There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies," said Susan Voss, president of the National Association of Insurance Commissioners, in a statement on the NAIC website. "Risk-based capital and asset valuation reserves are unaffected."

S&P on Friday said that it was downgrading U.S. debt for the first time in history because it lacks confidence that political leaders will make the choices needed to avert a long-term fiscal crisis.

The S&P noted that some of the fiscal indicators in the UK are worse than in the U.S., especially in terms of its debt, but it also doesn't expect the U.S.'s debt burden to decline. For France, the S&P said it has addressed its long-term entitlement programs effectively and showed the politcal will to deal with issues.

The S&P expects the debt burden in Germany, the UK and France to peak in a few years and then decline.

It said the U.S.'s political environment was strong, but not as strong as most highly rated governments. It noted elected officials have been unable to put U.S. finances on sustained footing comparable to other triple-A-rated sovereigns.

For the S&P to downgrade the U.S. even futher, it said it would need greater fiscal slippage than it anticipates. On the flipside, the possibility of upgrade depends on policymakers showing broader consensus on how to make fiscal policy choices.

The S&P earlier said that it thinks its sovereign ratings are robust and ahead of its rivals, and that it plans to continue that track record. It also noted that printing money doesn't deliver a triple-A rating.

-Reuters and AP contributed to this story.

http://www.cnbc.com/id/44058747