The two government-sponsored entities that were at the heart of the housing bubble that sent the American economy into recession three years ago were also downgraded by the Standard and Poor’s rating agency when they called into question the creditworthiness of the United States for the first time in the nation’s history this weekend.
According to Standard and Poor’s, the downgrades of Fannie Mae and Freddie Mac reflect their continued dependence on government support.
Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the American government. In addition to the implicit support we factor into our ratings, the United States Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary.
The two supposedly semi-private mortgage giants were bailed out at the expense of over $160 billion (so far) when their unhealthy exposure to high risk subprime mortgages and mortgage related financial products in 2008 tanked the American stock market. As a result, the government currently owns or guarantees more than 90 percent of new mortgages.
Freddie Mac said on Monday that it would need an additional $1.5 billion from taxpayers due to losses stemming from weak housing markets. Fannie Mae last week asked for $5.1 billion more in government funding. It reported a second quarter loss attributable to common shareholders of $5.2 billion or 90 cents a share.
Immediately before the crisis, nearly half of 55 mortgages in the United States were subprime. In buying millions of these inferior products, Fannie and Freddie encouraged trading in subprime lending while providing a false sense of security with their implicit government guarantee — which turned out to be an explicit one when push came to shove.
Standard and Poor’s also lowered its issuer credit ratings and related issue ratings on ten of twelve Federal Home Loan Banks along with the ratings on the senior debt issued by the Federal Farm Credit Banks from AAA to AA+.