S&P Downgrades Freddie Mac and Fannie Mae

Fallout from last week's debt deal continues to send shockwaves through the economy. The latest effect has been the decision by the credit rating agency, Standard and Poor's, to downgrade the debt rating of the government subsidized Freddie Mac and Fannie Mae from AAA+ to AA+. While it is still early to tell, many experts warn this could affect the future of the already sluggish housing market, by further stalling home sales and slowing any economic recovery which is becoming increasingly difficult.

LOS ANGELES (Catholic Online) - The widely panned debt deal is to blame for the latest round of bleak economic news as markets react. Both Wall Street and the American public have been nothing short of dissatisfied with the details of the compromise worked out between President Obama and the House Republicans.

The extreme partisan wrangling, and the lack of compromise until the very last minute has jaded many analysts. Some fear that come 2012, when another debate over raising the debt ceiling is likely to occur, we will see a repeat of the latest Washington fiasco where despite warnings from credit agencies, political analysts, and holders of US sovereign debt, neither party will consent to a deal on the basis of political concerns rather than economic ones.
 
Standard and Poor's defended their decision to downgrade the agencies because of their direct reliance on the US government. Since the government intervened in 2008, the federal government has poured $141 billion in thus far failed attempts to stabilize the housing market.

The firms, along with Ginnie Mae, guarantee more than 80% of the US housing market's mortgages, however the future prospects of government default means that the guarantee isn't as strong as it once was, which in turn increases the risk of investors who purchase the debt for private investments.
 
While the downgrade has been criticized by the Obama administration, the markets have adopted a wait and see attitude to the decision. Treasury yields, whose interest rates directly affect mortgage rates, fell even in the face of the downgrade.

Analysts speculate this means that investors remain somewhat confident the government will continue to pays its debts, including any debt it guarantees through Freddie Mac and Fannie Mae, despite the acrimony on capitol hill. Still, it is difficult to imagine that interest rates won't somehow be affected by the move, and if they go up, then it will be another shock to a housing market that is still very weak and very vulnerable.

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