Credit Ratings Downgrade for Fannie and Freddie Now?

In what is shaping up to be an erratic trading day, the Dow has dropped below 3% in early trading after the latest news that Standard and Poor's downgraded the debt of mortgage finance giants Fannie Mae and Freddie Mac.

It was widely expected that S and P's downgrade of U.S. debt would roll downhill to other entities that are closely linked to the federal government. Fannie and Freddie, which were taken over by the government in 2008, fuel home sales by purchasing mortgages from banks.

It's not clear what - if any - effect the downgrade will have on Fannie and Freddie's borrowing costs. And since Treasury yields remain at very low levels, a sharp spike in mortgage rates seems unlikely.

I’ll let you know what effect this is having on mortgage rates as soon as I know!

Here is an update of what effects the Fannie and Freddie downgrade may have:
Not every type of consumer borrowing has a direct tie to the government's credit rating, but there are potential ripple effects for individuals.-- Mortgage and home equity loans--

S and P's downgrade may have several implications for homeowners.

For starters, early Monday S and P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers. Freddie and Fannie together own or guarantee about half of all mortgages in the U.S.

Anyone hoping to buy a home in the near future likely has some time before they'll see rates climb. Still they should ask their bank or mortgage broker about the process for locking in a rate. Mortgage rates have been at historic lows in recent months, but fixed-rate mortgages are typically directly tied to the yield on 10-year Treasury bonds. Higher mortgage rates would follow any increase in the Treasury yield. But so far it appears that Treasury yields won't rise simply as a result of the downgrade.

Variable rate mortgages and home equity loans could become more expensive as well.

The high failure rate for adjustable rate mortgages during the housing meltdown means that today the number of new home loans with adjustable rates is minimal -- less than 5 percent of the market, according to Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

What's less clear is how many older loans with adjustable rates remain out there, he said. With interest rates low in recent years, many homeowners who held adjustable rate mortgages have refinanced to fixed-rates. For homeowners who still have ARMs, any potential change in their interest rates depends on whether their loan was linked to Treasury rates or some other benchmark, like the prime rate or federal funds rate.

Meanwhile, home equity loans, or HELOCs, are almost always variable rate loans and typically adjust more frequently than first mortgages, sometimes even monthly.

Homeowners with such loans could see shifts in their rates and payments while the markets absorb the downgrade.

One caveat is that many ARMs and most HELOCs are tied to the federal funds rate, which is set by the Federal Reserve, not to Treasuries. That should help insulate borrowers. The Fed, which meets Tuesday, has already said that it plans to keep rates low for "an extended period."

"The Fed is not likely to increase the federal funds rate anytime in the near future, especially if there's another problem with the economy as a result of the whole debt ceiling thing," said Gibran Nicholas, chairman of the Certified Mortgage Planning Specialist Institute.


Thanks for reading,
Steve