Along with a warning about the state of the country’s credit outlook, Standard and Poor (S&P) and lowered its evaluation of the outlook on the debt issues of Fannie Mae, Freddie Mac, the Federal Home Loan Bank System and the Farm Credit System Banks. All of these outlooks have been changed from “stable” to “poor”. S&P credits these ratings to “the links and roles attached to the supporting entity [of these lenders], the U.S. government.” The agency added that “We will not raise our outlooks and ratings on these entities above those on the U.S. government as long as the ratings and outlook on the U.S. government remain unchanged.”
In light of a downgraded outlook for the U.S. released earlier this week, these downgrades are not entirely surprising. S&P projects that the government could end up injecting another $130 billion into Fannie and Freddie alone – even though the GSEs are supposed to be wound down in the coming years. Given that Fannie Mae and Freddie Mac play an important role in attracting foreign investors, who rely on an “understood guarantee” when they buy GSE debt, this change in outlook could have a dramatic impact on the U.S. balance sheet, said Paul Norris, an analyst and head of structure products at Dwight Asset Management, an investment firm in Vermont. S&P has warned that any downgrade on the U.S. would result in further downgrades for the troubled lenders.
Thank you for reading the Bryan Ellis Real Estate Letter!
Your comments and questions are welcomed below.