Although government-controlled GSE Fannie Mae lost much less money in the second quarter of this year than the first (“only” $2.9 billion vs. $6.5 billion in the first quarter), the GSE has still requested an additional $5 billion from the U.S. Treasury, bringing the tally of taxpayer-funded support to $104.8 billion since the federal government assumed control of the entity[1]. The losses are reported to be largely credit-related, legacy expenses from before 2009. The GSE blames “continued weakness in the housing and mortgage markets,” unemployment, price declines and ongoing loan modification efforts for the losses.

Yesterday, Fannie Mae’s credit rating (along with Freddie Mac’s) took a hit right along with the national credit rating. Standard & Poor downgraded both GSEs to an AA+ rating, citing the fact that they are federal entities and the federal government had been downgraded to an AA+ rating[2]. Analysts believe that this downgrade might have a bigger impact on the lending market than the national downgrade since investors are likely to charge a higher premium for holding the GSEs’ mortgage-backed securities since the guarantee on those investments is no longer as valuable[3]. “Investors may command a higher premium for holding that debt,” says Greg McBride of Bankrate.com, adding that this could “translate into higher mortgage rates.” However, he believes that the weak economy will keep mortgage rates relatively low and the Federal Reserve will also likely act to keep them down, for now. However, when the economy picks up, interest rates could rise as well, he said.

**BEREL Update: Freddie Mac logged a $2.1 billion net loss for the second quarter of this year and is requesting an additional $1.5 billion in taxpayer funding. The GSE attributes the shortfall in large part to a $1.6 million dividend payment made to the U.S. Treasury as part of the terms of its conservatorship. Last quarter, Freddie Mac needed no additional funding from the Treasury [4].***

Do you think that the government should continue to support Fannie Mae and Freddie Mac in light of continuing losses and their recent downgrade?

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[1] http://www.dsnews.com/articles/fannie-mae-requests-5b-in-taxpayer-support-after-q2-loss-2011-08-05

[2] http://www.bloomberg.com/news/2011-08-08/fannie-mae-freddie-mac-ratings-cut-by-s-p-amid-reliance-on-u-s-backing.html

[3] http://weblogs.baltimoresun.com/business/realestate/blog/2011/08/sp_downgrade_could_affect_your_mortgage_rate.html

[4]http://www.bloomberg.com/news/2011-08-08/freddie-mac-swings-to-loss-seeks-1-5-billion-in-treasury-aid.html