US mortgage giants have been placed under scrutiny. Here’s what that means for homebuyers

washington d.c.

The credit ratings of US mortgage giants Freddie Mac and Fannie Mae were put on watch for possible downgrades by Fitch Ratings on Thursday evening. A downgrade is unlikely to happen as an agreement to resolve the debt ceiling impasse continues to be hammered out in Washington, but even the warning is impacting mortgage rates.

The warning came because Fannie Mae and Freddie Mac’s ratings are tied to the sovereign rating of the United States. The watch is the result of the ratings agency warning on Wednesday that America’s credit rating could be downgraded if the debt limit showdown isn’t resolved soon.

Fannie and Freddie, which underwrite about 70% of the country’s mortgages, do not issue mortgages directly to borrowers, but rather buy mortgages from lenders and repackage them for investors. They are each a government-sponsored enterprise, or GSE, licensed by Congress.

Freddie and Fannie’s goal is to provide liquidity to the mortgage market and enable a reliable flow of affordable funds to mortgage lenders. This ultimately allows more homeowners to borrow at more affordable rates.

Companies buy loans from lenders, bundle them together and sell them as securities to investors. Because they are guaranteed by the government, these securities are considered less risky than other investments and considered as creditworthy as the US government.

But that flow of funds could be disrupted if the United States fails to repay its debt, Fitch warned.

Placing GSEs on review for downgrades, a status Fitch calls “negative rating watch,” is a direct result of uncertainty about whether the United States will meet its debt obligations and concerns about the level of support that housing GSEs can expect if the US rating were to drop.

But, Fitch added, if it were to downgrade US sovereign debt due to debt ceiling issues, it wouldn’t necessarily result in an immediate downgrading of housing GSE ratings – as long as housing GSEs continued. to meet their respective obligations.

Fitch notes that GSEs primarily hedge their obligations with cash flow from operations, as opposed to direct reliance on the federal government.

“Housing GSEs continue to receive significant financial support from the U.S. government,” Fitch’s statement said. “Fitch is aligning GSE ratings with the US rating because of their critical function to the US housing finance system and the US Treasury First Preferred Share Purchase Agreement. Fitch believes Fannie Mae and Freddie Mac continue to fulfill their mission of providing liquidity, stability and affordability to the housing finance industry.

Under the stock purchase agreement, the Treasury is required to inject funds into Fannie Mae and Freddie Mac to prevent each company from being deemed technically insolvent by their government custodian, the Federal Housing Finance Agency. At the end of March, Fannie Mae’s net worth was $64 billion and Freddie Mac’s was $39.1 billion. The current version of the agreement allows the GSEs to retain funds until they each reach minimum capital levels that would allow them to exit from government control.

Already, the announcement is impacting mortgage rates, pushing them higher as 10-year Treasury yields — which mortgage rates reflect — climbed on Friday.

“What Fitch is doing is a stark reminder of the problems a default will cause us across the economy,” said Melissa Cohn, regional vice president of William Raveis Mortgage.

A recent Zillow analysis of the impact on the housing market of the United States defaulting on its debts found that home buying costs could climb 22% and mortgage rates could climb further. by 8%.

Even though a US default and downgrade of Freddie and Fannie are not likely to occur, there is a scenario where the US government defaults and is unable to provide the necessary support to companies.

Much of GSE’s funding comes from its own operations rather than government support, but, Cohn said, if mortgage rates rise and Freddie and Fannie receive less income, they might need that funding.

“If the rates reach 8% or more? The volume of house purchases would just stop, it’s kind of scary,” Cohn said, adding that since current homeowners can have ultra-low mortgages between 2% and 4%, buying a house at 8 % would crush their purchasing power. .

But a downgrade can be avoided, Fitch said in its statement, if there is a resolution.

And for the typical buyer looking for homes and trying to get a good mortgage rate, a deal made soon will be the best outcome.

“The typical homebuyer is focused on finding a home – if they qualify for a mortgage – knowing what to compromise on, contract negotiations and month-end payment,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.

“While politics are in play, the ratings watch is just that – a watch,” she said.

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