Meet Fannie & Freddie. Cute, aren’t they? These two adorable kids guaranty $8.3 trillion worth of mortgages in the United States, which account for roughly 70% of all outstanding home loans. Last week when the government was still deliberating how to balance the budget and seeking to arrive at a palatable debt ceiling solution that met the needs of 535 members of congress and their respective constituents and special interest groups, the credit rating of Fannie Mae and Freddie Mac was called into question. The speculation of a default by the U.S. on their debt payments, however remote the possibilities may have been, caused mortgage rates to jump close to 1/2%.
That seems entirely unfair, given their cute names and the reputation for conventional loans being completely outside of the government’s reach. But truth be told, Ms. Mae and Mr. Mac (not the one with the two-pants suit special) have both been sponsored by the U.S. government since the youngsters were short on cash 14 years ago this month at a moment that led to the last housing crisis. A happy anniversary wish is not necessary. Though the fed’s backing was welcome at the time, the sponsorship has let to higher priced mortgages ever since as profits from new loans are now funneled into Uncle Sam’s striped trouser pockets.
Now that the debt ceiling crisis has been kicked down the road for another 24 months, Fannie and Freddie are hoping to be exonerated so that interest rates can trickle back down from 2023 highs. That might not be as easy as the naïve kids are hoping. The credit rating company Fitch reiterated their ongoing review of the current U.S. AAA rating again this morning, and left them on the “negative watch list”. Fundamentally, interest rates are a function of risk, with higher rates being offered to individuals /entities that are less likely to repay, so that unfavorable stigma alone will be a huge hurdle in the race to achieve more affordable housing.
Sheesh, being a kid is hard.
