Tuesday, January 10, 2012

Congress’ tapping of G-fee drains vitality from Fannie’s & Freddie’s bond ratings

by Ethan Handelman, National Housing Conference

Remember a few weeks ago when Congress decided that a 10-year increase in the guarantee fee on Fannie Mae and Freddie Mac mortgage-backed securities was the way to pay for an extension of the payroll tax cut? Those who know housing knew, and said, it was a bad idea (for an entertaining and sharp-edged expression of this, see my colleague David A. Smith’s excellent blog post). Now it’s becoming even clearer.

Rating agencies are now more likely to downgrade the credit ratings of Fannie Mae’s and Freddie Mac’s bond, according to Bank of America analyst Ralph Axel, cited in Businessweek. If ratings on bonds drop, Fannie and Freddie may well have to offer higher interest rates to attract investors, which would translate into higher mortgage rates for homebuyers.

In other words, tapping the g-fee isn’t free money. But we all knew that, right?

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