Tuesday, May 03, 2005

A Perfect Storm

"NEW YORK, May 3 (Reuters) - Standard & Poor's on Tuesday reaffirmed the criteria used to support the triple-A debt ratings of U.S. government-sponsored enterprises."


Things are getting very interesting. This article points out that S&P reaffirmed the criteria of Fannie and Freddie that justify both government agencies triple-A ratings. S&P also implies that the AAA rating will remain intact as long as legislation does not remove the implied guarantee of the US Treasury.

What would make a "Perfect Storm", to use a much over used expression, in the real estate market would be a near simultaneous downgrade by S&P and Moody's of Freddie and Fannie debt and a rise in interest rates. I would roughly estimate that a downgrade of Freddie and Fannie debt from AAA to A would result in a 70 basis point increase in the agencies' cost of debt funding. That would be bad for mortgage rates.


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