On August 5, ratings agency Standard & Poor’s (S&P) downgraded, based on political risks and rising debt, its rating of U.S. long-term debt to AA+ from the AAA rating it had given the U.S. since 1941. The downgrade came even after Congress passed, and the President signed, a deal to raise the federal debt ceiling and avoid default on August 2. The other two major ratings agencies, Moody’s Investors Service and Fitch Ratings, decided not to downgrade their ratings of U.S. long-term debt at this time.
S&P’s downgrade had a domino effect on the ratings of other debt and agencies backed by the U.S. government, such as the housing Government-Sponsored Enterprises (GSEs) and many municipal bonds, including housing bonds. On August 8, S&P downgraded Fannie Mae, Freddie Mac, and the 10 Federal Home Loan Banks (FHLBs) with a AAA rating to AA+. In response to the downgrades, Federal Housing Finance Agency (FHFA) Acting Director Ed DeMarco stated that “the government commitment to ensure that Fannie Mae and Freddie Mac have sufficient capital to meet their obligations, as provided for in the Treasury’s Senior Preferred Stock Purchase Agreement with each Enterprise, remains unaffected by the Standard and Poor’s action.” It is unclear to what extent the downgrades will affect the mortgage market.
S&P downgraded to AA+ municipal housing issues guaranteed by Fannie Mae or Freddie Mac, including bonds issued under the New Issue Bond Program. It downgraded to AA+ ratings on certain public finance debt issues that have credit enhancement guarantees by Fannie Mae, Freddie Mac, or Ginnie Mae through mortgage-backed securities. It also put certain public finance debt issues that have mortgage guarantees from the Federal Housing Administration (FHA) on CreditWatch with negative implications.
According to Bloomberg, on August 9, S&P’s Managing Director of U.S. Public Finance said S&P will not downgrade additional municipal debt based on its downgrade of U.S. debt, until details of spending cuts resulting from the debt ceiling deal are revealed.
In a speech given August 8, President Obama said his hope is that the downgrade will “give us a renewed sense of urgency” to reach a compromise on long-term deficit reduction. He was specifically speaking about the need for the “super committee”—created by the agreement to increase the debt ceiling and made up of 12 congressional members, three Democrats and three Republicans from each the Senate and the House—to reach agreement on action to reduce the federal deficit.