Monday, 05 Jun 2023

US mortgage giants were placed on credit watch. Here's what that means for home buyers

US mortgage giants were placed on credit watch. Here's what that means for home buyers

The credit ratings of US mortgage giants Freddie Mac and Fannie Mae were put on watch for possible downgrade by Fitch Ratings late Thursday. A downgrade is not expected to happen, as a deal to resolve the debt ceiling standoff continues to be worked out in Washington, but even the warning is having an impact on mortgage rates.

The warning came because the ratings for Fannie Mae and Freddie Mac are linked to the sovereign rating of the United States. The watch is a result of the ratings agency warning on Wednesday that America's credit rating could be downgraded if the debt limit showdown was not resolved soon.

Fannie and Freddie, which guarantee roughly 70% of the country's mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors. They are each a government-sponsored enterprise, or GSE, chartered by Congress.

The aim of Freddie and Fannie is to provide liquidity into 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.

The enterprises buy loans from lenders, pools them and sells them as securities to investors. Because they are backed by the government, these securities are viewed as less risky than other investments and considered to be as creditworthy as the US government.

But this flow of funds could be disrupted if the United States defaults on its debt, Fitch warned.

Placing the GSEs on watch for a downgrade, a status Fitch calls "rating watch negative," is a direct result of uncertainty about the United States fulfilling its debt obligations and concern about the level of support the housing GSEs can expect if the US rating were to drop.

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