Standard & Poor’s warned mortgage lenders Fannie Mae and Freddie Mac on Friday that they may lose their top credit ratings if lawmakers do not raise the US government’s borrowing limit in time to avoid a default.
S&P said government--controlled Fannie and Freddie, along with certain Federal Home Loan Banks and Farm Credit System Banks, could also default on their debts, given each institution’s “direct reliance on the US government.”
The rating agency this week threatened to lower the US government’s credit rating if the White House and Congress cannot agree to raise the US$14.3 trillion borrowing limit and avoid a default in the coming weeks.
It said there was at least a one-in-two likelihood that it will lower the rating within the next 90 days.
On Wednesday, Moody’s Investors Services said it is also reviewing the government’s triple--A bond rating.
The government reached its borrowing limit in May. The Treasury Department has said that the government will default on its debt if the limit is not raised by Aug. 2.
Congressional officials and officials of US President Barack Obama’s administration met for a sixth day on Friday in an effort to avert a default. However, Obama conceded that “we’re running out of time.”
Attention has turned to a fallback plan being discussed by Senate Republicans and Democrats.
The plan would give the president greater authority to raise the borrowing limit while setting procedures in motion that could lead to federal spending cuts.
Administration officials and economists say a default on the debt would have a devastating effect on the US economy.
US Federal Reserve Chairman Ben Bernanke told a Senate panel this week that a default would force the federal government to pay higher rates on its debt.
Treasury rates serve as the benchmark for many consumer and business rates, including mortgages. So higher government rates would raise borrowing costs for consumers and businesses.
Fannie and Freddie own or guarantee about half of all US mortgages, or nearly 31 million home loans worth more than US$5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. So anyone looking to buy a home would be forced to pay higher rates on new loans.
The Bush administration seized control of the mortgage giants in September 2008, hoping to stabilize the beleaguered housing industry. The Federal Housing Finance Agency has acted as regulator, overseeing it as calls for the gradual dismantling of both companies have increased.
Taxpayers have spent roughly US$150 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates the final cost for rescuing Fannie and Freddie could go as high as US$259 billion.
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