By Kevin Chiu
Standard and Poor’s long term credit downgrade of the U.S. economy is directly impacted by the foreclosure crisis, which has cost tax payers $148-billion to bail-out Freddie Mac and Fannie Mae so far. But S&P analysts expect “extraordinary official assistance to large players in the U.S. financial sector” to be made to fix the housing market and the economy at large.
“We estimate that it could cost the U.S. government as much as 3.5% of GDP to appropriately capitalize and re-launch Fannie Mae and Freddie Mac, two financial institutions now under federal control,” S&P said in a statement, meaning it is likely to cost more than $700-billion to bail out and reorganize the two government sponsored lenders.
In the shadows of a massive failure to regulate the mortgage industry, major financial organizations have failed, including Countrywide, Freddie Mac, Fannie Mae, Bear Stearns and Lehman Brothers. Most commercial banks are hobbled by the foreclosure crisis, yet they are producing profits due to their investments in financial markets.
Poor corporate citizens attract unsavory business practices admired only by the few, and suffered by the many as millions of Americans suffer through a painful foreclosure nightmare. By the best accounts and collection of public records more than 7-million U.S. residential properties have been foreclosed so far in the prolonged foreclosure crisis with another 2.6-million homeowners currently in default.
The culprits behind the foreclosure crisis and widespread drop in real estate values from 2006 are worthless securities that were traded on Wall Street. Major financial institutions failed as a result and many others are still on the brink.
“The potential for losses on federal direct and guaranteed loans (such as student loans) is another material fiscal risk, in our view,” S&P said. “Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008.”
More than two years after the financial crisis nearly brought the U.S. economy to a standstill, tight credit market conditions in mortgage lending and a rise in foreclosures still trouble the economy. S&P said that in their “pessimistic scenario” the economy will plunge into a one year double dip recession in 2012.
“More than two years after the beginning of the recent crisis, U.S. policymakers (Congress) have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said Standard & Poor’s credit analyst Nikola G. Swann.
S&P analysts believe there is at least a one-in-three likelihood that the nation’s credit rating will be lowered within two years, restraining the government’s ability to borrow money from foreign nations. The outlook reflects an increased risk that negotiations between Republicans and Democrats in Congress will prolong until at least the 2012 elections.
“Some compromise that achieves agreement on a comprehensive budgetary consolidation program–containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013–is our baseline assumption and could lead us to revise the outlook back to stable,” S&P said in a statement.
“Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.”