Bailout could hurt U.S. rating, S&P says

WASHINGTON – A deep recession could force mortgage-finance titans Fannie Mae and Freddie Mac to require a federal bailout large enough to hurt the U.S. government’s top-grade credit rating, Standard & Poor’s warned Monday.

A lower credit rating would mean higher borrowing costs for the U.S. government and could lead to a flight from Treasury securities, which investors – including foreign governments – consider to be virtually risk-free.

The financial stress Fannie and Freddie may face poses a far larger risk to the government than the $29 billion in mortgage assets taken on by the Federal Reserve to avoid the bankruptcy of investment bank Bear Stearns Cos, the credit rating agency said.

Still, S&P analysts see a bailout of Fannie and Freddie as unlikely and point out that U.S. officials “are focused on avoiding a deep and prolonged recession.”

While the government isn’t obligated to assist Fannie or Freddie in a financial emergency, many on Wall Street believe it would bail them out if there is a collapse. The idea that they are “too big to fail” enables the two companies to borrow relatively cheaply by issuing top-rated securities backed by mortgages.

Washington-based Fannie and McLean, Va.-based Freddie face intense pressure to do more to help out a hobbled housing market. Over the past year, their share of new mortgages has soared, as Wall Street investors have backed away from all but the safest mortgage investments.

The two companies’ share of new mortgages rose from 46 percent in the second quarter of 2007 to 80 percent in January, S&P said.