Two-Thirds of GSE Purchases Downgraded to "Junk"

Two-thirds of the AAA-rated private-label MBS purchased by Fannie Mae and Freddie Mae have been downgraded to "junk," the GSEs' regulator told a congressional panel, and only a small portion is still rated AAA. Federal Housing Finance Agency director James Lockhart told a House Financial Services subcommittee the two government sponsored enterprises have $171.3 billion in PLS backed by Alt-A, subprime and other mortgages in their investment portfolios. Only 3% remain AAA and not on downward watch, Mr. Lockhart said. Another 11% remain AAA-rated but are on downgrade watch as of May 28. Meanwhile, 68% of the private label-MBS has been downgraded below investment grade, which is sometimes referred to as "junk" bonds. An additional 17% has been downgraded but remain investment grade, according to FHFA. "There is no doubt [the credit rating agencies] failed" in rating these securities," Mr. Lockhart said at the June 4 hearing. "We need to reform the rating agencies and we need to get them back to rating and not consulting and getting fees for structuring bonds," he said. Impairments on the MBS resulted in Fannie recognizing $6 billion in losses in the first quarter and Freddie recognizing $7 billion in losses.