“Standard & Poor’s Ratings Services [perhaps still Michael DeFestano?] said that its ‘AA-’ risk to the government, subordinated debt, and preferred stock ratings on Fannie Mae remain on CreditWatch Negative following the release of the company’s 12b-25 filing for the period ended June 30, 2006. “While the latest update on Fannie Mae’s accounting restatement process revealed some positive developments, it also disclosed an additional accounting error [involving accounting for master servicing arrangements under SFAS 140] that was discovered as part of the restatement process,” said S& P credit analyst Victoria Wagner. According to management, the accounting error will not result in a significant impact on Fannie Mae’s regulatory capital. Given the evolving process of the accounting restatement, and the uncertainty surrounding the final financial impact, coupled with the extensive remediation of material weaknesses in internal controls over financial reporting, the ‘AA-’ ratings will remain on CreditWatch Negative until these critical uncertainties are finally clarified, concluded S&P. (Market News Publishing, 08/11/06)”

And never has the risk premium been lower. The hetrodyne effect will kill retail lending. As the risk premium is built in fewer will qualify and adjustables will follow the curve up and wipe out more borrowers reinforcing the cycle.