Moody’s Downgrades Fannie And Freddie

Moody's Investors Service has downgraded the preferred stock ratings of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) to Baa3 from A1 and the Bank Financial Strength Ratings (BFSR) to D+ from B-.

The preferred stock ratings and BFSRs remain on review for possible further downgrade. Fannie Mae's and Freddie Mac's Aaa senior long-term debt and Prime-1 short-term debt ratings were affirmed with stable outlooks. The firms' Aa2 subordinated debt ratings were affirmed, but the outlook was changed to negative from stable.

Moody's says the downgrade of the BFSRs reflects Moody's view that Fannie Mae's and Freddie Mac's financial flexibility to manage potential volatility in its mortgage risk exposures is constricted. In particular, given recent market movement, Moody's believes these firms currently have limited access to common and preferred equity capital at economically attractive terms.

Moody's adds that these government-sponsored enterprises' (GSEs) more limited financial flexibility also restricts their ability to pursue their public policy mission of providing liquidity, stability and affordability to the U.S. housing market.

‘Given Fannie Mae's and Freddie Mac's importance to the U.S. mortgage market, we believe there is a very high level of support for their debt from the U.S. Treasury,’ states Brian Harris, a senior vice president at Moody's. ‘And given these GSEs' more limited ability to raise capital and grow their portfolio to accomplish their public policy role in a time of mortgage market turmoil, we believe that there's an increased probability of actual support coming from the U.S. Treasury.’

Source: Moody's Investors Service


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