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Fannie Mae 'AA-' Ratings Stay On CreditWatch Negative

NEW YORK Aug. 11, 2006--Standard & Poor's Ratings Services said today 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 on Aug. 9. The ratings were initially placed on CreditWatch on Sept. 23, 2004.

"While the latest update on Fannie Mae's accounting restatement process revealed some positive developments, it also disclosed an additional accounting error that was discovered as part of the restatement process," said Standard & Poor's credit analyst Victoria Wagner. The new accounting error, involving accounting for master servicing arrangements under SFAS 140, 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 (see "Fannie Mae 'AA-' Ratings Remain On CreditWatch Negative After OFHEO Special Report Released," published May 24, 2006, on RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis).

The positive developments cited in Fannie Mae's August 2006 12b-25 filing include significant progress in meeting its goal to restate 2004 financial results by the end of 2006, the fact that its original $10.8 billion estimate of the cumulative impact of errors in its accounting for derivatives is now expected to be lower due to lower estimates on the losses related to accounting for mortgage commitments, and its remaining in compliance with the OFHEO consent order issued May 23, 2006. Fannie Mae's core business results indicate that credit risk measures remain good with a low level of mortgage delinquencies and interest rate risk exposures low as measured by its duration gap, which has stayed in the zero- to one-month range for the past 12 months. In the filing of its business plan with OFHEO in July 2006, Fannie Mae did not request an increase in the current limitation on its ability to grow the mortgage portfolio. As part of the May 23, 2006, OFHEO consent order, Fannie Mae cannot increase its net mortgage portfolio assets above the amount stated in its Dec. 31, 2005, OFHEO minimum capital report, $727.7 billion.

Fannie Mae's capital position continues to exceed the 30% surplus level it must maintain as part of its agreement with OFHEO. OFHEO has classified Fannie Mae as adequately capitalized as of March 31, 2006, with core capital of $40.333 billion, exceeding the minimum regulatory capital requirement by $11.625 billion and the OFHEO required 30% surplus position by $3.013 billion.

Demonstrated timely improvement in accounting, compliance, financial reporting, internal controls, risk management and governance, as well as maintaining compliance with the consent order and the 30% capital surplus over regulatory minimum capital measures, are conditions for maintaining the ratings at their current level. In addition, the current ratings incorporate the current estimated costs for the restatement and compliance issues, to the extent these costs do not materially deviate from the current estimates. Any additional setbacks of a material nature could lead to a downgrade. The continued regulatory oversight by OFHEO and its monitoring of Fannie Mae's capitalization are important components to maintaining the current ratings, especially in the absence of audited financial statements for a prolonged period of time.

The 'AAA/A-1+' ratings on Fannie Mae's senior unsecured debt are not affected by this CreditWatch update, as these ratings reflect both the implied U.S. government support for Fannie Mae as a government-sponsored enterprise as elaborated in its charter, and the assessment of its current financial profile. The senior unsecured ratings have a stable outlook.

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