Moody's Downgrades Fannie and Freddie Preferred Shares

Fri Aug 22, 2008

(CEP News) - Moody's lowered the credit ratings on Fannie Mae and Freddie Mac on Friday saying there is a growing likelihood the U.S. Treasury will need to directly support the companies.

The ratings agency downgraded the preferred stock ratings of the government-sponsored entities' (GSE) to Baa3 from A1. Their subordinated debt ratings were affirmed, but the outlook was changed to negative from stable. The firms' senior debt ratings were affirmed at Aaa -- the highest possible rating -- and the outlook remains stable.

"Given recent market movement, Moody's believes these firms currently have limited access to common and preferred equity capital at economically attractive terms," said Moody's in a press release.

The ratings agency said the struggles of the GSEs could hurt the U.S. housing market because it "restricts their ability to pursue their public policy mission of providing liquidity, stability and affordability to the U.S. housing market." 

The top rating for Moody's senior debt reflects a belief the U.S. government will not allow the companies to fail. This also likely applies to the subordinated debt, Moody's said, but the negative outlook recognizes that "this is a fluid situation".

"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," said Brian Harris, a Moody's senior vice president. 

"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," he said.

Shares of Fannie and Freddie both fell sharply on the downgrade, but later recovered. Fannie Mae is up 0.04, or 1.02%, to 4.90. Freddie Mac is trading down 0.12, or 4.1%, to $3.04. The companies have lost about 95% of their value in the past year.

By Adam Button, abutton@economicnews.ca, edited by Megan Ainscow, mainscow@economicnews.ca

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