NEW YORK Dec. 7, 2006--Standard & Poor's Ratings
Services today said it removed its 'AA-' risk-to-the-government, subordinated debt, and preferred stock ratings on Fannie Mae from CreditWatch, where they were placed on Sept. 23, 2004. The ratings are affirmed and the outlook is negative. The rating action reflects Fannie Mae's progress in its accounting restatement process and the build-up of a stronger capital position.Fannie Mae has maintained a regulatorily-mandated, 30% capital surplus above its regulatory minimum capital requirements for four consecutive quarters. Management of its balance sheet growth and lower returns of capital to shareholders were the primary drivers behind its achieving the 30% capital surplus position over the higher capital ratios. "We expect the Office of Federal Housing Enterprise Oversight's requirement to maintain a 30% capital surplus above regulatory minimum capital to remain in place until Fannie Mae makes full and timely disclosure of financial results," explained Standard & Poor's credit analyst Victoria Wagner. "At such time, the level of capital ultimately held to support market and credit risks will be critical to the ratings."Having completed comprehensive reviews of its accounting policies and procedures, financial reporting, internal controls, and corporate governance, Fannie Mae has filed its 2004 Annual Report on Form 10-K with restatements with the SEC. Fannie Mae also has made extensive changes in its senior management team and board of directors during the past two years. Although Fannie Mae's filing of the financial statements is a significant milestone, we continue to view the pervasiveness of the deficiencies discovered in its internal controls over financial reporting as a concern and therefore we will closely evaluate further progress made toward full remediation of material weaknesses related to Fannie Mae's financial reporting processes, information technology systems, and infrastructure, all of which contributed to the accounting issues. Furthermore, 2005 and 2006 quarterly financial statements remain outstanding, representing a continued source of uncertainty with regard to Fannie Mae's current financial profile and performance.
Fannie Mae, like all financial institutions, is facing margin pressure on its portfolio of mortgages, especially in the current challenging yield curve environment, in addition to its core mortgage guaranty business. Management of market risks and the interest rate risks that are structurally inherent in its holding of long-term fixed-rate mortgage loans has been strong over the past year. Credit quality measures also have been strong with very minimal credit losses and a low level of NPAs recorded. Maintaining this strong asset quality position will be a challenge given the recent weakening of housing values from the very strong levels that prevailed in the last three years.
The 'AAA/A-1+' ratings on the senior unsecured debt of Fannie Mae reflect the company's very strong business franchise, extraordinary efficiency, very good asset quality, status as a GSE and, under Standard & Poor's government-related entities criteria, its status as a public policy institution. The ratings on the senior securities of Fannie Mae also reflect the implicit U.S. government support for the securities, as it relates to its charter and governing legislation.
The negative outlook reflects Fannie Mae's status as a non-current filer of financial statements and the restrictions it faces under its operating agreement with its safety and soundness regulator. The stronger capital position Fannie Mae has built over the past year as part of its regulatory agreement is an improvement to its credit profile and mitigates the mark-to-market gain/loss swings in GAAP earnings that it will likely face now that the company is not applying designated hedge accounting under FAS 133. Until critical uncertainties are further clarified, the outlook will remain negative. These critical uncertainties include becoming current with all financial reports, the level of core earnings post-restatement, the degree of quarterly earnings volatility, and capital levels to be held and capital strategies to be employed by Fannie Mae once removed from its surplus regulatory capital requirement.
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