Government Sponsored Enterprise Ratings Downgraded
September 22, 2008
The preferred stock ratings of Freddie Mac and Fannie Mae have been downgraded from A1 to BAA3 by Moody’s Investors Service. Additionally, Fannie and Freddie’s Bank Financial Strength Ratings has been downgraded from B minus to D plus.
The downgraded ratings remain on review for possible further downgrade. Moody’s said the downgrades of the financial strength ratings reflect its view that the government sponsored enterprise’s flexibility to manage volatility in their mortgage risk exposures is “constricted” because they now have “limited access to common and preferred equity capital at economically attractive terms.”
The downgrades of the preferred stock ratings reflect a greater risk of dividend omission stemming from two issues.
First, the Government Sponsored Enterprises mortgage portfolio performance is “worse and more volatile than Moody’s expected”, which could lead them to breach the capital requirements governing their ability to pay a preferred dividend. Second, there is uncertainty about how the preferred stock would be treated if the Treasury provides either GSE with support, Moody’s said.
Moody’s also affirmed the GSE’s AAA senior long term debt and Prime-1 short term debt ratings with stable outlooks, while their AA2 subordinated debt ratings were affirmed, but the outlook was changed from stable to negative.
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