Moody's Downgrades Certain GSE Ratings

The preferred stock ratings of Fannie Mae and Freddie Mac have been downgraded from A1 to Baa3 by Moody's Investors Service, and their Bank Financial Strength Ratings have 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 enterprises' 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, Moody's said. First, the GSEs' 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. In addition to the downgrades, Moody's affirmed the GSEs' 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.