S&P Warns May Cut Ratings on Fannie, Freddie

Standard & Poor's said on Friday it may cut its ratings on the preferred shares and subordinated bonds of Fannie Mae and Freddie Mac, citing concerns that U.S. government plans to shore up the mortgage finance companies may subordinate the debt.


The senior debt of the government sponsored enterprises (GSEs) was affirmed at the top "AAA," due to the government's explicit and implicit support of the companies. Their risk to the government ratings were also placed under review for downgrade.

The U.S. House of Representatives passed a housing rescue bill on Wednesday while the White House dropped a threat to veto it, which would give Fannie Mae and Freddie make a government lifeline.

"There is still ambiguity on the part of regulatory authority as it applies to how nonsenior creditors of Fannie Mae and Freddie Mac would be treated if the U.S. Treasury ever acted on its three-point liquidity plan," S&P said in a statement.

"The language in (the housing bill) increases the likelihood that subordinated debtholders and preferred stockholders would face greater subordination risk," S&P said.

This risk is not currently reflected in the agencies' subordinated debt and preferred shares, S&P said. It rates both Fannie Mae and Freddie Mac's subordinated debt and preferred shares "AA-minus," the fourth-highest investment grade.

These ratings may be cut by one or two notches at the conclusion of the review, S&P said.

"Both firms face weak earnings due to rising credit expenses," and are likely to experience higher stress on capital and earnings over the next several quarter, S&P said.

"The confidence crisis in the equity markets is adding to the already stressed business cycle and creates additional challenges in the near term for capital-raising initiatives," S&P said.

Shares of Fannie Mae were down about 5 percent Friday, while Freddie Mac shares lost more than 6 percent.

The S&P announcement somewhat offset upward momentum in the stock market that had come from crude oil's decline and better-than-expected economic data.