2nd UPDATE: S&P Cuts Fannie Mae Rating, Backs Freddie Mac's
Monday May 19th, 2008 / 23h35
(Updates first nine paragraphs with background, including statements from Bush and regulator; banking committee action.) DOW JONES NEWSWIRES Standard & Poor's said Monday that Fannie Mae's (FNM) difficult earnings outlook and relatively slim capital position puts the U.S. government at slightly greater risk of needing to bail out the mortgage-finance giant. The credit-rating company lowered its "risk to the government" rating on Fannie Mae to A+ from AA-, citing credit losses that aren't expected to peak until 2009, earnings that will "remain challenged" through next year and a low capital base compared with similarly rated institutions. "The lower risk-to-the-government rating reflects Fannie Mae's weak earnings and pressured capital ratios, which are outside the tolerance for a AA- rating," S&P credit analyst Victoria Wagner said. The ratings reflect the company's creditworthiness apart from inferred government support for the company's debt, support that S&P said has grown along with Fannie Mae's central role in the government's response to the housing slump. Meanwhile, S&P affirmed Freddie Mac's (FRE) ratings, including its risk-to-the-government grade, citing "a strong commitment to improving capital ratios." Fannie's downgrade came after tough comments in recent days by its main regulator and President Bush. James Lockhart, director of the Office of Federal Housing Enterprise Oversight, called Fannie and Freddie "a point of vulnerability for the financial system" because their capital is meager in relation to their mortgage assets and obligations. And on Monday, Bush renewed his call for legislation overhauling the oversight of both government-sponsored home lenders. Late Monday, the top two members of the Senate Banking Committee said they reached an agreement on a housing aid package that includes a regulatory overhaul for Fannie and Freddie. The banking panel is scheduled to vote on the measure Tuesday morning. Reform of Fannie, Freddie and the 12 Federal Home Loan Banks has long been one of Bush's top housing priorities, but attempts to overhaul the government-sponsored enterprises have collapsed as lawmakers argue over how tightly to regulate them. In addition to cutting Fannie's risk-to-the-government rating one notch, S&P affirmed its senior unsecured debt, subordinated debt and preferred stock ratings. Its outlook on the senior unsecured debt rating is stable; the outlook is negative on the others. Both lenders posted losses in the past three consecutive quarters. Fannie reported a $2.2 billion net loss in the first quarter while Freddie had a net loss of $151 million. Fannie's "earnings expectations for the remainder of 2008 and next year also remain challenged," S&P said. The firm said it expects higher credit losses and weak earnings during the next year. Although Fannie recently issued $2.6 billion of common stock, its capital remains low compared with that of other similarly rated large financial institutions, S&P said. "Although capital levels will remain under pressure, we expect management to continue to build common equity as needed throughout the year, through both external and internal means." The agency noted that Freddie raised $6 billion in capital in the fourth quarter of 2007 and plans to raise another $5.5 billion: 50% in common stock and the rest in nonconvertible preferred stock. "We expect credit losses to reach a new cycle peak for Freddie Mac by 2009," S&P added. S&P expects Fannie's market position to increase in 2008 because it will be one of the primary issuers of mortgage-backed securities in the U.S. If Fannie's credit losses exceed its own projection and lead to higher-than-expected operating losses in 2008, S&P could cut ratings another notch. "It is very unlikely that the outlook would return to stable before 2009," the firm added. Fannie's shares were flat at $28.95 in after-hours trading while Freddie's were at $27.25, up 24 cents, 0.9%. -By Kathy Shwiff, Dow Jones Newswires; 201-938-5975; Kathy.Shwiff@dowjones.com (James R. Hagerty and Michael R. Crittenden of the Wall Street Journal and Henry J. Pulizzi of Dow Jones Newswires contributed to this report.)
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