Fitch Ratings has now put Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) on its Rating Watch Negative list. Specifically, this refers to both companies’ AAA Long-term Issuer Default Ratings (IDRs) and debt ratings. That’s according to a press release (via Reuters).
U.S. government put on negative watch list
The action comes just a day after Fitch put the United States of America’s AAA Long-Term foreign and local currency IDRs on its Negative Watch list. According to Fitch, the negative switch for Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is in connection with the ratings agency’s view of the U.S. government.
Both of the housing companies are financially supported by the government. Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are both regular issues within capital markets, which means they receive “meaningful financial support from the U.S. government,” according to the press release.
Why Fannie Mae, Freddie Mac’s fate is intertwined with government
Fitch said one of the main drivers for aligning Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s ratings with those of the U.S. government is because of the Senior Preferred Stock Purchase Agreement, which the two companies have with the Treasury Department. Under the terms of the agreement, the agency is required to keep putting funds into the two companies so that they continue to have positive net worth and will not be considered insolvent. Under the agreement, Fannie Mae has $117.6 billion in funding left, while Freddie Mac has $140.5 billion.
In addition, the two companies’ subordinated debt requires that interest payments be deferred if the they can’t maintain certain levels of capital. In 2008, however, the Federal Housing Finance Agency said Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would be required to keep making both principal and interest payments even if the specified capital levels were not maintained. Fitch has AA- ratings on Fannie Mae’s and Freddie Mac’s subordinated debt because the conservator has been willing to support the companies’ obligations.
