Fannie Mae Downgraded to B+ from A- for bank financial strength as new accounting issues identified;

March 28, 2005

Aaa affirmed for senior unsecured debt

New York, March 28, 2005 -- Moody's Investors Service downgraded Fannie Mae's Bank Financial Strength Rating (BFSR) from A- to B+ with a stable outlook. The agency also affirmed Fannie Mae's Aaa senior unsecured debt rating with a stable outlook, and its Prime-1 rating for short-term debt. The BFSR had been under review for downgrade since September 28, 2004 following the announcement of the findings by the Office of Federal Housing Enterprise Oversight (OFHEO). Fannie Mae's subordinated debt and preferred stock ratings at Aa2 and Aa3, respectively, remain on review for possible downgrade.

Moody's said that the conclusion of its review of Fannie Mae's Bank Financial Strength Rating follows the company's recent announcement of several additional accounting and internal control issues identified by the OFHEO, Fannie Mae's regulator. The investigation by OFHEO is ongoing. The new findings may result in the recognition of additional losses adversely impacting regulatory capital in the short term and require improvement of additional internal controls. More importantly, the identification of additional accounting and internal control issues, along with the continuing regulatory and related investigations, may be suggestive of larger governance and control problems. These governance and control challenges, as well as uncertainty regarding capital levels prompted Moody's to place the GSE's BFSR under review for downgrade in 2004. Moody's believes that Fannie Mae is actively working towards resolving all issues related to the accounting investigation, but in the rating agency's opinion complete remediation will take time, and likely not occur until 2006.

Moody's said that it believes that Fannie Mae should be able to return to its A- Bank Financial Strength Rating. To do so, the GSE will need to demonstrate full compliance will all regulatory directives - particularly those relating to capital, accounting and internal control structures - as well as demonstrating a culture that promotes vigorous, independent oversight in all areas of the firm; and a capacity for sound and stable earnings. Fannie Mae's status as a leading participant in the important US housing finance market, and its effective technical management of credit and interest rate risk, provide support for the firm's high Bank Financial Strength Rating. Addressing these issues will likely take time.

Moody's Bank Financial Strength Rating measures the likelihood that a financial institution will require financial assistance from third parties, such as the government or shareholders. These ratings do not measure the probability that a financial institution would receive such support.

Moody's continuing review for possible downgrade of Fannie Mae's Aa2 subordinated debt and Aa3 preferred stock reflects uncertainty, though diminishing, regarding Fannie Mae's ability to pay dividends on its preferred stock. Moody's expects full and timely payment of all such dividends. Factors that could lead Moody's to confirm the ratings on Fannie Mae's subordinated debt and Aa3 preferred stock include the continued timely payment of dividends, more clarity regarding the impact of new accounting issues, and continued increase in capital to well above required levels. Moody's expects to conclude these reviews soon.

Fannie Mae's Aaa-rated senior debt and Prime-1 rating for its short-term debt continue to be supported by the benefits associated with its GSE status, strong US Government-implied support, important public policy mission in housing finance, tremendous franchise value, and sound interest rate and credit risk management.

The following rating was downgraded:

  • Bank financial strength rating to B+, from A-, with a stable outlook
  • The following ratings remain under review for possible downgrade:
  • Subordinated debt at Aa2, non-cumulative preferred stock at Aa3
  • The following ratings were affirmed:
  • Senior long-term debt at Aaa, stable outlook; Short-term debt at Prime-1

Source: Moody's

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