But don’t worry, be happy.
From FitchRatings tonight:
Fitch Downgrades Fannie Mae and Freddie Mac to ‘AA+’ Following Sovereign Action; Outlook Stable
Full statement:
Fitch Ratings – Chicago – 02 Aug 2023: Fitch Ratings has downgraded Fannie Mae’s and Freddie Mac’s Long-Term Issuer Default Ratings (IDR) and senior unsecured debt ratings to ‘AA+’ from ‘AAA’ and downgraded their respective Government Support Ratings (GSR) to ‘aa+’ from ‘aaa’. The Rating Watch Negative (RWN) has been removed, and the Outlook on the Long-Term IDRs is Stable. Concurrently, Fitch has affirmed Fannie Mae’s and Freddie Mac’s Short-Term IDRs and senior unsecured debt ratings at ‘F1+’ and removed the RWN, as well as affirmed the preferred stock ratings at ‘C’/’RR6’. These actions following Fitch’s downgrade of the United States of America’s (U.S.) Long-Term Foreign and Local Currency IDRs to ‘AA+’ from ‘AAA’ on Aug. 1, 2023.
Key Rating Drivers
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac benefit from implicit government support. The enterprises’ respective Long-Term IDRs and GSRs are directly linked to the U.S. sovereign’s Long-Term IDRs based on Fitch’s view of the U.S. government’s direct financial support. Fannie Mae and Freddie Mac’s respective ‘F1+’ Short-Term IDRs map to each’s Long-Term IDR based on the Ratings Correspondence Table in Fitch’s Non-Bank Financial Institutions Rating Criteria.
The downgrade of Fannie Mae’s and Freddie Mac’s Long-Term IDRs and GSRs is consistent with the recent action taken on the U.S. and is not being driven by fundamental credit, capital or liquidity deterioration at the firms. The rating linkages are further articulated in Fitch’s report “GSE Rating Linkage to the U.S. Sovereign”, dated Nov. 12, 2021.
The firms continue to benefit from meaningful financial support from the U.S. government. Key rating drivers for aligning Fannie Mae’s and Freddie Mac’s ratings to the U.S. rating include their mission critical function to the U.S. housing finance system and the U.S. Treasury’s Senior Preferred Stock Purchase Agreements (SPSPAs). Fitch believes Fannie Mae continues to execute on its mission to provide liquidity, stability and affordability to the housing finance industry, supporting rating equalization with the sovereign.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The Long-Term IDRs of Fannie Mae and Freddie Mac are directly linked to the Long-Term IDR of the U.S. sovereign and will continue to move in tandem.
In the future, if Fitch views government support as reduced, particularly through housing finance reform efforts, the GSEs’ ratings could be delinked from the sovereign and downgraded. Fitch believes this risk is well outside of the current rating horizon, and meaningful GSE reform is not likely for the foreseeable future.
The housing GSEs are reliant on access to the capital markets. A sustained deterioration in available liquidity and/or inability to access the capital markets over an extended period, absent intervention by the U.S. government, may result in a negative rating action.
Fitch does not expect to downgrade the Short-Term IDRs absent a multi-notch downgrade to their respective Long-Term IDRs.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
To the extent the U.S. sovereign is upgraded, the GSEs’ Long-Term IDRs would move in tandem.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The ‘C’/’RR6’ preferred stock ratings of Fannie Mae and Freddie Mac reflect the ongoing deferral of payments and very low prospects for recovery.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
Given the ongoing deferral of dividend payments, the ‘C’/’RR6’ ratings would be sensitive to changes in recovery prospects.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
Anyone having 2008-2009 flashbacks yet?
The bigger question is this however; how in the sam hell did Fannie and Freddie have a AAA rating in the first place?
Based on their portfolios and history they were A to A+ at best.
Buckle up ladies and gents, the ride is about to get bumpier.
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