The credit ratings of US mortgage giants Freddie Mac and Fannie Mae were downgraded by Fitch Ratings on Wednesday, the day after Fitch cut the US sovereign rating from the top-ranked AAA to AA+.
The firm downgraded the mortgage giants’ Long-Term Issuer Default Ratings (IDR) and senior unsecured debt ratings from AAA to AA+.
Fitch had previously placed the enterprises on a watch for possible downgrade in May.
Wednesday’s action came because the ratings for Fannie Mae and Freddie Mac are linked to the sovereign rating of the United States, which the firm downgraded on Tuesday.
The ratings agency said that as government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac benefit from implicit government support.
Fannie and Freddie, which guarantee about 70% of the country’s mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors. They are chartered by Congress and regulated by the Federal Housing Finance Agency.
The aim of Freddie and Fannie is to provide liquidity to the mortgage market and enable a reliable flow of affordable funds to mortgage lenders. This ultimately allows more homeowners to borrow at more affordable rates.
Because they are backed by the government, these securities are viewed as less risky than other investments and considered to be as creditworthy as the US government.
But this flow of funds could be disrupted if the United States defaults on its debt, Fitch warned.
Downgrading the GSEs is a direct result of uncertainty about the United States fulfilling its debt obligations and concern about the level of support the housing GSEs can expect if the US rating were to drop.
Fitch noted that its action is not being driven by fundamental credit, capital or liquidity deterioration at the firms.
“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),” the Fitch statement said.
Fitch said 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.
It also said that should the US sovereign debt rating be raised, the GSEs’ rating would move in tandem.
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