The hits keep on coming for Fannie Mae (FNM) and Freddie Mac (FRE). Tuesday morning, Moody’s Investors Service said it had downgraded key credit ratings at both GSEs over concerns about “diminished financial flexibility.” Fannie saw its preferred stock rating fall to A1 from Aa3, while its bank financial strength rating was knocked to B- from B; Freddie saw similar cuts to its preferred stock rating and financial strength, as well. Both ratings cuts are one notch, and keep the GSEs firmly in investment-grade territory, the B- financial strength rating is Moody’s lowest in the “strong financial strength” category. A further cut would put either GSE into “adequate” territory under Moody’s rating methodology. “Adverse market conditions have reduced Fannie Mae’s ability to raise additional equity capital. This limits the company’s ability to build further cushion to offset unanticipated stresses in its asset quality,” said Moody’s senior vice president Brian Harris, in a press statement. Both companies saw their key credit ratings put on negative watch after the downgrade, as well. “During our review, we will focus on our updated credit loss estimates on [the GSEs] mortgage portfolio and will relate these losses to its capital,” said Harris. “We will also focus on any capital initiatives that Freddie Mac may implement.” Not surprisingly, both companies saw all debt ratings affirmed on Moody’s assessment that both have “very high systemic support,” in the form of recently-announced rescue plans involving both the Federal Reserve and the U.S. Treasury. A review of other credit rating agencies Web sites found no similar downgrades at Standard & Poor’s or Fitch Ratings. Fannie Mae shares were at $7.50, off 23 percent, when this story was published; Freddie shares were at $5.24 (!), off 26.3 percent from Tuesday’s open. Links: Moody’s statement on Fannie, Moody’s statement on Freddie Disclosure: The author was long FRE when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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