S&P places some Fannie, Freddie ratings on watch

The mortgage giants are being eyed for possible investment downgrades.

NEW YORK (AP) — Credit ratings agency Standard & Poor’s has put the risk-to-government, subordinated debt and preferred stock ratings of Fannie Mae and Freddie Mac on watch for possible downgrade.

S&P currently rates Fannie Mae “AA-” for each of the three ratings, while Freddie Mac carries “AA-” ratings for its subordinated debt and preferred stock ratings. Freddie Mac’s risk-to-the-government rating is one notch lower at “A+.”

All the ratings are considered investment grade.

S&P said it expects further stress on capital and earnings for the nation’s two largest backers of mortgage debt. A ratings watch means there’s a 50 percent chance ratings will be cut during the next three months.

S&P affirmed both Fannie Mae and Freddie Mac’s “AAA” senior unsecured debt ratings, citing the government’s “explicit and implicit” support of the two mortgage financiers.

With mortgages defaulting at increasing rates over the past year, both Fannie Mae and Freddie Mac combined have lost billions of dollars. Fannie Mae has already raised $7.4 billion to shore up its capital position and Freddie Mac has committed to raise at least $5.5 billion in new cash.

Earlier this month, Freddie and Fannie received pledges of support from the federal government. The Treasury Department unveiled a plan to help provide larger credit lines for the nation’s two largest purchasers of mortgage debt. The Treasury will also ask Congress to allow it to purchase equity stakes in the pair if necessary.

The Federal Reserve said it would open a special lending option to Freddie and Fannie to provide further lending support.

But government support could increase subordination for current debt and preferred stockholders, which would warrant the ratings downgrade, S&P said.

Fannie and Freddie hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States.