Fannie Mae (FNMA)

[CatBirdSeat]

PREFERRED SHARES DEEMED WORTHLESS CONFIRMED BY FITCH

Fitch Affirms Fannie Mae and Freddie Mac's Ratings Following U.S. Sovereign Action; Outlook Stable

5:44 pm ET April 6, 2018 (Dow Jones) Print

(MORE TO FOLLOW) Dow Jones Newswires

April 06, 2018 17:44 ET (21:44 GMT)

The following is a press release from Fitch Ratings:

Fitch Ratings-Chicago-06 April 2018: Fitch Ratings has affirmed Fannie Mae's and Freddie Mac's 'AAA' Long-Term Issuer Default Ratings (IDRs) with a Stable Rating Outlook. These rating actions follow Fitch's affirmation of the United States of America's (U.S.) 'AAA' Long-term Foreign and Local Currency IDRs on April 5, 2018. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR

The ratings of Fannie Mae and Freddie Mac are directly linked to the U.S. sovereign rating, based on Fitch's view of the U.S. government's direct financial support of the two housing government sponsored enterprises (GSEs). The rating linkages are further articulated in Fitch's report 'Rating Linkages to the U.S. Sovereign Rating', dated July 18, 2011.

The housing GSEs are among the most active issuers in the capital markets and continue to benefit from meaningful financial support from the U.S. government. A key rating driver and Fitch's rationale for aligning the GSEs' ratings to the U.S. government rating is the U.S. Treasury's Senior Preferred Stock Purchase Agreement (PSPA). Under the PSPA, the U.S. Treasury is required to inject funds into Fannie Mae and Freddie Mac to maintain positive net worth, so that each firm can avoid being considered technically insolvent by their conservator.

As expected, the GSEs both required draws on their respective lines with the Treasury after being forced to write down the valuations of their deferred tax assets (DTAs), due to the corporate tax rate being reduced from 35% to 21%. While the tax cut will likely enhance the GSEs' long-term profitability, it also produced a significant one-time hit to earnings and capital. Fannie and Freddie took write downs of $9.9 billion and $5.4 billion and needed draws of $3.7 billion and $312 million, respectively at the end of 4Q17. The remaining funding available to Fannie and Freddie after the required draws will be $113.9 billion and $140.2 billion, respectively.

Although not expected, draws could also become necessary if economic conditions worsen materially causing credit performance of the GSEs' loan books to deteriorate. Nonetheless, additional capital draws from the Treasury would not change Fitch's current view of the ratings in light of the U.S. government's direct financial support assumptions.

In accordance with the dividend provision of the Senior Preferred Stock Purchase Agreement (PSPA) and quarterly directives from their conservator, the GSEs had been obligated to pay to the US Treasury any amount that exceeds their mandated capital reserve requirements.

On Dec. 21, 2017, the FHFA and the U.S. Treasury Department announced an agreement to reinstate a $3 billion capital reserve amount under the PSPA for each GSE beginning in 4Q17. Prior to this new agreement, the GSEs were going to be unable to retain any of their net worth commencing in 2018 and unable to build capital as the entire amount of their net earnings would have been remitted to the Treasury at the end of each quarter.

Fitch believes the $3 billion should be sufficient to cover income fluctuations in the normal course of each GSEs' business such as from falling interest rates, which would cause valuation adjustments within the GSEs' derivatives portfolios.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

In a 2008 statement, the Director of FHFA stated that the GSEs would continue to make interest and principal payments on the subordinated debt, even if the minimum capital levels are not maintained. Fitch's 'AA-' ratings on the subordinated debt are reflective of the conservator's willingness to support these obligations and the current timeliness of interest and principal on these obligations.

The 'C'/'RR6' ratings of Fannie Mae's and Freddie Mac's preferred stock ratings reflect the ongoing deferral of payments and very low prospects for recovery.

RATING SENSITIVITIES

IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR

The ratings of Fannie Mae and Freddie Mac are directly linked to the U.S. sovereign rating and will continue to move in tandem. Although not expected in the near term, if at some point in the future, Fitch views government support as being reduced, particularly though housing finance reform efforts, the ratings of the GSEs could be delinked from the sovereign and downgraded.

Deterioration in Fannie Mae's or Freddie Mac's available liquidity and/or inability to access capital markets over an extended period may result in negative rating actions, irrespective of the U.S. sovereign rating.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Should the FHFA change its position regarding the payment of the GSEs' subordinated debt obligations or if there is any deferral of interest or principal payments, Fitch would likely downgrade the ratings on the subordinated debt.

Given the ongoing deferral of dividends and low prospects for recovery on Fannie Mae's and Freddie Mac's preferred stock obligations, Fitch does not envision any changes to the 'C'/'RR6' ratings for the foreseeable future.

Fitch has affirmed the following ratings:

Fannie Mae (Federal National Mortgage Association)

--Long-Term IDR at 'AAA', Outlook Stable;

--Short-Term IDR at 'F1+';

--Support rating at '1';

--Support floor at 'AAA';

--Short-Term debt at 'F1+';

--Senior unsecured at 'AAA';

--Subordinated debt at 'AA-';

--Preferred stock at 'C'/'RR6'. = WORTHLESS !!!

Freddie Mac (Federal Home Loan Mortgage Corporation)

--Long-Term IDR at 'AAA', Outlook Stable;

--Short-Term IDR at 'F1+';

--Support rating at '1';

--Support floor at 'AAA';

--Short-Term debt at 'F1+';

--Senior unsecured at 'AAA';

--Subordinated debt at 'AA-';

--Preferred stock at 'C'/'RR6'. - = WORTHLESS !!!

During its review of various CUSIPs, Fitch discovered that it had misclassified the type of debt level on a Fannie Mae instrument associated with CUSIP 313586810. When it was rated in 2007, Fitch classified the instrument as subordinated debt. The instrument in actuality is Non-Cumulative Convertible Preferred Stock. In 2008, Fitch downgraded all of Fannie Mae's outstanding preferred stock to 'C'/'RR6'. However, given that this CUSIP was misclassified by as subordinated debt by Fitch, it did not get downgraded at that time. Therefore, today, Fitch is reclassifying the debt level to noncumulative preferred stock and downgrading the debt level rating on CUSIP 313586810 from 'AA-' to 'C'/'RR6'

Contact:

Primary Analyst

Bain K. Rumohr, CFA

Senior Director

[phone]

Fitch Ratings, Inc.

70 West Madison St.

Chicago, IL 60602

Secondary Analyst

Christopher Wolfe

Managing Director

[phone]

Committee Chairperson

Doriana Gamboa

Senior Director

[phone]

Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: [e-mail].

Additional information is available on www.fitchratings.com

Applicable Criteria

Bank Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023430

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/site/dodd-frank-disclosure/10026264

Solicitation Status

https://www.fitchratings.com/site/pr/10026264#solicitation

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: [phone]. Fax: [phone]. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchâ tms factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the

(MORE TO FOLLOW) Dow Jones Newswires

April 06, 2018 17:44 ET (21:44 GMT)

Press Release: Fitch Affirms Fannie Mae and -2-

particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchâ tms ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided â oeas isâ without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSROâ tms credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.

(END) Dow Jones Newswires

April 06, 2018 17:44 ET (21:44 GMT)