Fitch may lower Fannie, Freddie debt outlook

AP News
Posted: Nov 29, 2011 11:34 AM
Fitch may lower Fannie, Freddie debt outlook

The Fitch ratings agency will likely lower its outlook for debts linked to the U.S. government to negative, including debt of government-controlled mortgage buyers Fannie Mae and Freddie Mac.

Fitch, one of the three major ratings agencies, said Tuesday it expects to announce the revised outlooks over the next several days.

The announcement comes a day after the agency downgraded its outlook on U.S. debt to negative. The agency kept its rating for long-term U.S. debt at the top AAA level but said it has less confidence in the federal government's ability to rein in the deficit.

Ratings are based on the likelihood of default. The AAA rating is the highest available and signifies an extremely low likelihood of default.

A special congressional panel failed last week to reach an agreement on $1.2 trillion in deficit cuts over the next decade. The impasse triggered automatic cuts of the same amount, which are scheduled kick in beginning in 2013.

The U.S. government rescued Fannie and Freddie in September 2008 and has funded them since the financial crisis. The two mortgage giants own or guarantee about half of all U.S. home loans and nearly all new mortgages. So if the U.S. government can't pay its bills, neither can Fannie and Freddie.

However, the Federal Housing Finance Agency, the government regulator that oversees Fannie and Freddie, has said the entities will meet their financial obligations because the government will continue to fund them.

An array of bonds and securities and the 12 Federal Home Loan Banks also have credit ratings that are directly tied to the credit rating of U.S. debt.

In August, Standard & Poor's Ratings Services downgraded the credit ratings of Fannie and Freddie from AAA to AA-plus, reflecting the same downgrade S&P made of long-term U.S. government debt a few days before. It was the first time the agency had lowered the nation's AAA rating since granting it in 1917.

If Fitch were to downgrade U.S. debt in the next two years, Fannie and Freddie would certainly see its ratings fall too. Fitch said there is slightly greater than a 50 percent chance it would downgrade U.S. debt by 2013.