Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac at AAA, while the Rating Outlook remains stable. This action follows Fitch's affirmation of the 'AAA' IDR and stable Rating Outlook on the U.S. government.
The ratings of Fannie Mae and Freddie Mac are linked to the U.S. Sovereign rating, as articulated in Fitch's report "Rating Linkages to the U.S. Sovereign Rating." The GSEs remain regular issuers in the capital markets, benefiting from their implicit guarantee and ongoing explicit acts of meaningful financial support from the U.S. government.
The affirmation by Fitch of an AAA sovereign rating for the U.S. reflects the fact that the key pillars of nation's exceptional creditworthiness remains intact: Its role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to, as Fitch deems, "shocks."
A key element Fitch Ratings considered in bestowing the AAA rating on the GSEs was the injection of funds by the U.S. Department of the Treasury into both Fannie Mae and Freddie Mac, so that each firm can avoid being considered technically insolvent by their regulator. Fitch believes continued material credit expenses from each firm's legacy books of business and their quarterly dividend obligation to the U.S. Treasury makes it highly likely that one or both firms will continue to rely on capital support from the U.S. Treasury for the foreseeable future.
Back in February 2011, the Obama Administration issued a report to Congress titled "Reforming America's Housing Finance Market." In this report, when referring to Fannie Mae and Freddie Mac, the Administration stated:
"The government is committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations. The Administration will not pursue policies or reforms in a way that would impair the ability of Fannie Mae or Freddie Mac to honor their obligations."
Fitch believes such a definitive statement by the Administration confirms its ongoing support of the GSEs, and as a result, Fitch anticipates maintaining the equalization of the long- and short-term IDRs and Rating Outlooks of these firms with that of the U.S. sovereign.
