Fitch Ratings affirms all senior debt and Issuer Default
Ratings (IDRs) of Fannie Mae following OFHEO's release of its
investigative report of accounting and internal controls at Fannie
Mae. Additionally, Fannie Mae's subordinated debt and preferred stock
ratings remains on Rating Watch Negative. Ratings are listed at the
conclusion of this release.
Fitch believes the OFHEO report may spur additional board and management board changes, litigation, and potentially lengthen the discovery phase of pending lawsuits. It also places additional pressure on capital due to the potential for higher settlements or judgments. The report discusses an enterprise whose management was mired in earnings management and manipulation. While it also highlights some turnover at the senior management level, it may negatively impact management by increasing distractions and turnover. Both the board and management will need to demonstrate a material change in culture and improved transparency.
Both the Board and management will also need to move beyond the correction of accounting systems and internal controls and address numerous other challenges. These include addressing earnings expectations and portfolio management issues as the growth rate in mortgages has materially slowed, managing the portfolio as the US yield curve steepens, adapting to potential regulatory changes and competitive threats and differentiating itself from the culture currently depicted with an emphasis on improving safety and soundness.
Management has taken significant steps in addressing the issues enumerated in the report as directed by OFHEO. Accounting restatements are not expected to be completed for several more months. Fitch will continue to monitor these developments and evaluate their impact on the performance and capital of the enterprise. Fitch will also monitor progress towards regulatory changes but do not anticipate material changes to FNMA's charter or mission.
Senior debt ratings of Fannie Mae are supported by the GSE's capital levels, strong credit quality and maintenance of low interest rate risk as determined by its risk management systems. Fannie Mae's franchise is also viewed as an integral piece of the U.S. mortgage market. Fitch continues to rely on Fannie Mae's risk measurement systems as they have not been compromised despite weaknesses noted in accounting systems. The ratings are dependent upon the maintenance of a low assumption of interest rate risk and current capital levels including the 30% surplus dictated by OFHEO. Fitch would view meaningful capital reductions or changes in current risk levels to have negative rating implications.
The Rating Watch Negative will remain pending substantial demonstration of progress towards implementing sufficient systems and internal controls that allow the filing of accurate and timely financial statements, an evaluation of capital needs following the completion of the restatement and investigations, a review of the strategic direction of the enterprise and some estimate of the cost of litigation.
Fitch affirms the following ratings with a Stable Outlook:
-- Long-term Issuer Default Rating (IDR) 'AAA';
-- Long-term senior debt 'AAA';
-- Short-term 'F1+'.
The following ratings remain on Rating Watch Negative:
-- Subordinated debt 'AA-';
-- Preferred securities 'A+'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Fitch believes the OFHEO report may spur additional board and management board changes, litigation, and potentially lengthen the discovery phase of pending lawsuits. It also places additional pressure on capital due to the potential for higher settlements or judgments. The report discusses an enterprise whose management was mired in earnings management and manipulation. While it also highlights some turnover at the senior management level, it may negatively impact management by increasing distractions and turnover. Both the board and management will need to demonstrate a material change in culture and improved transparency.
Both the Board and management will also need to move beyond the correction of accounting systems and internal controls and address numerous other challenges. These include addressing earnings expectations and portfolio management issues as the growth rate in mortgages has materially slowed, managing the portfolio as the US yield curve steepens, adapting to potential regulatory changes and competitive threats and differentiating itself from the culture currently depicted with an emphasis on improving safety and soundness.
Management has taken significant steps in addressing the issues enumerated in the report as directed by OFHEO. Accounting restatements are not expected to be completed for several more months. Fitch will continue to monitor these developments and evaluate their impact on the performance and capital of the enterprise. Fitch will also monitor progress towards regulatory changes but do not anticipate material changes to FNMA's charter or mission.
Senior debt ratings of Fannie Mae are supported by the GSE's capital levels, strong credit quality and maintenance of low interest rate risk as determined by its risk management systems. Fannie Mae's franchise is also viewed as an integral piece of the U.S. mortgage market. Fitch continues to rely on Fannie Mae's risk measurement systems as they have not been compromised despite weaknesses noted in accounting systems. The ratings are dependent upon the maintenance of a low assumption of interest rate risk and current capital levels including the 30% surplus dictated by OFHEO. Fitch would view meaningful capital reductions or changes in current risk levels to have negative rating implications.
The Rating Watch Negative will remain pending substantial demonstration of progress towards implementing sufficient systems and internal controls that allow the filing of accurate and timely financial statements, an evaluation of capital needs following the completion of the restatement and investigations, a review of the strategic direction of the enterprise and some estimate of the cost of litigation.
Fitch affirms the following ratings with a Stable Outlook:
-- Long-term Issuer Default Rating (IDR) 'AAA';
-- Long-term senior debt 'AAA';
-- Short-term 'F1+'.
The following ratings remain on Rating Watch Negative:
-- Subordinated debt 'AA-';
-- Preferred securities 'A+'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.