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Publish Date : 21-Aug-2012

Standard & Poor\'s Ratings Services today said that the US Treasury\'s amendments to its Preferred Stock Purchase Agreements (PSPAs) with Fannie Mae (senior debt rated \'AA+/Negative\') and Freddie Mac (senior debt rated\'AA+/Negative\') do not immediately affect the ratings on their debt instruments. The preferred stock held by the US Treasury is not rated by Standard & Poor\'s.

Changes to the PSPAs include: - An accelerated wind-down of the entities\' investment portfolios-to a 15 per cent annual reduction of the portfolios, versus 10 per cent previously; - A newly required annual plan to be given to their conservator, the Federal Housing Finance Agency (FHFA), detailing their progress in reducing taxpayer exposure to mortgage credit losses; and - The elimination of the 10 per cent annual dividend on Treasury-owned preferred shares in favor of a sweep of all profits each quarter.

We do not believe the accelerated reduction of these firms\' investments will result in a significant behavioral change since they\'ve thus far been able to make strong progress on this mandate up until now. But the dividend policy change will, in effect, prevent any future draws on the Treasury if they remain profitable. It should reduce the potential for future draws as the housing market recovers.

The changes are largely in line with previous plans that the Administration and the FHFA have put forth, and both have stressed a desire to wind down these entities over time and to reduce the government\'s role in the housing market. We do not expect that the amendments to the PSPAs will affect the strong linkage between these entities and the US government, and we do not believe the amendments portend a change in Fannie and Freddie\'s role in the housing market anytime soon. Our ratings on these entities\' senior debt remain the same as our rating on the US government. We could reduce or remove the support we currently factor into the ratings on these entities if we perceive a meaningful weakening in the link they have to the government or in their role in the domestic housing market.

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