Moody's eyeing Fannie Mae downgrade

Rating agency to review Fannie Mae's B+ rating for potential downgrade after massive profit loss.

February 28 2008: 9:38 AM EST

NEW YORK (AP) -- Credit rating agency Moody's Investors Service on Thursday said it put Fannie Mae's "B+" bank financial strength rating on review for possible downgrade.

Fannie (FNM), the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007, and $2.1 billion for the year, amid mounting home-loan delinquencies and soured bets on interest rates.

"This loss exceeded our expectations and represents a significant deterioration of surplus regulatory capital," Moody's said in a statement. Moody's said it expects Fannie to have sizable losses in the first half of 2008 and possibly a net loss for the year due to the continued deterioration in the residential mortgage sector.

Moody's affirmed Fannie's "Aaa" senior debt, "Prime-1" short-term debt, "Aa2" subordinated debt and "Aa3" preferred stock ratings with "Stable" outlooks.

Mortgage volume has fallen rapidly as banks tighten lending standards in response to rising delinquencies and defaults.

Fannie Mae could get relief from its dwindling capital surplus requirements if its federal regulator decreases the requirement, something it said it would discuss with Fannie Mae.

Moody's financial strength rating measures a financial institution's likelihood of requiring financial assistance from third parties to continue operating normally.