Fannie Mae, Freddie Mac Lose Fitch AAA Ratings After U.S. Downgrade
By Andrew Coen August 3, 2023 3:16 pm
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Fitch Ratings downgraded the long-term debt of Fannie Mae (FNMA) and Freddie Mac (FMCC) late Wednesday, underscoring the contagion effect from the U.S government’s first credit downgrade in 12 years.
The two government sponsored entities (GSEs) saw their long-term debt ratings lowered to AA-plus from AAA by Fitch, which cited its Tuesday downgrade of the U.S. as the primary factor. Fitch also stressed that the action “is not being driven by fundamental credit, capital or liquidity deterioration” at the mortgage finance firms.
Reuters first reported news of the downgrades.
Fitch lowered U.S. bonds to AA-plus from AAA citing “a steady deterioration in standards of governance” two months after the country nearly defaulted before lawmakers struck a last-minute deal to raise the debt ceiling until 2025. The ratings agency said “the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management” and “lacks a medium-term fiscal framework” compared to peer AAA nations.
“Sovereign downgrades may in some instances spill over into highly rated corporates,” said Sam Chandan, director of New York University’s Chen Institute for Global Real Estate Finance. “As I see it, the downgrade has nothing to do with the soundness of the GSEs. It reflects the structural relationships.”
The Fitch downgrades bring Fannie Mae and Freddie Mac in line with S&P Global Ratings, which also rates the GSEs at AA-plus. Moody’s Investors Service continues to rate the firms at AAA.
McLean, Va.-based Freddie Mac is coming off a 2022 in which it executed $73.8 billion of financing and Low-Income Housing Tax Credit enquiry investments, which included more than 420,000 units of affordable housing. Fannie Mae, which is headquartered in Washington, D.C., supplied over $69 billion in debt financing to support the multifamily market last year.
Officials at Fannie Mae and Freddie Mac did not immediately return requests for comment.
The U.S. downgrade by Fitch came nearly 11 years to the day S&P cut the county’s long-term debt for the first time in history one notch from AAA on Aug. 5, 2011, following another near default from a Washington debt ceiling battle. The 2011 S&P action came days after the Obama administration and Republican leaders crafted a budget compromise.
Fitch first placed the U.S. sovereign rating on credit watch negative May 24, just before President Joe Biden and House Speaker Kevin McCarthy reached a debt ceiling deal. DBRS Morningstar, which also placed the U.S. on negative watch in late May, continues to rate the country’s long-term debt at AAA along with Moody’s Investors Service.
Chandan said despite a sovereign downgrade creating uncertainty for the U.S. fiscal conditions, in 2011 there remained a steady flow of overseas capital.He said he expects that dynamic to play itself out again in 2023 since the country remains one of the “lowest risk investments on a macro level.”
The effect on foreign capital into CRE should be “much more muted” than the overall bond and equities markets, according to Chandan, since other factors remain more front and center, like higher interest rates and uncertainty about the future of office properties from increasing hybrid work trends.
“There are other things going on in the U.S. commercial real estate markets that will dominate and that are more significant factors for investors, whether they be global or domestic than our sovereign rating,” Chandan said. “It behooves us though to understand and pay close attention to the drivers of this rating adjustment, and as a country we need to get our fiscal house in order.”
Barclays (BCS) released a report late Wednesday saying that while the U.S. downgrade would lead to downgrades of some existing non-agency commercial mortgage-backed securities and Freddie K deals, it would “not likely be enough to cause any meaningful forced selling.” Barclays noted that the risk of downgrades will be “isolated” to tranches of deals previously upgraded by Fitch, which is limited to 48 conduit transactions.
Jonathan Morris, founder of the REIT Academy, said the downgrade is “a reflection of a melange of issues” most notably the constant battles that brew between Democrats and Republicans each time the country hits its debt ceiling. Morris, a former executive at three real estate investment trusts including as director of acquisitions at Boston Properties, said the U.S. downgrade likely would not materially affect investor demand for REITs on a global level.
“I don’t think it really will have much impact in the face of the many rate increases,” Morris said. “Under normal times, a rating reduction might impact rates, but they’ve already been raised significantly so this won’t add to the pain.”
Andrew Coen can be reached at acoen@commercialobserver.com
