S&P reviews Fannie-Freddie ratings

Standard & Poor’s put some of its ratings on Fannie Mae (FNM) and Freddie Mac (FRE) on watch for a possible downgrade Friday, saying that the bailout bill pending in Congress could increase the risks facing holders of the mortgage giants’ subordinated debt and preferred stock.

“Although there is still ambiguity on the part of regulatory authority as it applies to how nonsenior creditors of Fannie Mae and Freddie Mac would be treated if the U.S. Treasury ever acted on its three-point liquidity plan, the language in HR 3221 increases the likelihood that subordinated debtholders and
preferred stockholders would face greater subordination risk,” analyst Victoria Wagner wrote. That is to say, investors in the companies could find themselves wiped out in the event of a bailout - a fear that drove shares in Fannie and Freddie to 17-year lows earlier this month.

S&P affirmed the firms’ triple-A senior unsecured debt ratings while putting their double-A minus preferred stock, subordinated debt and risk-to-the-government ratings on watch for a possible downgrade.

The review comes a day after shares of the companies plunged almost 20%, as investors continue to grapple with the ramifications of falling house prices and a slowing economy. The Senate is now considering a bill that would authorize the government to buy shares in the companies or lend them money more freely if they run short on funds. On Friday, Freddie was off 8% and Fannie down 5%.