Freddie Mac's Strength Rating May Be Cut by Moody's

(Bloomberg) -- Freddie Mac, the U.S. mortgage company that reported its biggest loss last quarter, may be downgraded by Moody's Investors Service because the damage from loan defaults could be worse than the ratings company expected.

Moody's said it may lower Freddie Mac's financial strength rating from A-, the second-highest grade. The McLean, Virginia- based company's top Aaa senior long-term debt rating and the Prime-1 rating for its commercial paper or short-term IOUs won't be cut, Moody's said.

Chief Executive Officer Richard Syron has attempted to shore up Freddie Mac's finances by selling $6 billion of preferred stock, slicing its dividend in half and reducing its mortgage assets by $30.9 billion to $701.4 billion in the three months to Nov. 30. The government-chartered company may need to take similar steps again, Moody's said.

Freddie Mac ``may experience higher credit losses than Moody's previous expectations,'' Moody's analysts led by Brian L. Harris in New York said in the report late yesterday. ``In its review, Moody's will focus on Freddie Mac's asset quality and the potential that the company may experience an elevated level of credit charges over the near to medium term.''

Freddie Mac, which owns or guarantees one in five U.S. home loans, and larger competitor Fannie Mae are suffering as the worst U.S. housing slump in 27 years increases defaults. More than 100 mortgage lenders were shut, scaled back or sold last year as U.S. home foreclosures rose to the highest on record.

`Credit Stress'

``People may regard the financial strength rating as a signal as to whether the agency is becoming more or less positive on a particular institution, and that may feed through to the debt rating,'' said Simon Adamson, a financial services analyst at CreditSights Inc. in London.

Any downgrade to Freddie Mac's financial strength rating is unlikely to be severe enough to result in a cut to its senior debt ranking, Moody's said.

U.S. home prices may fall 12 percent from their peak through 2010 in ``the toughest housing correction in our lifetimes,'' Fannie Mae Chief Executive Officer Daniel Mudd said this week.

``Credit stress is most likely to occur in the company's guarantee portfolio,'' Moody's said.

The New York-based rating company's financial strength rating measures the likelihood a company will need financial assistance from a third party, such as the government or its shareholders.

 

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