Last week Standard & Poor's gave Fannie Mae and Freddie Mac a credit rating several notches lower than the agencies' longtime AAA senior debt ratings.

S&P issued AA-minus ratings for both agencies to represent their overall creditworthiness, also called "the risk to government" ratings, where the agencies are reviewed based on their own merits and not including the potential for government backing.

The ratings are part of an agreement reached in 2000 between the two agencies and Congressional foes, who argued that Freddie Mac and Fannie Mae had been leveraging their overall AAA ratings to gain market share while not being fully insured by the government.

The 1st step in the GSEs' effort to increase financial transparency was the issuance of sub debt. Fannie Mae has completed this part while Freddie Mac's sub debt is forthcoming. The next stage is the risk-to-the-government' credit rating by a nationally recognized rating agency.

The rating measures financial strength assuming there is no government assistance.

In addition, S&P considered criteria such as an evaluation of business fundamentals, competitive position, management, strategies, and relevant financial measures.

Both GSEs want S&P's risk-to-the-government credit rating be maintained on a continuous, surveillance' basis. This goes beyond the voluntarily agreed-upon annual rating review announced in October. The risk-to-the-government' rating does not apply to any debt that the GSEs issue, so FNMA and FHLMC's senior debt continues to be rated AAA' by S&P.

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