S&P keeps Fannie Mae on negative watch

Standard & Poor's said its AA- subordinated debt, risk to the government and preferred stock ratings on Fannie Mae remain on CreditWatch negative, where they were placed on Sept. 23, 2004.

The CreditWatch update follows the announcement and publication by Fannie Mae that its board of directors and the company have received the internal review report on Fannie Mae conducted by former U.S. Senator Warren Rudman and the law firm of Paul, Weiss, Rifkin, Wharton & Garrison LLP. The findings and conclusion of the Rudman Report are substantially consistent with matters previously disclosed and have not resulted in significant newly discovered matters.

Nevertheless, the significant work necessary to complete the financial statement filings and resolve the issues raised in the report remain a negative in the rating, the agency said. Furthermore, the Rudman Report raises concerns regarding lack of internal controls, adequacy of accounting systems, staffing competencies and a weak risk management-reporting framework, all of which are critical issues that also bear negative factors to the financial ratings.

Notwithstanding these challenges, S&P said it continues to expect Fannie Mae to maintain its central market position within the whole complex of mortgage finance in the U.S. market, operating performance is likely to remain good under a wide range of interest rate scenarios and capitalization will likely remain adequate, as there were no findings in the report that raise serious concern about capitalization.

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