Fitch Lowers Fannie Mae Pfd Stock to 'A+'; Places Sub & Pfd Ratings on Watch Negative.

NEW YORK -- Fitch Ratings has downgraded the preferred stock rating for Fannie Mae to 'A+' from 'AA-'. Additionally, Fitch places the 'AA-' subordinated debt and preferred stock ratings on Rating Watch Negative. Fitch also has affirmed the 'AAA' long-term senior debt rating and 'F1+' short-term rating. The Rating Outlook on the senior debt remains Stable. Approximately $4.1 billion of preferred stock and $12.5 billion of subordinated debt is affected by today's action.

Today's action follows Fitch's downgrade of Fannie Mae's subordinated debt and preferred stock ratings on Sept. 29, 2004, which already considered the possibility that a restatement of prior period financial statements could be necessary and that management changes may occur. That action also considered that a significant portion of the losses on the company's derivatives positions may require a reclassification and be recognized as a reduction of capital.

Today's downgrade of the preferred stock rating to 'A+' reflects the announcement by Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), that Fannie Mae's core capital level was below its minimum capital requirement at Sept. 30, 2004 and results in a classification of 'significantly undercapitalized'. According to The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, once Fannie Mae was deemed to be 'significantly undercapitalized', OFHEO must approve all capital distributions, including preferred stock and common stock dividend payments.

"While Fitch anticipates that OFHEO will permit the dividends to be paid beyond the Dec. 31 payment date, the downgrade acknowledges the fact that the ability to pay preferred stock dividends lies with the regulator and is outside of Fannie Mae's control. Fitch believes that this development is inconsistent with a rating in the 'AA' category," said Marc Yaklofsky, Director, Financial Institutions, Fitch Ratings. The same supervisory action does not extend to the subordinated debt outstanding, however, and is the primary factor for the differentiation of the preferred stock and subordinated debt ratings. It is important to note that if OFHEO elects to suspend the preferred stock dividend payment, Fitch will likely downgrade the preferred stock ratings materially.

The decision to place the preferred stock and subordinated debt ratings on Rating Watch Negative is primarily due to the uncertainty created by the removal of Fannie Mae's external auditor, KPMG. Specifically, Fitch believes that the selection of a new auditor and the subsequent comprehensive review of accounting processes, procedures and controls required to appropriately attest to Fannie Mae's financial statements will be a lengthy process that will likely significantly delay timely financial reporting. Further, Fitch believes that such review, coupled with the ongoing investigations conducted by OFHEO and the board of directors, may uncover additional accounting deficiencies.

Central to Fitch's ratings assessment of Fannie Mae's long-term senior debt and short-term ratings is its U.S. Government charter and status as a government sponsored enterprise (GSE). Additionally, Fitch continues to believe that Fannie Mae is fundamentally sound, maintains significant financial flexibility and possesses several options to enhance its capital position.

Fitch recognizes that success of Fannie Mae's business model is dependent upon continued and unimpeded access to the capital markets. Any noticeable loss of investor demand could directly affect the company's profitability, liquidity position and capital generation abilities going forward and may carry negative implications on the subordinated debt and preferred stock ratings.

A complete list of Fannie Mae's ratings is as follows:

-- Senior long-term 'AAA', Rating Outlook Stable;

-- Senior short-term 'F1+', Rating Outlook Stable;

-- Subordinated debt 'AA-', on Rating Watch Negative;

-- Preferred stock 'A+', on Rating Watch Negative.