Morningstar DBRS Confirms Federal National Mortgage Association's (Fannie Mae) Long-Term Credit Ratings at AAA With a Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed both the Long-Term Issuer Rating and Long-Term Senior Debt credit rating of Federal National Mortgage Association (Fannie Mae or the Company) at AAA. The trend on all credit ratings is Stable. The Company's current position under conservatorship and strong implicit support from the U.S. federal government results in Fannie Mae's final credit ratings being equalized with the Long-Term Local Currency - Issuer Rating of the United States of America (the U.S.), as well as the confirmation of the SA1 Support Assessment.

KEY CREDIT RATING CONSIDERATIONS
Despite the lack of an explicit guarantee from the U.S. government, the Long-Term Issuer rating of Fannie Mae continues to be equalized with the sovereign rating of the United States of America given the very strong and ongoing systemic support in place from the U.S. government. While there has been increased speculation around the potential privatization of the Government-Sponsored Enterprises (GSEs), we view any changes to the current status quo as unlikely for the length of the credit rating outlook period given the complexities and potential far-reaching consequences of such an action, especially considering current macroeconomic uncertainties. The privatization of the GSEs also remains unlikely in the short to medium term, in our view, as the pursuit of any well thought out solution will require ample implementation time given the need to minimize the possibility of any negative repercussions and/or degree of transitional disruptions to the world's largest housing market.

In our view, Fannie Mae remains essential to the functioning of the U.S. housing market given its scale and critical role it serves. The equalization also considers the Company's irreplicable market position, access to funding commitments from the U.S. Treasury, and conservatorship status under the Federal Housing Finance Agency (FHFA). Fannie Mae is systemically important given its role in supporting the very large U.S. housing finance ecosystem, which would likely experience higher levels of volatility in the absence of this support, resulting in more severe/disruptive systemic shocks across the broader U.S. economy during periods of stress. We also consider the Company's strong market position (the two housing GSEs effectively operate as a duopoly) given its entrenched market position and scale economies (driven by its large established platform). There are currently no other entities that could readily perform this specific role outside of the two housing GSEs, in our view.

Fannie Mae's position, not only in the U.S. housing market but the global debt capital markets, was also a consideration in the assessment of the Company's essentiality. The Company's debt is widely held throughout the global financial system, likely incentivizing the U.S. government to help avoid any defaults given the potential significant repercussions. Indeed, as of March 19, 2025, the U.S. Federal Reserve Bank held $2.2 trillion (33% of the Fed's total balance sheet and second only to U.S. Treasuries of $4.2 trillion) of agency debt and agency MBS.

We also took into account Fannie Mae's high degree of access to financial support given the existing funding commitment with the U.S. Treasury, which affords the Company the ability to draw funds should net worth turn negative. Although the drawable limit remains ($113.9 billion as of YE 2024), continued support from the U.S. government is assumed to be timely should it be necessary. Fannie Mae also has strong government oversight given its conservatorship status under the FHFA. The FHFA reconstituted the Board after becoming conservator, directing the Board to owe its fiduciary obligations solely to the FHFA (and not to the Company or shareholders). The Director of the FHFA (William J. Pulte) is currently serving as Chairman of the Board. Any new product offerings also continue to require FHFA approval, effectively limiting the scope of the Company's current and future business activities.

The Stable trend primarily reflects that of the U.S. sovereign credit rating. Given the complexities of privatization, level of capital required to meet regulatory capital standards put in place in 2021, and the current U.S. housing market that is facing substantial headwinds, we foresee Fannie Mae remaining in conservatorship for the length of the credit rating outlook period.

CREDIT RATING DRIVERS
Given the current credit ratings of Fannie Mae are at the highest level in our long-term rating scale, there is no potential for a credit ratings upgrade. Conversely, the credit ratings would be downgraded should we lower the Long-Term Local Currency - Issuer Rating of the United States. The credit ratings would also be downgraded should we view the support from the U.S. Treasury to have been diminished, or the expectation of support to be less timely.

CREDIT RATING RATIONALE
Franchise Strength
Fannie Mae has a unique franchise given the implicit backing from the U.S. government. The Company does not originate loans or lend directly to borrowers, but it did own/guarantee approximately 26% of all U.S. residential mortgage debt outstanding (as of September 30, 2024), reflecting a significant share of the market and the scale of its operations. The Company's business model revolves around guaranteeing payments on the mortgage loans it acquires/securitizes, and the mortgage-backed securities it issues are highly sought after in the global capital markets. Fannie Mae operates across two business segments (single family and multifamily), with single family accounting for most of its net revenues (84% in 2024). The Company must also obtain FHFA approval prior to any new product offerings, resulting in limitations on its current and future business activities. As Fannie Mae's business is closely tied to the cyclical U.S. housing market, various macroeconomic factors can also significantly impact its financial results (interest rates, home prices, housing activity, GDP, etc.).

Earnings Power
Fannie Mae has substantial earnings power given the size of its operations. Nonetheless, the Company can also be subject to a high level of volatility given its ties to the cyclical U.S. housing market. Fannie Mae's primary source of net interest income (NII) is the guaranty fees received for managing the credit risk on loans underlying the Company's agency MBS. Given the business model revolves around securitization (as opposed to direct lending/loan origination), borrower relationships are more transactional, though services are provided under a highly visible brand.

Fannie Mae reported 2024 net income of $17.0 billion (down 2% YoY), driven primarily by a lower benefit for credit losses in 2024. The Company's single-family acquisitions were up 3% YoY (from $316 billion in 2023 to $326 billion in 2024), driven by higher refinance acquisitions (from $43.2 billion to $56.1 billion) that were partially offset by lower purchase acquisitions (from $272.8 billion to $269.9 billion), while multifamily business volume was up slightly YoY (from $53 billion to $55 billion), reflecting increased market activity in Q4 2024.

Risk Profile
Fannie Mae is exposed to both national and regional housing downturns given its significant share of the U.S. housing market. Nonetheless, the Company's single-family guaranty book is geographically diversified, and credit quality has remained strong with serious delinquency rates (SDQs) remaining near historical lows of 56 basis points (bps) at YE 2024. Credit has also remained relatively benign in the Company's multifamily guaranty book, though SDQs have ticked up slightly (from 46 bps at YE 2023 to 57 bps at YE 2024), largely driven by a portfolio of approximately $600 million of ARM loans that became seriously delinquent during Q3 2024. The Company manages credit risk by transferring a portion of its single-family credit risk to third parties through mortgage insurance and credit risk transfer transactions, as well as utilizes credit enhancements (both front-end and back-end) across its multi-family credit exposures.

The Company has sound operational risk oversight and has maintained a good track record of identifying and managing these risks. Fannie Mae has a comprehensive and well-designed risk management framework for setting its risk appetite and monitoring ongoing conditions. Cybersecurity risk has significantly increased in recent years and the Company has, from time to time, been the target of attempted cyber-attacks. However, there have been no reported breaches to date.

Funding and Liquidity
Fannie Mae has developed a broad and deep funding base to finance its mortgage purchases, which comprises of a wide range of securities tailored to meet the needs of the global investor base. With 97% of total debt comprised of securitization related debt, the majority of the Company's balance sheet is encumbered. Nonetheless, as the Company's agency MBS amortizes with the underlying pools of mortgages, most of its funding base is well-aligned with its assets. The remaining funding is issued as unsecured corporate debt, the majority of which is fixed rate (73% of total), with maturities that are laddered appropriately.

In a severely stressed operating environment, Fannie Mae is unlikely to meet its sizeable liquidity requirements (given the scale of its operations) without support from the U.S. Treasury. The Company had $11.2 billion of short-term corporate debt, and $132.4 billion in its corporate liquidity portfolio (consisting of $38.8 billion in cash and equivalents, $77.6 billion in U.S. Treasury securities, and $16.0 billion in securities purchased under repos).

Capitalization
While Fannie Mae is gradually rebuilding its capital base, capital levels remain substantially below regulatory requirements. Although the Company is subject to the enterprise regulatory capital framework (ERCF), capital requirements have been waived during conservatorship. While Fannie Mae had a GAAP positive net worth of $95 billion at YE 2024, the ERCF excludes the stated value of the senior preferred stock ($120.8 billion), as well as a portion of deferred tax assets, resulting in the Company being significantly undercapitalized. Indeed, at YE 2024, the shortfall to adjusted capital requirements totaled $227 billion. As a result, the Company reported negative regulatory capital ratios given the deficits across each tier of capital. Given covenants under the PA, Fannie Mae also does not have access to equity funding except through draws from the U.S. Treasury.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the United States of America are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of United States of America are discussed separately at https://dbrs.morningstar.com/issuers/12866. However, there were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodologies have also been applied:

Global Methodology for Rating Government-Related Entities (April 15, 2024) https://dbrs.morningstar.com/research/431178

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc., U.S. Federal Reserve, Federal Housing Finance Agency and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

This is the first credit rating action since the Initial Rating Date.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: No
With Access to Internal Documents: No
With Access to Management: No

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Eric Chan, Vice President,
Rating Committee Chair: David Laterza, Associate Managing Director,
Initial Rating Date: April 18, 2024

For more information on this credit or on this industry, visit dbrs.morningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277