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UPDATE 1-Fannie Mae bank rating cut, preferred may be cut

(Updates with S&P, Fitch actions)

NEW YORK, May 6 (Reuters) - Moody's Investors Service on Tuesday downgraded its bank financial strength rating on Fannie Mae FNM.N by one notch after the largest provider of U.S. home financing posted its third straight quarterly loss.

Two other agencies, Standard & Poor’s and Fitch Ratings, warned they may cut Fannie Mae’s preferred stock rating. All three agencies kept their “triple-A” rating on Fannie Mae’s senior debt, however.

Fannie Mae on Tuesday posted a $2.51 billion net loss, after payment of preferred dividends, for the first quarter, compared with an $826 million profit in the year-ago period. For details, see [ID:nN06456763].

Moody’s cut Fannie Mae’s bank financial strength rating by one notch to “B” from “B-plus.” It also placed a negative outlook on the bank financial strength rating and Fannie Mae’s “Aa3” preferred stock rating, indicating a downgrade is more likely over the next 12 to 18 months.

In affirming Fannie Mae’s “Aaa” senior debt rating with a stable outlook, Moody’s said the company benefits from “very high systemic support because of its central role in mortgage finance in the United States.”

Federally chartered Fannie Mae said it would cut its common stock dividend to preserve cash and raise $6 billion in new capital because it sees significant credit losses stretching into 2009.

“These charges could reduce its financial flexibility despite the planned capital issuance,” Moody’s said in a statement. Moody’s said its ratings assume that cumulative credit losses in 2008 and 2009 for Fannie Mae’s portfolio could reach as high as $9 billion.

The ratings also incorporate a “stress case” scenario where Fannie Mae’s net loss in 2008 could reach $8 billion, Moody’s said. The rating agency said it expects Fannie Mae to meet its regulatory capital requirement even at the stressed level, however.

The negative outlooks reflect the possibility that Fannie Mae’s total credit costs could exceed Moody’s stress expectations because of the unprecedented deterioration in the residential mortgage market, the agency said.

S&P said it may cut Fannie Mae’s “AA-minus” preferred stock and subordinated debt ratings because of the company’s weak core earnings and high mortgage credit losses. In making its decision, S&P said it will review Fannie Mae’s capital strength, commitment to capital and core earnings outlook for the next year.

The rating could be affirmed or lowered one notch to “A-plus,” S&P said.

Fitch also put Fannie Mae’s preferred stock “AA-minus” rating on for downgrade. Fitch said the proportion of preferred stock to total capital may grow from already elevated levels, exposing preferred shareholders to higher losses. (Reporting by Dena Aubin; Editing by Jonathan Oatis) (dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters Messaging: dena.aubin.reuters.com@reuters.net))

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