Fannie Mae and Freddie Mac, the big government-sponsored mortgage enterprises, pose a credit risk to the federal government equivalent to a AA-minus rating, according to a new report by Standard & Poor's.

That makes them less risky than they were in 1991-the last time Standard & Poor's rated their risk to the government. Back then, Fannie Mae earned an A-minus and Freddie Mac an A-plus.

Both agencies have substantially increased their mortgage investments in those years. But S&P said the deft use of callable debt by Fannie and Freddie controls the additional interest rate risk.

Indeed, S&P concluded that Fannie and Freddie have such strong competitive positions, credit quality, and risk management that taxpayers are well-protected except in extreme situations, such as a broad-based national depression or times of hyperinflation.

The credit rating was requested by the Office of Federal Housing Enterprise Oversight, which monitors the safety and soundness of the mortgage agencies, as a yardstick for whether Fannie and Freddie hold enough capital to protect taxpayers.

The oversight agency is drafting its own complex risk-adjusted capital standard for Fannie and Freddie.

Indeed, S&P said that Fannie and Freddie hold less capital than would a purely private company rated AA-minus.

But Fannie and Freddie make up for the capital shortfall with strong management, broad national asset diversification, and access to the capital markets even in times of financial stress, Standard & Poor's said.

A senior official at the oversight agency said it would not be as flexible with its capital standard. The 1992 law that the agency must implement requires that Fannie and Freddie hold enough capital to withstand specified interest rate and credit stresses.

Indeed, both companies have shown a marked ability to deliver strong earnings to shareholders regardless of interest rate fluctuations or shifts in loan origination volume.

The law makes no allowances for the competitive advantages that led S&P to give the agencies an AA-minus rating despite low capital, the official said.

Mortgage insurers, whose business is analogous to the guarantee business of Fannie and Freddie, generally carry a AA rating.

The oversight agency now expects its risk-based capital rule to be released for public comment next summer.

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