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The lower ratings on the bonds reflect our view that the lease rental payments supporting the various bonds, while subject to appropriation, are backed by the full faith and credit of the U.S.
FHA guarantees cover nearly all the losses from loans that have defaulted, with FHA assuming the risk of recouping its expenses through the sale of the foreclosed property. The issuer, through the loan servicer, receives the claim from FHA for the outstanding balance of the loan and other expenses from FHA, but has no claim to the sale proceeds. Therefore in the foreclosure process on an FHA loan the issuer’s entire exposure is exclusively to FHA.
We believe there is a moderate likelihood that public housing authorities would benefit from government support in the event of an extraordinary circumstance. Nonetheless, in our view the lower U.S. sovereign rating no longer supports a one-notch upgrade of the stand-alone credit profile for these affected ratings.
In our view, the credit strength of these bonds is basedsolely on the guarantee of FHA and, as such, will reflect the ratings of the U.S. government of which the FHA is an agency.
The ‘AA+’ rating on the affected debt issues is based on our view of MBS enhancements that make mortgage payments in the event of a mortgage default. In the cases of the affected issues, the enhancement is irrevocable and is in place until bond maturity. Payment on the MBS enhancements provided by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) are guaranteed by those entities. The ratings on those
issues reflect our view of the support likely to be provided by the U.S. government. Payment on the MBS enhancements backed by Governmental National Mortgage Association (Ginnie Mae) is backed by the full faith and credit of
the government, and the ratings on those issues reflect the rating of the U.S. government.
The rating on the affected debt issues is based on the rating on either Fannie Mae or Freddie Mac, which either guarantees direct payment on the bonds, or in some circumstances, guarantees mortgage payments in the event of a mortgage default. In the cases of the affected issues, the guarantee is irrevocable and is in place until bond maturity. As such, the bonds carry the rating on Fannie Mae or Freddie Mac.
The number of sovereign rating actions taken by Standard & Poor’s Ratings Services over the past several months has led to heightened interest in our approach to issuing ratings that are above the sovereign’s for government-related entities, banks, insurers, corporations, state, regional, or local governments, and securitizations. Investors have asked for clarification on our methodologies and examples of how we put them into practice. So it seems appropriate to summarize the criteria we’ve published on the topic, and to answer the questions we receive most frequently from market participants.
None of the banks we rate in the U.S. has an issuer credit rating higher than the U.S. sovereign rating. The sovereign downgrade does not alter the government support assumptions that we factor into our ratings on four banks.
The sovereign downgrade will not affect the ratings or stable rating outlooks on the six U.S.-domiciled highest-rated nonfinancial corporate issuers: Automatic Data Processing Inc. (ADP; AAA/Stable/A-1+), ExxonMobil Corp. (AAA/Stable/A-1+), Johnson & Johnson (AAA/Stable/A-1+), Microsoft Corp. (AAA/Stable/A-1+),General Electric Co. (AA+/Stable/A-1+), and W.W. Grainger Inc. (AA+/Stable/A-1+).
Standard & Poor’s Ratings Services today stated that its ratings on 744 structured finance transactions (the affected transactions) remain on CreditWatch negative following the loweringof the long-term credit rating on the United States of America to ‘AA+’ with anegative outlook from ‘AAA’ and the removal of the long-term and short-termratings from CreditWatch negative.
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