Fitch Ratings affirmed the long-term Issuer Default Rating of both Fannie Mae and Freddie Mac, but it downgraded Fannie Mae’s preferred stock rating and put Freddie Mac’s rating on rating watch negative.

“Today’s affirmation of Fannie Mae’s long-term IDR and senior debt rating reflect the high probability of external support becoming available and the company’s importance to the U.S. housing market,” Fitch explained, noting that the US Treasury has recently expressed the potential for explicit support to maintain the confidence and stability of the financial markets.

Fitch’s downgrade of Fannie Mae’s preferred stock reflects the higher proportion of preferred stock to core capital in the wake of the recent erosion of core capital due to operating losses. “As a result, Fitch believes that preferred shareholders have greater exposure to potential losses,” it says.

The rating agency is also maintaining the Negative Rating Watch on Fannie Mae’s preferred stock to reflect the uncertainties surrounding the U.S. Treasury’s plans. Fitch says it is seeking greater clarity around such contingency plans to evaluate the impact on preferred shareholders under the unlikely scenario that a capital injection is needed. Fitch is also concerned that Fannie Mae’s financial flexibility is more limited given the current equity market pressures.

It cited the same rationale for affirming Freddie Mac’s long-term IDR and senior debt rating, and in placing Freddie Mac’s preferred stock on Rating Watch Negative. “While Fitch believes the Treasury has restored investor confidence, Freddie Mac faces some execution risk surrounding its upcoming equity raise due to the current market environment,” it says.