Feb. 28 (Bloomberg) -- Fannie Mae, the largest source of money for U.S. home loans, may have its bank financial strength rating cut by Moody's Investors Service because of a record $3.55 billion fourth-quarter loss.

The loss ``represents a significant deterioration of surplus regulatory capital'' from $3.9 billion in December, Moody's said in a statement today. Fannie Mae is likely to have ``sizable losses'' in the first half of 2008 and may have a net loss for the year.

Fannie Mae, which accounts for at least one in five home loans, is facing the toughest housing slump in a generation, Chief Executive Officer Daniel Mudd said yesterday, forecasting the market won't bottom until 2009. Regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac yesterday, enabling the companies to increase financing for the housing market.

While Moody's affirmed the Washington-based lender's top Aaa senior-debt rating with a stable outlook, it's reviewing the financial strength rating, which measures the odds of the company needing assistance from shareholders, the government or other external parties. That rating is at B+, the third highest grade.

`Shock Wave Unlikely'

``A downgrade would raise Fannie's borrowing costs, which would be negative for its shareholders, but would be unlikely to send another shock wave through credit markets,'' said Tim Condon, Singapore-based head of research at ING Groep NV.

Fannie Mae lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut recommendations to ``sell'' in the past week on concern that falling home prices will hurt earnings.

Fannie Mae rose 60 cents, or 2 percent, to $27.87 at 10:07am in Frankfurt trading.

``The possible downgrade of Fannie Mae's financial strength is not a surprise to the market, but the fact it posted this much loss has a negative impact,'' said Yasuhiro Matsumoto, a Tokyo- based credit analyst at Shinsei Securities Co. ``The loss suggests there will be more banks that will post bigger losses.''

Fannie Mae yesterday increased its estimates for credit losses and said home prices will fall more than its previous forecast, boosting costs for the $2.3 trillion of mortgages that the government-chartered company owns or guarantees.

The Office of Federal Housing Enterprise Oversight said yesterday it will remove the asset caps imposed in 2006 after the two largest mortgage finance companies revealed $11.3 billion of accounting errors. The agency will still require the companies to set aside reserve capital that is 30 percent more than the usual minimum.

Unconstrained by portfolio limits, the government-chartered companies may buy more loans and bonds, replacing buyers who fled the market amid the collapse in subprime mortgages.

To contact the reporters on this story: Junko Fujita in Tokyo at jfujita@bloomberg.net

Last Updated: February 28, 2008 05:39 EST