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Reuters - Moody's Investors Service on Friday cut its ratings on the preferred stock of Fannie Mae and Freddie Mac on concern that market turmoil has hurt their access to capital.

Moody's Investors Service on Friday cut its ratings on the preferred stock of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) on concern that market turmoil has hurt their access to capital.

The rating company also slashed a rating that suggests a greater likelihood the mortgage finance giants will require "extraordinary financial assistance" from the government or shareholders.

Moody's lowered the preferred stock ratings on the companies to "Baa3" from "A1," and the bank financial strength rating to "D-plus" from "B-minus," it said in a statement.

Investors have pummeled common and preferred shares of Fannie Mae and Freddie Mac over the past two months as speculation grew that the pace of losses on their mortgage holdings and guarantees is quickly eroding their capital. Many analysts expect the government will have to exercise its new abilities to recapitalize the companies, effectively "nationalizing" them.

"Given recent market movement, Moody's believes these firms currently have limited access to common and preferred equity capital at economically attractive terms," Moody's analysts said, of the bank financial strength rating downgrade.

Moody's added that Fannie Mae and Freddie Mac are restricted in their ability to support the housing market, which is in its worst downturn since the 1930s.

Moody's affirmed the companies' "Aaa" senior debt ratings, and the "Aa2" rating on their subordinated debt.

Senior and subordinated debt both benefit from implicit "systemic" support of the companies given their central role to the mortgage and housing markets. However, Moody's downgraded the outlook on subordinated issues to "negative" from "stable."

Subordinated debt yield spread premiums widened sharply on Monday after a newspaper report suggested a government bailout for Fannie Mae and Freddie Mac was imminent, and that would put subordinated debt at risk. The spreads have since narrowed.

(Reporting by Al Yoon; Editing by Tom Hals)