When just about all the new conventional mortgage-backed securities that can be created and sold are being purchased by the Federal Reserve, it should be no surprise at all that the primary securitization outlet has a warning about what would happen if a Fed tapering begins to take place. This is the case in the latest Fannie Mae economic and housing outlook from the Federal National Mortgage Association (FNMA). Fannie Mae said that the economy has gained steam but that the expected Fed tapering is a downside risk to growth.

Fannie Mae’s Economic & Strategic Research Group is forecasting that the economy and housing market will remain on track, with gross domestic product (GDP) expected to come in at approximately 2.0% in 2013. The new outlook puts 2014 GDP growth at 2.6% as the fiscal drag is waning. While companies like Walmart and Target are lowering retail sales expectations, Fannie Mae is maintaining that consumer spending and the employment sector appear to be growing sustainably.

Again, Fannie Mae is adding that the growth measures “may help to offset downside risks from the expected tapering of the Federal Reserve’s securities purchases.” As a reminder, Fannie Mae is a government sponsored entity (GSE), so some consider it the government even if that is not entirely true.

Fannie Mae’s August outlook is little changed from July. It says on the tapering effect and the risks:

The biggest risk to this forecast is the expected reduction in the Federal Reserve’s asset purchases, which would likely put additional upward pressure on interest rates and lead to some volatility in capital markets. Although the nature and timing of the tapering are still to be determined, we continue to expect the Fed will scale back its asset purchases and end the program by spring. In addition, we may see some fiscal tightening this fall as the debate over federal spending and the debt ceiling takes place.

Fannie Mae projects that the additional growth in the housing market recovery is expected to be modest rather than robust. It points out that the rise in mortgage rates has led to a drop-off in refinance activity but does not appear to have had much impact on home purchase activity so far. On home prices it said:

Home prices are expected to continue to climb, although the pace should slow significantly from the dramatic levels seen during the past 12 months.

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