S&P Cautious on Plans for Fannie Mae and Freddie Mac

The Federal Housing Finance Agency (FHFA) was established in 2008 to mitigate the losses that would be suffered by US taxpayers as a result of the devastation in the home financing market. Fannie Mae and Freddie Mac were both taken into conservatorship and the FHFA sought ways to keep home mortgages available to buyers.

Now the agency has developed a plan to go a few steps further. The goals, according to S&P, are: “to build an infrastructure for the secondary mortgage market, to gradually reduce Fannie and Freddie’s market dominance by simplifying and shrinking their operations, and to maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.”

S&P’s spells out its skepticism:

[W]e have difficulty envisioning how the U.S. government would be able to achieve its historical social policy goals (see the appendix) by transferring mortgage credit risk from the GSEs to private investors. A withdrawal of the GSEs’ outsized role in U.S. mortgages would likely result in higher mortgage rates, less credit available to borrowers as lenders seek higher-quality borrowers, and a smaller mortgage market absent any government guarantees or loss-sharing agreements. The size of the mortgage market could also be affected as new securitization requirements under the Dodd-Frank Act (DFA) force risk retention in the form of higher capital by issuers.

S&P continues to assign a ‘AA+’ rating to Fannie and Freddie because it is the company’s opinion that “the likelihood of the U.S. government (AA+/Negative/A-1+) providing timely and sufficient extraordinary support to Fannie and Freddie’s senior unsecured obligations in the event of financial distress is almost certain.”

The S&P report is available here.