A ratings agency report indicates that reforming the government-sponsored enterprises could have wide-reaching implications for a range of sectors and entities.
A potential reform of the U.S. housing finance that is centered around Fannie Mae and Freddie Mac is possible but not likely imminent.
The pair of secondary mortgage lenders were at the center of the financial crisis and thrust into conservatorship in September 2008 by the Federal Housing Finance Agency.
But more than eight years later, both GSEs remain in conservatorship, and their resolution remains one of the largest pieces of unfinished business remaining from the global financial crisis, according to Reform of Fannie Mae and Freddie Mac Has Potential to Reshape US Mortgage Markets from Moody’s Investors Service.
With the Donald J. Trump administration suggesting that addressing their future is a priority, speculation is increasing about reforming the $11 trillion residential and multifamily market.
But any reform would require legislation and consideration of a large number of stakeholders.
“Even proposals whose impact would seem straightforward at a high level, could have unintended consequences in practice,” Moody’s Investors Service Managing Director Bart Oosterveld said in the report. “One possible outcome could be a broad increase in interest rates on new mortgages, which would have meaningful and often negative credit implications across most housing-related sectors.”
Among the possibilities is returning Fannie and Freddie to private companies. In this case, higher capital requirements could force the GSEs to raise guarantee fees — increasing interest rates in the process.
A scenario that would remove explicit government backing would potentially result in less favorable regulatory treatment of the mortgage-backed securities that they guarantee.
Moody’s noted that reform
could also have broader implications for financial markets. It could affect banks’ capital and liquidity ratios. It could also impact the supply of “safe” assets for money market funds and corporate treasurers.
“In addition, any down-sizing of the GSEs could remove a source of quasi-regulatory oversight of mortgage documentation, product standards and data,” the report stated.
