Political uncertainties may rock GSEs performance
Both Fannie Mae and Freddie Mac received a 'negative' rating outlook with analysts still uncertain about the direction of government debt, the ongoing financial debates in Congress and the upcoming debt ceiling debate, according to Fitch Ratings.
Not to mention, Fitch is worried about the U.S. sovereign debt rating, which could have an automatic impact on the government-sponsored enterprises.
While the credit rating agency has stated that it expects to resolve its negative outlook in 2013, the likely potential failure of Congress to reach an agreement on the fiscal cliff and debt ceiling could trigger another ratings review and ultimately a downgrade for the GSEs.
Nonetheless, analysts Ilya Ivashkov, Joo-Yung Lee and Christopher Wolfe of Fitch noted in a financial institutions report that if the debt ceiling was not resolved they would not expect it to have a direct impact on the government-sponsored enterprises because the U.S. Department of Treasury would have some flexibility to fund potential capital draws.
"The indirect impact could be much more meaningful, as a slowdown in the economy would impact unemployment rates and housing prices," they explained.
Additionally, the GSEs remain by far the largest participants in the mortgage market as well as a key role in the housing recovery, with both making up 60% of the mortgage market, according to Fitch.
As a result, an immediate GSE reform – which Senator Elizabeth Warren is pushing for – is not expected by the credit rating agency to happen any time in the near future.
"Given what remains a fragile housing market, the political motivation to pursue far-reaching GSE reform remains limited," the analysts stated.
While incentivizing private investors to re-enter the mortgage market remains a key focus for federal regulators, the results have been lackluster with the private-label securitization market issuing $6 billion in 2012.
While 2013 is expected to bring more creative structures such as credit-linked notes, issuance volume will remain a small percentage of agency issuance, Fitch noted.
"Uncertainty regarding risk retention and bank capital rules is one of the key constraints, and private appetite for mortgage assets is likely to remain muted," the analysts said.
On a similar note, Standard & Poor’s noted that private-label securitization issuance is on track to generate $12 billion in 2013.
"Agency issuance continues to dominate the market, but several issuers are accumulating collateral," according to industry reports.
Furthermore, Fitch noted that increase guarantee fees is a trend that will likely continue in 2013 because it’s one of the more straightforward ways to attract private capital in the mortgage market.
However, the credit rating agency noted that g-fees may need to rise materially before nonagency execution becomes a "convincingly viable alternative."
Additionally, Fitch believes that increasing reliance on g-fees to fund various government spending programs will limit the "political feasibility" of significant reform of the housing industry.
As the size of the legacy mortgage portfolios continues to shrink at both Fannie Mae and Freddie Mac, improving credit quality trends for loans originated after 2008 could help limit future credit losses and lead to a continued stable earnings trend.
For instance, Freddie Mac reported significant yearly as well as fourth quarter earnings on Thursday, posting a net income of $11 billion for 2012 as a result of an improving housing market.
"We played a leading role in helping America’s homeowners last year, working with our lender customers to streamline programs to assist more distressed borrowers while expanding access to affordable mortgage funding through programs like HARP," said Freddie Mac CEO Donald Layton.