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Moody’s: Increased competition for Fannie, Freddie would be a credit negative

Rates credit impact of Calabria's suggestions for GSE reform

Last week, Federal Housing Finance Agency Director Mark Calabria outlined his GSE reform wish list for lawmakers in his first annual Report to Congress since taking the helm at the agency.

In it, Calabria urged Congress to take steps to increase competition for Fannie Mae and Freddie Mac, stating that more competitors in the space “would reduce market reliance on either Enterprise and enhance market stability, as well as benefit homebuyers.”

But Moody’s Investors Service says increased competition would also amount to a credit negative for both agencies.

“Increased competition would reduce the residential mortgage market’s reliance on Fannie and Freddie and reduce their systemic importance within the U.S. financial system, a credit negative for Fannie’s and Freddie’s individual credit profiles,” Moody’s wrote in a paper published Sunday.

Fannie manages 27%-28% of all residential mortgages while Freddie has 17%-18%, Moody’s estimates, noting that these sizable market shares demonstrate their crucial role in anchoring the mortgage market, especially in prolonged periods of uncertainty.

“A severe reduction in either companies’ market share would reduce their centrality to the U.S. housing finance market,” Moody’s said. “A materially lower market share would erode the creditworthiness of the two companies and could lead us to reduce our support assumptions for Fannie and Freddie.”

More competitors might also lead to weaker underwriting standards or price competition, Moody’s wrote, which would both be credit negatives for the GSEs' creditors.

“How negative this would be depends on how quickly, and predictably, their market share declined; how clear policymakers would be about their objectives; and the path forward to a reformed US housing finance market, including the level and form of government support,” the report stated.

But Calabria’s other suggestions would be a credit positive for the GSEs, Moody’s determined.

Among his other recommendations, Calabria asked Congress to strengthen FHFA’s powers so that it could better oversee the third parties it contracts for business – a move Moody’s said would have a positive effect on the GSEs’ creditors.

And, Calabria’s request that FHFA’s have flexibility in determining its capital requirements, rather than sticking to statutory mandates, would also be a positive, according to Moody’s.

“Providing FHFA additional flexibility to set the capital rules, in particular with respect to determining eligible capital components, would allow FHFA to develop stronger capital requirements, a credit positive for Fannie's and Freddie's creditors because it would increase their ability to absorb unexpected losses,” the investor service concluded.


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