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Fitch: GSE reform won’t hurt Fannie, Freddie ratings

Ratings will remain intact, at least in the near term

With word circulating that a plan for GSE reform is imminent, Fitch Ratings Agency released a review of what might happen to the credit ratings of Fannie Mae and Freddie Mac upon the release of the Treasury Department’s anticipated roadmap.

The good news for those gunning for an end to the conservatorship?

Fannie’s and Freddie’s ratings shouldn’t take too much of a hit – at least, not right away, according to Fitch.

Fitch concluded that any reform plan set forth by the Treasury Department “will likely not result in near-term downgrades.”

The agency also said the plan might include a roadmap to end the net-worth sweep with the Treasury and might allow Fannie and Freddie to begin retaining capital as a first step toward the conservatorship’s end.

Any change to the GSEs’ ratings would require a change in Fitch’s view of their support from the government, the agency said, adding it thinks such a shift would be unlikely over the next one to two years.

“As long as Fannie and Freddie remain in conservatorship and continue to be supported by the substantial available funding under the [Preferred Stock Purchase Agreement], their ratings will continue to be linked to the U.S. sovereign rating,” Fitch wrote.

“In the absence of a formal support agreement, Fannie’s and Freddie’s ratings would be based solely on Fitch’s assessment of the stand-alone creditworthiness of the respective entities,” it added. “Fitch estimates Fannie and Freddie’s likely stand-alone rating could be in the ‘A’ to ‘AA’ category depending on the level of capitalization.”

That said, Moody’s Investor Service published a different view of the credit impact of GSE reform in June, analyzing the long-term impact of the end of conservatorship and concluding that it would be a credit negative for the GSEs.

But it appears Fitch’s analysis is only considering the near-term impact of the Treasury’s plan, which may not come to light as soon as some expect.

Fitch said that while the Treasury has indicated that it is aiming to release its plan by September, it thinks the timeline may be pushed back, and added that a lack of support might hamper progress.

“FHFA’s Calabria has continued to target reform; however, lack of bipartisan support could challenge Congress’ ability to enact meaningful legislation,” Fitch said.

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