Fitch: GSEs Play Dominant Market Role Amid Political Uncertainty

NEW YORK--()--The two U.S. housing government sponsored entities (GSEs), Fannie Mae and Freddie Mac, continue to play a key role in the U.S. housing market recovery, thus limiting the motivation for wide-reaching GSE reforms in the near future, according to a Fitch Ratings report.

Fitch notes that both companies have shown operating performance improvements during the first nine months of 2012. These improvements are primarily driven by the high-quality business written since 2008, a recovery in housing prices, and a more stable interest rate environment.

Incentivizing private investors to reenter the mortgage market remains an ongoing focus for regulators and politicians. Fitch notes, however, that results have been disappointing, as nine out of 10 mortgages still have some form of government backing. Uncertainty regarding risk retention and bank capital rules continues to be an important constraint and private appetite for mortgage assets is likely to remain muted.

Increasing guarantee fees (g-fees), a trend Fitch expects to continue in 2013, is one of the more straightforward ways to attract private capital into the mortgage market. However, Fitch believes that g-fees may need to rise materially before non-agency execution becomes a convincingly viable alternative.

Fitch affirmed its 'AAA' ratings on Fannie Mae and Freddie Mac and maintained a Negative Outlook in November, 2012. The ratings for both entities are directly linked to the U.S. sovereign rating, based on the government's direct financial support.

The GSEs remain regular issuers in the capital markets, benefiting from the implicit U.S. guarantee and ongoing explicit acts of financial support from the government. Fitch believes that the recent improvements in credit and financial performance make it less likely the GSEs will require material support from the Treasury going forward.

The full report 'U.S. Housing Finance GSEs: Where to From Here' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research U.S. Housing Finance GSEs: Where to from Here

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