Housing-finance system reform could affect US mortgage markets

Reform of the US housing-finance system centered around Freddie Mac and Fannie Mae could affect banks, non-bank mortgage companies, private RMBS, and other housing-related sectors.

Reform Fannie Mae Freddie Mac US mortgage marketsReform of the US housing-finance system centered around Freddie Mac and Fannie Mae, while likely not imminent, could have wide-reaching implications for a range of sectors and entities, including banks, non-bank mortgage companies, the US sovereign and federal home loan banks, says Moody’s Investors Service.

The conservatorship of the two government-sponsored enterprises (GSEs) has run for more than eight years and deciding on a path forward remains one of the largest pieces of unfinished business remaining from the global financial crisis. Officials in the new presidential administration have suggested that addressing their future is a priority, increasing speculation of reforms that could reshape the $11 trillion US residential and multifamily mortgage market.

However, most GSE reform options would require legislation and navigating the interests of a large number of stakeholders, and there are many proposals for policy makers to weigh.

Even proposals whose impact would seem straightforward at a high level, could have unintended consequences in practice. 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” said Bart Oosterveld, a Managing Director with Moody’s Investors Service.

For example, if Fannie Mae and Freddie Mac were reprivatized, rates could rise if higher capital requirements put pressure on the GSEs to raise guarantee fees. In some scenarios, a lack of explicit government backing could also result in less favorable regulatory treatment of the mortgage-backed securities that they guarantee.

Reform could also have broader implications for financial markets, affecting banks’ capital and liquidity ratios, as well as 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.