Fitch: Indirect Impact of Sequester Could Hurt GSEs

A report from Fitch Ratings on Fannie Mae and Freddie Mac said the ongoing U.S. fiscal policy debate is not expected to have a direct impact on the two government-sponsored enterprises.

The ratings agency added that with the two companies’ recent improvement in performance, it does not seem likely that either would need to draw from the Treasury any time in the next several quarters to fund a net-worth deficit.

But the bad news is in what Fitch termed the indirect effect of the sequester, which it said is “likely to be much more significant. Delinquencies are most closely tied to unemployment trends. Therefore, another recession is likely to result in additional delinquencies from 2005-2008 vintages and reverse recent improvement in loss severity. Both of these would likely require additional loan loss reserves and draws from the Treasury.”

As for the return of private capital to the mortgage market, Fitch said that while increasing GSE guarantee fees is one of the more straightforward ways of doing that. But it declared those g-fees “may need to rise materially before nonagency execution becomes a convincingly viable alternative.”

Since the agencies play such a dominant role right now in housing finance, Fitch said “given what remains a fragile housing market, the political motivation to pursue far-reaching GSE reform remains limited.”