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COVID-19 May Delay Meaningful GSE Reform

Posted by: | Posted on: June 5, 2020

Fitch Ratings says meaningful reform for government-sponsored enterprises will be delayed by the COVID-19 outbreak.

The economic shock triggered by the COVID-19 pandemic has lowered the chance of “meaningful GSE reform over the next couple of years,” the credit rating agency said in a new report.

“At the very least, the coronavirus pandemic has pushed back the timing of releasing the GSEs from government control,” it wrote. “The GSEs’ ability to raise the massive amounts of capital that they would likely need to fully exit government control could be further challenged by the grim and highly uncertain economic outlook.”

The agency also wrote that a capital rule from the Federal Housing Finance Agency gives a framework for the amount of capital that would be required to be held by Fannie Mae and Freddie Mac.

“The re-proposed capital rule would require the GSEs to hold over $240 billion in capital on a combined basis based on Sept. 30, 2019 balance sheet data,” according to the article. “The return on required capital, based on 2019 performance, is less than 9%, excluding the impact of the coronavirus pandemic. This may dampen investor appetite for eventual capital raises, which could be among the largest in history.”

According to Fitch Ratings, it’s unclear how forbearance related to the coronavirus will be treated with the final rule.

“Fannie and Freddie’s current ratings benefit from support provided under the Treasury’s Senior Preferred Stock Purchase Agreements,” it said.

The credit rating agency says it considers the support from those agreements as ”more qualitative than quantitative.” The size of the agreements is “indicative” of strong support from the government, according to the agency.

“If support under the PSPAs were reduced significantly and not offset by other means of support, Fannie and Freddie could be notched down from the U.S. sovereign,” Fitch wrote. “Depending on how the final capital rule is calibrated and assuming Fannie and Freddie were fully compliant with the capital rule, Fitch believes that a stand-alone rating in the ‘A’ category is possible.”

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