–Bondholders Insulated from Reform that Would Impact GSE Credit Quality

By Yali N’Diaye

WASHINGTON (MNI) – U.S. ratings agency Moody’s said in a research
note Monday that the reform of Fannie Mae and Freddie Mac might end up
being “modest” should it be deferred until after the November 2012
presidential elections, a move that it believes is a “real possibility.”

This outlook for the reform, combined with the government’s desire
to preserve the availability of 30-year fixed rate mortgages, is
“limiting its ability to stop supporting the GSEs,” and insulates
bondholders from a housing reform “that would negatively affect GSE
credit quality,” analyst Brian Harris wrote.

A modest reform would already be a big step, since it implies a
consensus is reached, another thing the rating agency considers very
unlikely.

“The most likely scenario is a lack of consensus regarding GSE
reform and a drawn out process,” Harris wrote.

“The debate around the macroeconomic role of housing in the U.S.
market and the political cycle’s tight time constraints lead us to
believe that there will be limited progress until after the November
elections, leaving a year before the presidential election cycle
begins,” he continued.

And after these elections, prospects for major reforms aren’t more
encouraging.

Should the reform be pushed back until after the next presidential
election, “we believe the composition of reform legislation in 2013 will
tend toward modest change rather than more extensive restructuring,” the
analyst wrote.

And by this time, the expected improvement of Fannie Mae and
Freddie Mac’s financial situation as well as a “much stronger” economy
— including the housing market — will have largely diminished the
“need” and the “urgency” for reform.

“This suggests that the status quo, and government support of
Freddie and Fannie, will prevail,” the analyst concluded.

The government will also want 30-year fixed rate mortgages to
remain available, implying a continued support for the housing market,
Moody’s said.

The government has already indicated it will continue to play a
role in housing finance.

Against this backdrop, bondholders of Fannie Mae and Freddie Mac
should not worry as Moody’s expects them to be “insulated” from reforms.

So far, the administration has made clear it could not withdraw its
support for the GSEs in the short term, and has, on occasion, relied on
the mortgage giants to implement government’s measures addressing
foreclosures.

Congress itself has been cautious, ordering Treasury to conduct a
study and come up with recommendations the beginning of 2011, but
falling short of imposing a deadline for ending the conservatorship.

** Market News International Washington Bureau: 202-371-2121 **

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