Moody’s Says US May Wind Down Fannie, Freddie

Two giant players in the US mortgage finance market share a ‘bleak’ near- to immediate-term outlook as losses continue to mount, according to Moody’s Investors Service. Regulators may begin to wind down government-sponsored enterprises (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE) within the next 18 months, Moody’s said Monday in a global banking analysis report. Fannie and Freddie landed in conservatorship under the Federal Housing Finance Administration in September, and since have drawn a respective $35.2bn and $50.7bn from the government under an agreement with the US Treasury Department, which said it would purchase up to $200bn of senior preferred stock. The Moody’s report, authored by Brian Harris, Craig Emrick and Robert Young, noted bondholders will benefit from the government support. But with the GSEs taking heavy losses, a winding down and ultimate resolution by the US government looks likely. Moody’s noted since Q307, the Fannie and Freddie reported seven consecutive quarterly losses totaling $86.9bn and $63.7bn, respectively. Due to these rising losses, it could take a decade of government ownership before the GSEs can operate as “viable stand-alone entities,” Moody’s said. Instead, the analysts said the government could resolve Fannie and Freddie’s business and then a new organization might be created to take on their role. A replacement entity would likely bear a different organizational structure and would avoid the criticism that would likely arise if Fannie and Freddie were simply resurrected. “This is not bad news for Fannie Mae and Freddie Mac bondholders as the US government has become entwined with these companies and the creation of a new entity to support housing finance likely means the orderly conclusion of Fannie Mae and Freddie Mac,” the report reads, in part. Write to Diana Golobay. Disclaimer: The author held no relevant investments at the time this story was published.