Government-sponsored enterprises Fannie Mae and Freddie Mac will show strong profitability over the next few years as their asset quality continues to improve, says Moody's Investors Service in its new special comment "Fannie Mae and Freddie Mac: Ample Earnings, Long-term Reform Uncertain." The GSEs will continue to benefit from the improved housing market, and increased top-line growth in guarantee fee income.
"Lower provisions for loan losses have been the primary driver of the GSEs' recent strong earnings and will continue to support their profitability through the second half of 2013," says Moody's Senior Vice President Brian Harris, "However, this contribution to net income will gradually decline as provisioning begins to normalize."
The dramatic rise in guarantee fees -- and resultant profitability -- will drive future performance, says Moody's. In addition, GSE market share remained at historic highs with lenders choosing GSE guarantees for the vast majority of new loan originations due to the GSEs continued cost advantage versus private capital. But the Federal Housing Finance Authority (FHFA) is attempting to contract the GSEs dominance of the housing market, the success of which remains an open question, says the rating agency.
Despite this increased profitability, the GSEs still rely on the US Treasury for future capital needs and GSE reform remains elusive despite much political activity, says Moody's. The rating agency believes that the longer the stalemate regarding GSE reform continues, the more likely the GSEs will remain entrenched in the mortgage finance market.
Finally, Moody's says that both Fannie Mae's and Freddie Mac's Aaa senior debt and Aa2 subordinated debt ratings are likely to move in lock-step with the US sovereign rating, even through any future negotiations regarding the US debt ceiling.