Treasury Secretary Bessent’s cautious remarks about the prospect for GSE reform heighten industry skepticism about the release of Fannie Mae and Freddie Mac from conservatorship.
Obstacles like how to deal with the implicit guarantee and excessively high capital requirements make it unlikely that the GSEs will exit conservatorship under Trump, though the chances are higher than before his election.
The debate over how to end the conservatorships of Fannie Mae and Freddie Mac hinges on whether rating services would downgrade the GSEs if they exit without an explicit government guarantee.
Critics argue that, if Fannie Mae and Freddie Mac are released from conservatorship without an explicit government guarantee, MBS investors will demand wider spreads to cover the added credit risk.
Residential MBS transactions will likely experience a spike in delinquencies, but performance will return to pre-storm levels within a year, according to Moody’s.
Fitch Ratings sees relatively smooth sailing for residential MBS this year while times are tough in the CMBS market, and the worst could be yet to come.
The Fed could start cutting rates in June, according to projections by industry analysts. The Fed is also moving toward slowing the runoff of its holdings of Treasury securities and MBS.
The creation of a U.S. sovereign wealth fund could grease the skids for an end to the conservatorships of Fannie Mae and Freddie Mac.
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