Situs Residential: GSE reforms are paying off


Under the direction of the Federal Housing Finance Agency (FHFA), the government-sponsored enterprises (GSEs) have completed a whole host of reforms since being taken into conservatorship. A new report from Fitch Ratings confirms these efforts were worthwhile.

“Both Fannie Mae and Freddie Mac enjoy ‘Above Average’ ratings for their operational risk controls,” said Brian O’Reilly, Managing Director and Head of SitusAMC Advisory and Consulting. “This is the product of a decade’s worth of work.”

Since 2008, the GSEs have made changes to nearly every aspect of their businesses, from leadership and personnel to underwriting standards, loss mitigation requirements, counterparty eligibility, guaranty fees, portfolio size and credit risk transfers.

FHFA has led updates to legacy systems, information security and data management to reduce operational risk. Fannie Mae and Freddie Mac’s post-crisis improvements have resulted in lower operational risk, the Fitch report confirms.

Fitch applauded the GSEs, saying they have “creatively taken advantage of their scale, access to big data and market leverage to improve loan manufacturing quality and ensure seller/servicer compliance with their policies and procedures.”

Fitch reduces projected losses on GSE loans relative to other aggregators in the market. The ratings agency also recently affirmed the GSEs’ AAA Long-Term Issuer Default Ratings, with a Stable Rating Outlook.

According to the report, “The post-crisis enhancements have contributed to the strong credit performance of the loans and a significant reduction in manufacturing defects as measured by quality control results and loan repurchases by sellers.”

“The latest Fitch report is a confirmation that the GSEs have learned from the experiences of the past,” said O’Reilly. “You can’t discuss the state of the GSEs, however, without talking about the prospect of GSE reform, which could have a significant impact on how investors and rating agencies, like Fitch, perceive the stability of Fannie Mae and Freddie Mac.”

In affirming the GSEs’ AAA rating, Fitch said, “If at some point in the future, Fitch views government support as being reduced, particularly though housing finance reform efforts, the ratings of the GSEs could be delinked from the sovereign and downgraded.” The rating agency, however, expressed some doubt about reform occurring in the near term.


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