If the government-sponsored enterprises were to be privatized by the Trump Administration, it would have ramifications for their creditworthiness, and that could impact U.S. mortgage and housing markets broadly, Standard & Poor's said.
In that context, S&P is taking a look at how an exit affects the ratings on credit risk transfers from both companies, especially since the counterparty risk profile would change.
With a CRT deal, the credit risk is normally contained in the underlying reference pool of mortgages. But the counterparty risk for the GSEs could become a constraining factor in how S&P looks at those, it said in a report on the topic.
The commentary
"The impact of GSE privatization would depend on whether the U.S. would provide support to the GSEs or their obligations, including the [mortgage-backed security] and CRT transactions they issue," the S&P analysts, led by Jeremy Schneider and John Schuk, wrote. "While privatization could take on various forms, we believe that any housing finance reform would support the existing (and possibly future) senior obligations of the GSEs, given the outsized footprint of the GSE MBS market."
Through July,
While S&P currently rates the senior unsecured debt for both companies at "AA+," that is based on the likelihood of the government providing financial support.
But in separate April 16, 2024 reports, "we assess their stand-alone credit profiles absent governmental support at 'b-' based mainly on their weak capital positions," S&P declared. The authors added that it is premature at this point to look at the GSEs' future creditworthiness after they might be released.
"Hypothetically, if their privatization were to result in [issuer credit ratings] below 'AA+', ratings on the CRT notes could be constrained depending on the notes' potential exposure to untimely interest payments or principal loss when considering an event for which the GSE failed to fulfill its obligations related to the CRT transactions," S&P said.
"We would also consider the sufficiency of the requirements of the eligible account and institution, and investments of the collateral backing the notes when determining whether the note ratings would be constrained directly by the GSE rating (or something higher)."
The report also comments on the effect of a government guarantee on the GSEs' obligations. While some have called for a continuation of the preconservatorship implicit guarantee, the Mortgage Bankers Association
"The market needs an explicit government guarantee on mortgage-backed securities," Broeksmit's prepared remarks said. "Without it, there's no way to ensure the liquidity through all economic cycles that supports affordable single-family and multifamily lending."
If privatization were to take place with any sort of government guarantee, "we would need to understand whether contractual obligations under the GSE CRT transaction documents and agreements fall under purview of such a 'government guarantee,'" S&P said.
"In particular, obligations under the capital contribution agreement and the collateral administration agreement are 'unsecured contractual obligations' while the MBS issued by GSEs represent 'general unsecured obligations.'"
If a guarantee were to be given, S&P's analysis of credit risk transfer deals would consider the guarantor's rating when considering a GSE's obligations when looking at the notes.
