One of the world’s top rating agencies warned on Monday that sweeping or high-level changes to Fannie Mae  and Freddie Mac  could unleash a host of unintended consequences on America’s housing-finance system and the global banking sector—just as they enter a new recovery period in the wake of the recession.
Moody’s Investors Service  released an in-depth analysis of the GSEs that said the changes—while likely not immediate—have the potential to cause “wide-reaching implications” across a swath of industries, including housing and finance.
Taken into conservatorship at the height of the 2008 financial crisis, the mortgage giants Fannie Mae and Freddie Mac occupy an outsized role in the u.S. housing sector, facilitating more than half of all home loans in the $11-trillion U.S. residential and multifamily mortgage market.
Experts have warned periodically in the past that incomplete or hasty reforms could undermine their place in the economy.
"Even proposals whose impact would seem straightforward at a high level, could have unintended consequences in practice," Bart Oosterveld, a managing director with Moody's Investors Service, said in a related statement.
The assessment also noted that “most GSE reform options would require legislation and navigating the interests of a large number of stakeholders, and there are many proposals for policy makers to weigh.”
Something that could be affected? Interest rates.
Mortgage-interest rates rise or decline in part on investments in U.S. Treasury debt. Sources shared with us before that any significant change to the GSEs—such as, say,- removing them from federal conservatorship too soon or quickly—could push up rates.
"One possible outcome could be a broad increase in interest rates on new mortgages, which would have meaningful and often negative credit implications across most housing-related sectors,” Oosterveld added.
According to the report, reprivatization of the GSEs could re-trigger some of the crises experienced in the Great Recession, with the loss of an explicit government backstop potentially creating a “less favorable” regulatory space for mortgage-backed securities.
And that, in turn, could shake the foundations underpinning capital and liquidity ratios for banks—most likely including those that pose a systemic risk to the U.S. and global economy in situations involving collapse, Moody’s indicated.
Numerous GSE reform bills have cleared their congressional committees in recent years. It’s unclear whether the current Republican-controlled Congress will move on any legislation to reshape Fannie Mae and Freddie Mac.