Fitch: Private Market Stymied by GSEs’ Role in Recovery

As the private sector struggles with regulatory uncertainty, Fannie Mae and Freddie Mac will continue to maintain their dominant role in the housing market, according to a ""report"":http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700032 from ""Fitch Ratings"":http://www.fitchratings.com.

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Since the GSEs act as key players in the market's fragile recovery, political motivation for far-reaching GSE reform has been limited, the rating agency explained.

Fitch noted the GSEs have seen stronger operating performance over the last three quarters of 2012. Amid the backdrop of rising home prices, ""Fannie Mae"":https://themreport.com/articles/fannie-mae-pulls-in-18b-q3-2012-11-08 and ""Freddie Mac"":https://themreport.com/articles/freddie-mac-posts-11b-profit-in-2012-2013-03-01 have been able to fund dividends to Treasury without requiring additional draws in recent quarters.

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Although regulators and politicians have emphasized the need for the private sector to enter the mortgage market, Fitch said ""results have been disappointing."" For example, private label-securities issued in 2012 totaled $6 billion and nine out of 10 mortgages still having some form of government backing, according to Fitch.

In order to attract private capital, Fitch says guarantee fees (g-fees) would need to increase. In 2012, the GSEs have seen two g-fee hikes, and the rating agency expects the trend to continue into 2013.

Though, ""Fitch believes that g-fees may need to rise materially before non-agency execution becomes a convincingly viable alternative.""

The agency noted ""hurdles"" still need to be overcome before the private capital reenters the market.

""Bank balance sheet capacity for mortgage assets is constrained by impact on leverage ratios, Basel III liquidity rules, interest rate risk implications, and continued regulatory uncertainty,"" Fitch stated.

Fitch also added uncertainty surrounding risk retention rules, as well as the limited supply of high-quality mortgage loans, have also led to limited activity from the private sector. Overall, Fitch says appetite from the private sector is likely to stay ""muted.""