Will Fannie Mae, Freddie Mac survive the coronavirus crisis?

Fannie Mae and Freddie Mac have taken several big steps to help homeowners stay in their homes despite the coronavirus-related job losses. However, those measures complicate the government-sponsored enterprises’ process of getting out of conservatorship and recapitalizing.

So how will the coronavirus affect Fannie Mae‘s and Freddie Mac’s progress toward release, and will they survive this crisis?

Fannie and Freddie impacted by mortgage market moves

The CARES act, which is the federal government’s biggest aid package ever, includes assistance for homeowners with federally backed loans. They can request that their payments be put on hold for up to a year. No documentation is required to request forbearance. As a result, analysts from ACG Analytics said in an emailed note that there is a “moral hazard” because homeowners face the prospect of not paying their mortgages for a year.

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Federal Housing Finance Agency Director Mark Calabria told CNBC that so far, the impact has been seen on a little more than 1% of the agency’s book. He also said they expect the number of people asking for delays in their payments to triple in May. That would result in forbearance being extended to between 3% and 5% of Fannie’s and Freddie’s books.

Because of the credit quality in the mortgages backed by Fannie Mae and Freddie Mac, ACG doesn’t expect the coronavirus crisis to have a serious impact on the GSEs. The firm noted that Calabria has said repeatedly that as long as the coronavirus pandemic doesn’t last more than two or three months, Fannie Mae’s and Freddie Mac’s exit from conservatorship won’t be delayed more than a few months.

They also pointed out that subprime mortgages are mostly backed by the Federal Housing Administration rather than Fannie and Freddie, like they were in 2008.

Coronavirus impact on Fannie Mae’s and Freddie Mac’s retained earnings

They added that the delay of several months will be caused by the delay in earnings as borrowers delay their payments. They also note that Calabria mentioned “crisis illustrated flaws” as a new “political motivation.” The coronavirus pandemic has made it even more apparent that Fannie Mae and Freddie Mac must build up capital on their balance sheets. Having capital is essential for dealing with issues like the current crisis.

ACG Analytics noted that a new preferred stock purchase agreement that stops the net worth sweep is needed. Such an agreement should also consider the government’s senior preferred shares paid and include the overpayment to the Treasury of a prepaid asset of $30 billion.

This agreement would enable the government to settle the litigation concerning the GSEs and move forward on the path to recapitalize and release them from conservatorship. Such a move would allow both Fannie and Freddie to have enough capital to keep the housing market stable during the next economic downturn.

Coronavirus causes some bumps in the road for Fannie Mae

In a note this week, Dick Bove of Odeon Capital noted that Fannie Mae and Freddie Mac are the only firms with the money to help servicers out and make the payments homeowners aren’t making because the loans aren’t in default. He also noted that the GSEs could end up with hundreds of millions of dollars in losses at a time when they are attempting to build capital.

Despite Calabria’s statement that the GSEs’ process of recapitalization and release won’t be delayed more than a few months, Bove advises investors to “forget any recap and release for the foreseeable future or until the default threat passes.”

ACG has said it expects Fannie Mae and Freddie Mac to exit conservatorship toward the end of the year, so based on that timeline, it could happen by early next year in the event of a delay of a few months.

Disclosure: No positions