Agency strategists from RBS Greenwich Capital last week downplayed the chances for Fannie Mae and Freddie Mac privatization. They believe that the potential for the GSEs to end their charters at this time is unlikely considering that neither agency is current with their financials. Also, Fannie Mae's subordinated debt is now on negative watch by both Standard & Poor's and Fitch Ratings. Furthermore, the agencies still have the ability to benefit from the arb as run-off is replaced.

"We think that the review of the charter's value is likely conducted in the normal course of business," wrote the strategists. Additionally, talk of privatization is really nothing new. Most market participants believe that the GSE debt outstanding would be defeased to the U.S. Treasury and the process would be conducted over several years.

Previous speculation about privatization has usually been driven by the government sector. The Federal Reserve, The Department of the Treasury, and the Bush administration have been trying to distance themselves from the perceived risks in the balance sheets of these agencies in the last six years. This has been reflected in the persistent talks of removing the GSEs' Treasury lines of credit, the President no longer appointing Board members, the push for portfolio limits, as well as the different studies commissioned to examine the benefit of the funding advantage to the shareholders, versus the benefit to homeowners and the risk to taxpayers, the RBS Greenwich strategists said.

Previously, the GSE portfolios were not limited and Fannie Mae and Freddie Mac were able to take advantage of the arbitrage between MBS and agency debt as valuations dictated. However, the portfolio growth limits and capital constraints have recently hindered this ability, negatively impacting the value of the charters from both Fannie Mae's and Freddie Mac's perspective. Additionally, having to comply with the difficulty of being a quasipublic/private company with increased disclosures, Security and Exchange Commission registration of the equity, and restrictive regulation brings into question the value of GSE status. However, despite these challenges, the GSE status still offers benefits to both agencies, particularly given the financial reporting delays, RBS Greenwich Capital analysts said.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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