GSEs Will Remain Under Pressure as Mortgage Insurers Struggle

Tools

NEW YORK--(BUSINESS WIRE)-- Freddie Mac Thursday reported a $4.4 billion third quarter loss, partly driven by a reduction of mortgage insurance recoveries. Fitch Ratings believes future results for both government-sponsored entities (GSEs) under U.S. government protection (Fannie Mae and Freddie Mac) will continue to be negatively affected by additional deterioration in the mortgage insurance industry. The 'AAA' long-term IDRs of Fannie Mae and Freddie Mac are based on strong government support.

Fitch feels mortgage insurers may be forced to make additional haircuts on payments to GSEs as homeowners with the riskiest types of mortgages continue to default. The new business volumes being written are not sufficient to offset continued losses from the legacy books of business.

Last month, the main subsidiary of one of the leading mortgage insurers, PMI Group Inc., was seized by insurance regulators after sustaining major losses stemming from the subprime crisis. PMI Mortgage Insurance Co. is under exclusive control of the Arizona department of insurance and paying just 50% on its claims. Fitch thinks other insurers remain vulnerable, posing additional threats to GSEs.

In addition to insurance payment trouble, GSEs are also affected as interest rates have continued to drop to historically low levels. Their derivative books, which are used as a hedge for increasing interest rates, must be marked down if rates drop. The Federal Reserve isn't expected to adjust interest rates until mid 2013.

RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which includes hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Additional information is available on www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

CONTACT:

Fitch Ratings
Kellie Geressy Nilsen
Senior Director
Fitch Wire
+1-212-908-9123
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
+1-212-908-9123
Thomas Abruzzo
Managing Director
+1-212-908-0793
or
Media Relations
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com