About That Implicit GSE Guarantee...

Parrot and Zandi argued that Trump 47 would eliminate an implicit guarantee in connection with any GSE recap/release. Credit rating agencies stated that would be credit negative for the GSEs.

In Will GSE Recap/Release Increase Mortgage Interest Rates? Survey Says..., I discussed whether a GSE recap/release would adversely affect mortgage interest rates. The short answer is nobody knows. There is no precedent offering reliable data to look for guidance.

But a JP Morgan survey of MBS traders, the institutional investors with the most skin in the game, indicated that there would be no adverse effect if a GSE recap/release was structured to result in safe and sound levels of GSE capital and a substantial Treasury paid-for line of credit backstop.

This survey contradicts the argument made by “fellow travelers” Parrot and Zandi, perennial GSE antagonists, in Fannie and Freddie’s Implicit Guarantee— Another Iceberg on the Path to Privatization, that the Trump administration “will thus presumably go to some pains to argue that once it releases the GSEs there will be no such taxpayer support beyond the [Treasury line of credit back stop].”

Credit ratings agencies have pointed out that maintenance of any implicit GSE guarantee would be important to their credit ratings of GSE-guaranteed MBS, which directly affects the yield required by buyers of GSE MBS, and thus would also affect mortgage interest rates.

So what about that implicit guarantee?