U.S. will not nationalize Fannie Mae, Freddie Mac anytime soon, Barclays analysts say

By Kenneth Lim

Boston, Jan. 22 - The Obama administration will probably not nationalize Fannie Mae and Freddie Mac when it announces a plan for the housing agencies in February, Barclays Capital analysts Rajiv Setia and James Ma wrote in a note.

Nationalization is unlikely to happen anytime soon because the Treasury's recent loosening of a preferred stock funding line should be enough to support the government-sponsored enterprises for the next few years, the analysts wrote.

The White House is expected to announce a plan for Fannie Mae and Freddie Mac, which are under federal conservatorship, in February. A recent report by the Congressional Budget Office that said the GSEs have "effectively become government entities whose operations should be included in the federal budget" prompted speculation that the government would make the guarantee on GSE securities explicit, the analysts stated.

But the analysts do not expect nationalization so soon, especially after the Treasury on Dec. 24 amended rules on a preferred stock line that was set up to meet the funding needs of Fannie Mae and Freddie Mac. Most significantly, the Treasury lifted the cap on the amount of funding it will provide to the agencies, which can now draw on the funding line for as much as necessary to remain in positive net worth.

"While we expect the GSEs eventually to be absorbed into the government balance sheet, we strongly disagree with the notion that this will occur in February 2010," the analysts wrote. "In fact, if this were the case, there would have been absolutely no need for Treasury to amend the Preferred Stock Purchase Agreements (PSPAs) for the two GSEs on Christmas Eve.

"Rather, Treasury's open-ended capacity to absorb GSE losses for the next three years cements our view that large-scale GSE reform is unlikely anytime soon."

Beyond the preferred line, the Treasury has also asked Congress to increase the debt limit by $1.9 trillion in the next budget, which would not be enough to cover $1.5 trillion of Fannie Mae and Freddie Mac debt that would have to be added to the nation's balance sheet if the agencies were nationalized, the analysts said.

"This also suggests that nationalization in 2010 is unlikely," the analysts wrote.

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