The Fannie and Freddie 3Q earnings show not only how perilous the prospects are for GSE profitability – old news as we’ve detailed in prior analyses – but also the extent to which g-fees are shaping the future of U.S. housing finance. Leaving aside whether a bit of the g-fee is or isn’t seized for federal spending, they are set by each of the GSEs now not just to sustain earnings, but also to preserve franchise value. Freddie is gambling that it can avoid losses that necessitate a Treasury draw and thus cutting g-fees to preserve market share. Fannie isn’t using a foregone Treasury contribution to cut g-fees, holding them high enough to support earnings to ensure its long-term viability with or without a single securitization.
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