Supporters of Fannie Mae and Freddie Mac have long argued that constraining the two government-sponsored enterprises would risk destabilizing the mortgage market.
Yet over the last two years the market for mortgage-backed securities has taken each headline-grabbing accounting scandal and regulatory scuffle involving the GSEs in stride.
Perhaps the biggest threat yet - the prospect of Fannie's having to unload mortgage assets in a hurry - drew a similar yawn Thursday.
Analysts and traders reported little spread widening following the Securities and Exchange Commission's announcement that it had ordered Fannie to restate earnings.
That order - which essentially cleared the Office of Federal Housing Enterprise Oversight to declare that Fannie is undercapitalized by several billion dollars - could force the GSE to further raise capital or cut assets. But observers said they were not worried that Fannie will have to sell off any of its portfolio. Besides, they said, banks' and foreign investors' heavy appetites for mortgage securities have kept Fannie and Freddie Mac from buying much for more than a year.
If those other investors pulled back, or if it Fannie were forced to sell big chunks of assets, the effects could be much bigger than anything the GSE drama of the last two years has produced, some observers said.
It is hard to guess what will happen next until certain issues are resolved. Among those issues: How undercapitalized is Fannie, in OFHEO's view? Will a previously imposed 30% capital surcharge be lifted when the new losses are added? How long will Fannie have to get its capital back above minimum levels?
Above all, would OFHEO be willing to take punitive or corrective steps that could upset the market?
The "key ingredient" in the market's outlook is "the timeframe" OFHEO puts on Fannie, said Andrew Davidson, the president of the New York mortgage consulting and risk analytics company Andrew Davidson & Co. Inc. Spreads will widen sharply if the market decides Fannie will be forced to come into capital compliance within a month, he said, because then Fannie will have to sell securities.
Most bond and equity analysts said Fannie should be able to make up for the capital shortfall in a few quarters by retaining earnings, skipping dividends, and issuing preferred equity.
Given time, Fannie should not have to sell holdings, the analysts said. In fact, some said it might not even have to let the portfolio shrink through runoff as loans prepay.
Some analysts also said a restatement could let Fannie move assets from its portfolio to trading accounts. Doing so would let mark-to-market gains offset accrued derivative losses that a restatement will uncover.
At the beginning of the year Fannie had $14 billion of such gains, according to Jonathan Gray, an analyst at Sanford C. Bernstein & Co.
No one is predicting that its business of securitizing and guaranteeing loans, which requires much less capital, will be curbed. Also, analysts said the creditworthiness of Fannie's mortgage bonds is not in doubt.
If it did have to unload assets, Fannie could drive down prices for mortgage bonds. But with issuance low after a record refinancing boom and a seasonal slowdown, the market could easily absorb some selling right now, analysts said.
Paul J. Miller, an analyst at Friedman, Billings, Ramsey & Co. Inc., said that asset sales would hurt Fannie's earnings more than the other options, and that the potential consequences - higher mortgage rates and perhaps broader market disruptions - mean OFHEO probably would not force it to shrink its portfolio.
"I don't think its does anybody any good to have Fannie Mae just sell off assets," he said.
Linda Lowell, the managing director of mortgage strategy for RBS Greenwich Capital, agreed that many market players think assets sales are unlikely.
"We've all done a lot of back-of-the-envelope math," she said.
However, mortgage securities holders face a bigger risk, Ms. Lowell said. If a flattening yield curve cause banks and other investors to unwind the "carry trade," and Fannie is not there to shore up the market, prices would drop faster or farther, she said.
Mr. Miller said knowing this could make bank investors a little less comfortable holding on to securities, but OFHEO would probably be flexible with the GSEs in a market disruption.
Fannie has acknowledged that its capital needs would contribute to expected portfolio shrinkage in November and December. But since it had been holding back anyway, some mortgage bankers said, they see little evidence of any recent change in its appetite.
"We cannot honestly say we've seen any dramatic change in what Fannie Mae is doing with us, one way or another," said Michael Marcus, the senior vice president of secondary marketing at Sovereign Bank in Reading, Pa.
