A prominent financial industry group has written to leaders of the effort to overhaul Fannie Mae and Freddie Mac, the mortgage guarantors under federal control, arguing that the two enterprises must have an explicit government guarantee of the bonds they sell to investors if the mortgage market is to continue to function smoothly.
“Our members believe that market participants will no longer consider an implicit guarantee... as equivalent to an explicit guarantee,” said Kenneth Bentsen, Jr., president of the Securities Industry and Financial Markets Association, known as SIFMA.
Read: Fannie-Freddie reform could rewrite a familiar Washington script
That’s a reference to the situation in 2008, when the government had to step in to save Fannie FNMA, -0.13% and Freddie FMCC, +0.38% , which investors had long believed had an implied federal guarantee.
SIFMA said this week it believes that the lack of an explicit backing would make foreign investors skittish, while domestic investors may be required to hold only assets guaranteed by the government. Foreign investors only account for about 5-10% of market share, the group noted, but added, “experience from 2008 showed that once these investors retreat, they are slow to return.”
The Treasury Department and the Federal Housing Finance Agency, Fannie and Freddie’s regulator, are currently discussing their exit from conservatorship and next steps beyond that. But if the enterprises are released from conservatorship without an explicit guarantee, SIFMA said, it would raise funding costs for lenders, which they would pass on to borrowers.
Related: Fannie, Freddie overhaul could mean windfall for preferred stock, analyst says