Raffery Capital Markets Vice President Richard X. Bove highlights the changes in Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) upon FHFA’s policy changes.

Fannie Mae

Change in FHFA directorship

Representative Mel Watt takes charge as the head of the Federal Housing Finance Agency (FHFA) on January 6. He has been a Democratic Representative from North Carolina. Rep. Watt announced that he will be delaying the implementation of the price increases announced by the departing acting head of the FHFA. Edward DeMarco, just two weeks ago.

This is a significant change in more than one respect. Mr. DeMarco is a technocrat. He has a Ph.D. in economics and has spent his working career in governmental positions at the GAO and the U.S. Treasury among elsewhere. Rep. Watt is a politician with a legal background.

It may be fairly stated that Mr. DeMarco’s approach was to adhere to Treasury’s instructions and Congress’ stated intent – i.e., get rid of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA). Not so Rep. Watt. Rep. Watt is at FHFA to listen to and adhere to the political issues more than the economic issues in charting Fannie Mae’s future, in my view. He represents a return to the pre-2000 leaders of Fannie Mae who were virtually all politicians.

Mel Watt blasting Fannie Mae

It appears that Rep. Watt heard the first blast suggesting that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) may become a huge political liability to the President. The price increases announced by Mr. DeMarco raised the cost of housing for every American seeking a new residence. These price increases were particularly hard on the President’s constituency – i.e. low income households.

The potential impact of the increases combined with the rapidly rising cost of housing showed up starkly earlier this week. Existing home sales declined while new housing starts were rising. If housing sales drop while new construction is rising, the result would be another housing problem and more unemployment.

To Mr. DeMarco, these two developments would be non-events. To Rep. Watt these developments are canaries that are now signaling danger.

Fannie Mae to back away from the mortgage market

To this point, the FHFA could exert as much pressure as it wanted on Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) to back away from the mortgage markets because the Federal Reserve had replaced the company in those markets. The Federal Reserve was buying all-time record amounts of mortgages every month.

Now the Federal Reserve supposedly is backing off; Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is being forced to stand down; government prices were about to go up; and housing activity may have been hit. Time to get rid of the technocrat and bring in the politician.

Political policies poses a risk to Fannie Mae

This is the core argument that I am making as to why Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is not going to be eliminated despite everything coming out of Washington. The American people will not stand for it and the politicians are at great risk if they let Fannie Mae go away.

This stock continues to be a great speculation but recognize that if I am wrong the stock is an option whose downside value is zero.