Entry of new mortgage companies would increase the reliance on Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), reckons Rafferty Capital.

Richard X. Bove of Rafferty Capital Markets LLC also highlights the fact that the public issues from the new mortgage companies would perform well only during the initial years.

Also see: Fannie Mae, Freddie Mac 500% Price Appreciation Or Bust: Bove

Entry of new mortgage companies

Pointing to a recent article in Wall Street Journal, Richard X. Bove notes that in the rising housing market, a number of new mortgage companies are taking market share, as the big banks give ground. He believes a few of these mortgage companies would make public offerings and most likely, these offerings would be well received.

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Taking a cue from history, Richard believes that the stocks from these new mortgage companies should perform nicely for two to three years, and the mortgage companies too will grow meaningfully in size.

However, he cautions, as the cycle wears down, these new mortgage companies could face the fortunes of hundreds of their predecessors before fading away.

Also see: Fannie Mae, Freddie Mac Wind Down Means 100% Loss For Stakeholders

Enhanced role of GSEs

Richard X. Bove of Rafferty Capital Markets LLC points out that the new mortgage bankers would need the services of secondary market companies. Hence he emphasizes that there will be growing need for a continuation of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Bove thus concludes that with the mortgage market shifting from a bank dominated market to a mortgage banker dominated market, the need for the two GSEs would witness exponential expansion.

Richard’s recent defense for the GSEs

Interestingly, a couple days back, arguing against Jonathan Laing’s recent column in Barron’s, Richard X. Bove emphasized that the maintenance of the GSEs saved the U.S. housing industry, as 90% of the mortgages purchased in the secondary market in the recent years were made by these two giants.

He stressed that if the GSEs had been put into bankruptcy in September 2008, there would have been no secondary market, no fixed rate mortgages and no 20 to 30 year terms on mortgages.

Reduced regulation

Bove believes the shift to a mortgage banker-led mortgage industry would lead to a meaningful reduction in regulation. He points out that these companies are not regulated and they are not audited on a regular basis by one of the many banking regulators.

Bove points out that though mortgage guidelines issued by the Consumer Financial Protection Bureau (CFPB) do exist, these could not be applied rigorously to an industry that doesn’t submit information to the regulators.

Hence Bove believes the banking regulators are facilitating the creation of shadow banking companies that are not regulated as a consequence of the over-regulation of the banks. He believes this could be the normal consequence of over regulation.

Richard X. Bove of Rafferty Capital Markets LLC thus concludes the public offerings from several mortgage bankers would be beneficial to investors. The new mortgage bankers’ entry would also reinforce the need for the GSEs apart from opening the way to avoid regulation.

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