Rafferty Capital Markets analyst Richard X. Bove believes that as the stock price of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) drops in anticipation of the Johnson/Crapo bill, an opportunity exists for savvy investors who know that the odds of the bill ever becoming law are very slim.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

Little vs. Big: Fannie Mae, Freddie Mac

The Johnson/Crapo Bill is viewed by most observers as legislation that eliminates Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) (FNM/$3.06/Buy) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (FRE/$3.03/Buy) and reduces the government’s exposure to the housing industry. I am about 1/3rd through my reading of the 442 page proposed legislation and a number of other issues immediately become apparent.

Little State vs. Big State

Senators Johnson (D., SD) and Crapo (R., ID) represent very small states from a population perspective. In fact, Idaho and South Dakota together have fewer people than the borough of Brooklyn in New York City. Mindful of this there are multiple demands in this Bill that money be directed to regions of the country that are underserved in the current housing finance structure. These demands are built into the legislation. Small states are to be protected but the bulk of the money to do this will come from big states.

Little Bank vs. Big Bank

The new mortgage agency, the Federal Mortgage Insurance Corporation (FMIC), is to be run by a five member Board of Directors who is to be assisted by a 9 member advisory committee. By law, 4 members of the advisory committee must come from depository institutions with less than $10 billion in assets and/or state institutions. The other five are to be from the mortgage insurance industry, consumer protection sector, rental housing, multifamily housing, and asset management. By law there would be no big traditional or investment banks represented on this committee. Thus, the banks that originate over
50% of the nation’s mortgages are not represented anywhere in the Bill. Nor are the markets that they serve considered in the legislation. Relatively tiny banks are to call all the shots along with those who have a stake in rental housing.

Full Faith and Credit: Fannie Mae, Freddie Mac

This Bill puts the full faith and credit of the United States behind the insurance offered by the new FMIC. This element of the legislation is completely contrary to the stated position of the President, the Treasury, and the Housing Urban Development Department who have clearly indicated in a white paper that the United States needs to get out of housing finance. My accounting background in insurance is lacking so I do not know how much of the insurance fund that is a Federal obligation would show up on the balance sheet of the United States but whatever the number, this commitment is likely to be strongly fought.

Funding: Fannie Mae, Freddie Mac

I am only one third through this Bill but to this point there is no indication of why there will be a steady flow of funds into the housing industry. There are demands for more capital up and down the industry. There are demands for fees to fund the new Mortgage Insurance Fund. There are multiple regulatory requirements including the demand to put money into underserved areas.

There are reporting demands on virtually everything that is to be done.

There is no study of what the economic impact of these demands is likely to be. There is no indication as to why the originators of mortgages will make a profit in this business although they can be sued in any number of ways.

Conclusion

The prices of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) (FNM/$3.06/Buy) and Freddie Mac / Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) stock are plunging under the assumption that this Bill has bipartisan support and will be rapidly passed. Having only dipped into the legislation, I can see multiple reasons why this Bill will never see the light of day. Therefore, I would be buying these stocks as they fall.