In his most recent April 23 report, well-known banking expert and Rafferty Capital Markets LLC VP of equity research Richard X. Bove made the point that U.S. housing sales were on the decline primarily due to government-engineered actions that are driving up home-ownership costs for the American consumer.

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

A combination of factors such as rising loan processing costs due to regulatory changes, as well as banks’ drive to make mortgage servicing more profitable, are responsible, but the main cause, according to Bove, is the reduced availability of that sine qua non of the U.S. housing market – the 30-year mortgage loan.

Banks unwilling to offer 30-year loans

The 30-year is an endangered species given that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are reducing the number of such loans that they guarantee, as they are likely to be wound down.

Without the backstop from Fannie Mae and Freddie Mac, banks are leery of assuming the risks of such long-term lending on their own books, and are pushing home-owners to accept 15-year loans instead.

The shorter tenure of the loan requires the borrower to make higher monthly payments, raising the question of ability to service. This, according to Bove, is pressuring new home sales.

Home-owners facing a triple whammy?

“Median housing prices have risen by $13,700 year-over-year according to data released by the Commerce Department,” says Bove in his update of April 24. “Mortgage rates, as monitored by Freddie Mac, have increased by 77 basis points in the same time frame. The net result is that a household seeking to purchase a new unit must pay a $2,740 higher down payment and $119.83 per month more on the mortgage.”

Here’s Bove’s table that shows how a borrower’s monthly loan payment has already increased by $120 due to the pincer effect of rising home prices on the one hand and hardening mortgage interest rates on the other:

1-table1 Fannie Mae

Add to that the impact from shorter loan term (15 years instead of 30 years) and the monthly payment shoots up by $372, as shown here:

2-table Fannie Mae

(Note: the reduction in interest rate is the bait offered by banks to the borrower to accept a 15-year instead of 30-year loan)

That’s not all

In addition, borrowers must pay 20% upfront, and also ensure that loan pay-outs do not exceed 40% of their income.

It’s possible therefore that the onerous debt service liability and vigorous eligibility norms are restricting demand for mortgage loans, and therefore, new homes.

Also, why banks would like to see the demise of Fannie Mae and Freddie Mac

On the face of it, banks have a valuable facility in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)  which absorb the risk for all the 30 year rate mortgages that the banks sell.

According to Bove, however, banks would in fact make more money without Fannie Mae and Freddie Mac.

This is because banks would be free to raise mortgage rates in the absence of deep-pocketed competition from Fannie Mae and Freddie Mac – remember that the latter enjoy below-market cost of funds and are therefore able to undercut banks in the mortgage market.

“In sum, the banks would make more money without the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) but consumers would pay much more for their home loans,” concludes Bove. “Moreover, the prices of homes would decline due to the adjustment in their monthly costs.”