There’s no question that Federal Housing Finance Agency (FHFA) director Mel Watt’s recent speech at the Brookings Institute was a departure from previous policy on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), but at this point the magnitude of the change is still open to interpretation (and to influence from Treasury and the White House). But if you ask Rafferty Capital Markets LLC VP of equity research Richard X. Bove, it’s a “massive change in mortgage policy.”

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‘We won’: Bove

Bove’s response to the Watt speech (titled: ‘Wow!!! Unbelievable; We Won’) draws a line from recent comments by Federal Reserve chairperson Janet Yellen, Treasury Secretary Jack Lew, and former FHFA director Edward DeMarco centered on how the weakness in the housing market threatens the rest of the economy to Watt’s speech and sees an administration that has come around to his point of view.

“For some time, I have argued that the United States cannot shut down Fannie Mae and Freddie Mac,” writes Bove. “It now appears that the Administration along with the Federal Reserve sees and understands what they have done. More importantly, it now appears that the policies of disaster are being ripped up and there will be a return to the housing philosophies of the past.”

The combination of tapering (reducing demand for mortgage-backed securities), the Treasury mandated reduction in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) portfolios, and the combination of new Consumer Financial Protection Bureau regulations and the Qualified Mortgage Rules (QMR) had created what Bove calls a perfect storm for the housing market.

Bove calls for fourth amendment, sees huge upside for Fannie, Freddie

Share of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have both seen a bump following Watt’s speech ($4.24 to $4.61 and $4.20 to $4.61 respectively for common stock), and they are each up more than 220% over the last year, but there is still a lot of upside if the Administration decides to reverse course and end the full income sweeps, setting the stage for re-privatization.

“A fourth amendment is needed for Fannie Mae and Freddie Mac. The game is on again. I reiterate that this will ultimately be a $20+ stock,” writes Bove.