Rafferty Capital’s Dick Bove is a man of strong opinions. In his most recent investment report, dated May 8th and titled “Thinking About Home Sales”, Bove rails against government interference in the housing markets, and warns that over-regulation will continue to choke off real growth in residential real estate.

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

Furthermore, Bove points to the current conundrum of a record number of homes selling for cash despite a slowdown in overall home sales as symptomatic of the malaise infecting the U.S. housing market.

Fannie Mae, Freddie Mac: Over-regulation is preventing the middle class from borrowing to buy a home

Bove’s main gripe in his current missive is that the federal government’s tight regulation of both banks and the mortgage market in general means that borrowers with good jobs and solid incomes do not qualify for home loans in many parts of the country.

The current “qualified mortgage” rules are one major stumbling block, according to Bove. He argues that stringent rules defining those who can qualify for conforming mortgages; and the fact that if a bank actually dares to lend to a non-conforming lender, that borrower can default and then sue the bank for negligently lending the money means banks are sticking closely to qualified mortgage rules.

To make matters worse, banks that do decide to continue making home loans to lower-income households are forced by Basel III regulations to keep higher loan reserves.

Bove also argues that too much regulation has in effect killed the primary mortgage market, as financial institutions are no longer willing to make home loans given “the no fault/zero loss policy that the government has imposed on the industry.”

The report also highlights that Fed’s ongoing tapering policy is removing the single biggest buyer of mortgages from the market and completing drying up liquidity in the market. Bove also points out that current regulations requiring Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to reduce their balance sheets is removing another huge buyer. There has been no replacement for either of these large buyers, which means the secondary market is basically withering.

Specifically, Bove argues that “if a bank does a poor job in creating a new mortgage, as stated above, it can be sued by the borrower. Plus, the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)  who may have  purchased the loans will put them back to the mortgage originator. This is the no fault/zero loss policy that the government has  imposed on the industry.”

In terms of the secondary mortgage market, Bove states:

The Federal Reserve’s tapering policy is removing the single biggest buyer of mortgages from the market. The Treasury’s demand  that the government sponsored enterprises (GSEs) Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shrink their balance sheets is removing another huge buyer. There has been no  replacement with the cost structure of the Federal Reserve and the  Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to replace their buying power.

Fannie Mae, Freddie Mac: High-end home sales holding up

Not surprisingly, banks are more than happy to make real estate loans to the wealthy, as those loans are extremely low-risk. This means that so-called “jumbo loans” continue to stock up, while fewer and fewer mid- and low-range mortgage are issued.