Last Friday, Treasury Under Secretary Mary Miller said that recapitalizing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was an unrealistic plan that would leave taxpayers on the hook for the next twenty years while the GSEs recapitalize, and then its advocates are just trying to avoid difficult decisions. One of those advocates, Rafferty Capital Markets VP of Equity Research Richard X. Bove, has pushed back against Miller’s speech, accusing her of placing hyperbole and politics above good policy.

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

Miller calls Fannie Mae and Freddie Mac a failed experiment

“Ms. Miller and the President have called the GSEs a failed experiment,” writes Rafferty Capital Markets VP of Equity Research Richard X. Bove. “These companies have, over 7 decades, placed hundreds of millions of households in their own homes. They have maintained the stability of the housing market in the past 5 years. Plus, they have repeatedly been used to stimulate economic activity in the broad national market.”

Bove and other advocates of re-privatizing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) argue that the real trouble started in the 90s when underwriting standards were reduced and the GSEs were mandated with guaranteeing lower quality mortgages in an effort to expand home ownership. Strengthening underwriting standards necessarily means that some people won’t qualify, the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage being the current example, but they don’t see why the government won’t return to a business model that was successful for decades.

Bove also takes issue with Miller’s claim that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) need twenty years to recapitalize, pointing out that the GSEs would have $190 billion in capital today instead of just $15 billion if Treasury hadn’t instituted its full income sweep.

Miller’s ‘most fantastic claim’

But he says that her ‘most fantastic claim’ is the claim that the Crapo-Johnson proposal for GSE reform has strong bipartisan support. While Senators Mike Crapo (R, ID) and Tim Johnson (D, SD) crossed the aisle to work on it, Senators Chuck Schumer (D, NY), Sherrod Brown (D, OH) and Elizabeth Warren (D, MA) all voted against it and virtually no one expects the bill to get a vote on the Senate floor this year.