It wasn’t long ago that Rafferty Capital Markets LLC VP of equity research Richard X. Bove declared victory on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform, sensing a sea change in Federal Housing Finance Agency (FHFA) chief Mel Watts comments at the Brookings Institution. Now he has swung to the opposite extreme and is warning that unless the government changes course we could be looking at the making of another housing crisis.

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

“In 2017, a new President will take office. S/he will be faced with a deteriorating housing environment that s/he never thought about during the election. However, the problems surfacing in housing will require immediate action. A bailout of the industry might be required costing well more than what occurred in 2008,” Bove writes. “If I am right that year will experience a hair raising recession driven by another catastrophe in housing.”

Bove writes about Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)

At the moment, there is no movement in bills or regulations related to housing finance:

• The Senate bill that would eliminate annie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was approved by the Senate Banking Committee but it is not going to be debated on the Senate floor so it is effectively dead.

• The bills introduced by Maxine Waters (D., CA) and Jeb Henserling (R.,TX) related to the annie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have gained no traction in the House of Representatives.

• There have been no major new initiatives by Mel Watt the Director of the Federal Housing Finance Agency (FHFA) since he delayed further gains in the annie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) guarantee fee.

• The Consumer Financial Protection Bureau (CFPB) is staying with the qualified mortgage guidelines that it has issued.

• As evidenced by the differences in the home finance bills in the Senate and House there is no agreement between the Democrats and Republicans as to what should be done to restructure Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

• As evidenced by the negative votes cast on the Senate Bill in Committee, there is a deep chasm between what the President believes should be done and what is believed by the key Senators in his own party who voted against the President’s bill.

• The courts are still mulling over the filings made by both sides in the GSE lawsuits and it appears that a minimum of 800,000 documents are about to be made available to the plaintiffs although this has not happened as yet.

But Bove declares that this does not mean we are at an impasse. He states:

The nation has a defined set of policies in place for housing finance and if nothing is done to change them the nation will follow these guidelines.

A number of key philosophies are being implemented:

• The Administration has clearly indicated that its desire is to get out of the home finance business.

o It does not believe that every household should own its own home, and
o It strongly believes, and has articulated its view, that low income households should rent not buy housing units.

• The CFPB has put in place clear guidelines for originating mortgage loans that are in keeping with the Administration’s desire to push households toward renting

o Homeowners must put down 20%, and
o Limit their debt service payments to all sources to 50% of their income, so that
o Low income households or first time buyers cannot get qualified mortgage loans.

• Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) must

o Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Get rid of 100% of their capital by January 1, 2018, and
o Shrink the size of their owned loan portfolios down to $250 billion apiece, and this is to be
o Liquidated over the next 10 years.

All of these policies are now in place and unless some action develops to change them; they will be realized. It appears that both the President and the Secretary of the Treasury are content with these Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) policies so that they feel no need to make any adjustments. The United States will get out of the home finance business and the private sector will pick up the slack as they see it.

Fannie Mae, Freddie Mac reform deadlock could easily last until 2017

A lot can happen in the next few years, but considering President Obama has met with resistance from his own party on GSE reform in the Senate, and Republican intransigence shows no sign of letting up, legislative deadlock is one of the more likely outcomes. When the next president takes office Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be more or less insolvent, and will be unable to buy any new mortgages, in line with President Obama’s current plan for the GSEs.

Expensive mortgages could depress housing prices

But if Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) aren’t replaced with anything else, Bove predicts that 20 and 30 year fixed rate mortgages will all but disappear, guarantee fees from a mostly private secondary mortgage market will be higher, and interest rates will go up. All this means that monthly payments for new loans will go up, causing housing prices to fall. It’s a plausible scenario and one that FHFA and Treasury officials must have contemplated.

A major part of Bove’s long thesis on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), which he has acknowledged as high risk from the beginning, is that a housing market without them is unthinkable and the government will eventually see the error of its ways. Homeownership is one of the most important ways that middle class families build and pass on wealth, and home owners reinvest in their communities in a way that renters don’t, which explains why Fannie and Freddie were founded in the first place. But in his latest letter Bove seems to be confronting the idea that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)  may be wound down all the same.