Bove is right not to expect Fannie Mae reform this year, but the end of conservatorship that he supports still isn’t on the table
It wasn’t that long ago that Rafferty Capital Markets VP Richard Bove declared victory in the push to get Fannie Mae and Freddie Mac recapitalized and re-privatized, citing a massive change in FHFA policy. But after this week’s testimony by FHFA director Mel Watt in front of the House Committee on Financial Resources, Bove seems much less optimistic.
“My sense is that nothing will be done by Congress on the status of the GSEs for a year. The press is not interested in the issues. The public does not care because it sees no change. Stalemate!” he writes.
Housing Trust Fund is the biggest source of disagreement between Watt, House Republicans
Bove homes in on the three biggest disputes between Watt and Republican representatives regarding the GSEs. They opposed his decision to invest in the Housing Trust Fund, and argue that he doesn’t have the authority to restart payments under HERA (though HERA has been interpreted by the courts as giving FHFA an extremely wide berth); they argue that the new 3% down payment programs will lead to higher loan losses (and Bove agrees); finally Watt was pushed to explain how he believes guarantee fees should be set – whether they should ideally balance risk perfectly or be used to turn a profit.
Bove interprets that last bit as a debate about whether high g-fees might let private mortgage backers into the market and shrink the GSEs, but it was clear from context that the g-fee discussion was a different angle of attack on the Housing Trust Fund. If g-fees are too high, then the trust fund is being financed by borrowers, if they’re too low then it’s being financed by taxpayers.
Fannie Mae deadlock is over what comes next
“The Democrats are clearly making decisions that would lead to the continuation of the existence of the GSEs. The Republicans understand this and are fighting the willingness of the FHFA to take actions that that extend the life of the GSEs,” writes Bove.
But Watt has continually asked Congress to enact GSE reform (not just at this week’s hearing) and has refused to offer guidance about what he thinks that reform should look like. He also claimed during the hearing that he is an independent regulator and is not a part of the Obama administration.
Regardless the option that Bove and other Fannie Mae longs most want to hear discussed, the possibility of reviving Fannie Mae and Freddie Mac and ending the conservatorship, wasn’t on the agenda. There does seem to be a serious stalemate on GSE reform, but the question is what will come next, not whether we’ll go back to the old system.