Fannie Mae Is Political Dynamite: Bove

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It’s a difficult choice.

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) continue to haunt America’s political leadership with the prospect, however remote, of a repeat of the housing crisis that led to their conservatorship. Taken together, the two GSEs support 90% of the country’s housing mortgages, and politicians such as President Obama, and Senators Bob Corker (R-TN) and Mark Warner (D-VA), have been vociferously advocating the need to wind them down to eliminate the possibility of another shock to taxpayers.

But the uncomfortable reality is that the two institutions have been instrumental in providing that bedrock of American home finance – the 30-year fixed rate mortgage, a facility that allows citizens to affordably own a home.

Throwing the baby out with the bath water?

“The elimination of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) means the elimination of fixed rate mortgages with durations of 20 to 30 years. These instruments will be replaced with 10 or 15 year adjustable rate mortgages. This means higher monthly costs; lower housing prices; and reduced home equity for all Americans. Thus, the desire to get rid of the GSEs would create instant slums and cut the wealth of every American household who owns his/her own home,” says Richard X Bove, banking analyst and V.P. Equity Research at Rafferty Capital Markets, in his research note “Fannie Mae: Shifting Politics.”

The implications of such a situation (“political dynamite”) are now being grasped by politicians, who are “now rethinking their views concerning the longevity of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA),” says Bove.

Fannie Mae: politicians now making haste… slowly

Bove observes that politicians now appear to be turning down the volume on winding up Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), as evidenced by President Obama’s recent appointment of ex-Congressman Mel Watt as director of the FHFA, the overseer for Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae, and the more conciliatory attitude of Senator Corker. “Statements made by Senator Corker (R. TN) suggest that he may no longer be supporting his bill to eliminate the company. He is willing to discuss the Fairholme proposals to solve Fannie Mae’s problems,” says Bove.

Last week, stocks of the two GSE’s shot up after deliberations at a meeting of the Financial Services Round Table stoked hope that Congress would consider the interests of private investors when winding them down.

In November, Fairholme Capital’s Bruce Berkowitz proposed to purchase the insurance businesses of the two GSEs, a proposal that was turned down by the White House. Consumer activist Ralph Nader has also protested that as a shareholder of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), he’s being ‘used and abused’ because of the government’s policy to draw out all of the GSEs profits through dividends, thereby preventing a growth in their reserves.

Housing reform: the realities can’t be wished away

According to Bove, the politicians would have to face up to the compulsions of the housing market and be forced to maintain Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s role in it. That brings along with it the uncomfortable reality that Fannie’s debt becomes the country’s debt if private shareholders are eliminated.

“Thus, I continue to believe that the realities of housing in this country will force the politicians to reinstate Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) to its old position. This will be very positive for its current shareholders,” concludes Bove. “This stock is a high risk investment. The risk reward calculation is now moving more to reward than risk.”

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