Dick Bove Points To Housing Collapse Without Fannie Mae, Freddie Mac Support

Dick Bove Points To Housing Collapse Without Fannie Mae, Freddie Mac Support

Fannie Mae

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In a strongly worded opinion piece, Rafferty Capital Markets equity research analyst Richard Bove says that the government’s plan to wind down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would lower housing prices, harm the economy and increase unemployment.

“The result (of eliminating Fannie and Freddie) will be to create neighborhoods of rental units — or in my view, instant slums,” Bove, author of the book Guardians of Prosperity: Why America Needs Big Banks wrote. “Given the risks implied by the current proposals, one would think that Americans would want to know more about what is happening to home finance or, more specifically, the price of their homes.” Bove notes that banks need Fannie and Freddie so they can offload long term loans they sell.

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Misplaced blame on Fannie, Freddie for 2008 collapse

Bove thinks misplaced blame for the 2008 financial crisis on the mortgage finance companies has left “the president and Congress intent on killing these companies — and the media and public do not seem to care.”

Bove does not think Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are to blame for the 2008 crisis, but rather their downfall was caused by political considerations. “For eight decades, the system that they represent was successful in allowing tens of millions of Americans to own their own homes,” he wrote. “The system was abused by politicians, regulators, and bankers beginning in the mid-1990s and this led to the downfall of these two giant companies. It was not structure but political and financial interference with proper underwriting that created their difficulties. The reaction to these misdeeds is to eliminate these companies without considering what this will do to housing and beyond housing, the economy.”

Withdrawal of government support for housing market a concern

Noting concern about a reduction in government support for “the nation’s most subsidized sector,” Bove thinks the withdrawal of government support for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) could cause major market disruptions. “Clearly if the transition is not handled properly, major dislocations will emerge and these dislocations will be very painful to all Americans,” he wrote.  “If there is no Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), no bank will be willing to make 20- or 30-year self-amortizing mortgages. I have spoken to at least a dozen banks who feel very strongly about this issue — they just don’t view mortgage lending as the profit center it once was in the past. It’s more of a loss-leader to attract customers and cross-sell them other products.”

Banks unwilling to finance 30 year mortgages at low rates

Bove says as a result of the withdrawal of government support, banks will be unwilling to put 30-year self-amortizing mortgages on their balance sheets, particularly at today’s record low interest rates.

“The math here is frightening,” Bove said, noting that qualified homeowners would be required to make a down payment equal to 20 percent of the value of the home to be purchased and would not be allowed to pay more than 40 percent of household income to meet principal and interest payments. “The bottom line is always the same: Affordability drops. Housing prices must come down.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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