While the Crapo-Johnson proposal for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform has more bipartisan support and a better chance of getting out of committee than any previous proposals, analysts continue weighing in on how unlikely we are to see anything happen before next January.
“As Congress prepares for mid-term elections, we believe meaningful Fannie Mae and Freddie Mac reform legislation will make little progress this year,” write Raymond James analysts Buck Horne and Paul D. Puryear in an April 9 report. “The White House has expressed a desire for a bipartisan bill to serve as a reference point for Congress next January, rather than starting Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform from the ground up. Even though Fannie Mae and Freddie Mac reform bills are making their way separately through the House and Senate, we see little chance of either passing through Congress this year.”
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Fannie Mae, Freddie Mac reform: Not much time left before election season
Horne and Puryear point out that Representative Maxine Waters’ (D., CA) House proposal is similar to Crapo-Johnson, reducing capital requirements for the first-loss provision from 10% to 5% and creating a lender consortium instead of the Federal Mortgage Insurance Corp.
But the House is far more conservative than the Senate, and Chairman of the House Financial Services Committee Jeb Hensarling would rather see Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) wound down over five years with no new government institution filling their role, so the Waters proposal is at best a starting point for negotiations. Considering the House and Senate would need to come up with final language in conference, there just isn’t much time for such an action before Washington is in full campaign mode.
While Fannie Mae and Freddie Mac reform isn’t an election issue, at least not at the moment, the outcome of the mid-term elections will certainly impact what legislation eventually looks like.
Mortgage applications lag other indicators
In the meantime, the housing market shows signs of recovery, finally pulling ahead of last year’s numbers.
“The seasonally-adjusted index has recovered 16.3% from the week ending February 21, which was the lowest since August 1995 – possibly indicating improving momentum as the spring weather warms,” write Horne and Puryear.
Mortgage applications continue to lag other indicators, such as new home sales, existing home sales, and single-family permits, and Horne and Puryear suspect that homebuyers are finding ways to pay with cash to get around stricter mortgage documentation requirements. Once the house is paid for they can refinance to get much of that cash back (and presumably pay back whoever lent it to them in the first place).
If that’s true, it’s a cautionary sign for anyone thinking about Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform. Put too much of a burden on buyers and lenders and they may simply opt out of the carefully designed system.