A new research report from Rafferty Capital’s Dick Bove suggests that the Johnson Crapo bill currently under consideration to wind down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is not likely to move out of the Senate, never mind pass the Senate and House to become law. Bove’s April 28th report says that the surprise release of a statement by the two government-sponsored enterprises regarding numerous problems with the Johnson Crapo bill is likely the death knell for the misguided legislation.
Given that the Johnson Crapo bill appears unlikely to advance, Bove is reasonably sanguine about the future of the two GSEs and recommends Fannie Mae as a Buy.
10 reasons Johnson Crapo won’t work
Bove summarizes the 10 reasons the JC bill is problematic highlighted in the statement from Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). First, without Fannie and Freddie as currently constituted, there would not be consistent funding of housing through cycles. Second, the GSEs will not be able to provide liquidity contra-cycle as they can currently. Third, the still unknown provisions in the bill could go so far as to make mortgage-backed securities impractical. Fourth, Johnson Crapo as currently written clearly discriminates against smaller lenders. Fifth, the amount of capital required is too high and likely to increase mortgage costs. Sixth, the new company set up to replace Fannie Mae and Freddie Mac is unlikely to be able to do its job. Seventh, on a related note, the new company will likely have problems raising capital. Eighth, the new small lender mutual is almost certain to be be uncompetitive. Ninth, the requirement to pay all dividends to the U.S. Treasury will harm Fannie Mae and Freddie Mac’s ability to perform their functions during the transition period. Tenth, just exactly how the “full faith and credit” of the U.S. government remains unclear.
Bove very negative on Fannie Mae, Freddie Mac reform
Dick Bove has been extremely negative about the Johnson Crapo bill from the moment it was unveiled. He argues passage of the bill will be a disaster for the country. “It will lower the price of every house in this country by crippling the mortgage finance industry. It will deny low income households the right to own homes. It will create instant slums. It will harm the economy for an extended period.”