Dick Bove is talking to his TV, as he sends a research note targeted to CNBC’s Becky Quick. In the research note, Bove discusses Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reforms, the impact of stimulus reduction on the housing market, drawing correlations between the Fed’s unwinding of stimulus and the surging real estate market. “Becky,” the research note oddly starts, “When you discuss the housing industry you might want to consider the following.” Bove then lists 11 points and wraps them all into a general observation about rising home prices and rates.
Taking shot at Mel Watt administrator of Fannie Mae
Bove takes a shot at Mel Watt, administrator of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and their support 60% of mortgage purchases. Support for the housing market, “despite the comments of Mel Watt,” is being reduced under the current Fed regime, leading to a toppy looking US real estate market.
As people consider stagnating real estate prices, Bove notes that half the money allocated in the QE3 program was being designated to purchase mortgage backed bonds, thus the Fed tapering, where it reduces such purchases, also reduces the supply of money for housing, reducing demand and keeping a lid on pricing.
Banks having difficulty in mortgage origination: Fannie Mae, Freddie Mac
Bove notes that mortgage lending isn’t profitable for three of the four largest banks, citing JPMorgan Chase & Co. (NYSE:JPM), Citibank and Bank of America Corp (NYSE:BAC), which have lost over $100 million per year making mortgages. But its not just big banks having difficulty. Bove cites a as yet unpublished studies by regional banks that show they are not profitable originating mortgages.The regional banks, however, “won’t publically state” the results of the study findings Bove notes.
Perhaps a large risk in mortage lending is that if a borrower obtains a mortgage and then defaults, under the qualified mortgage rules they can sue the borrower because the bank has an obligation to “know their customer,” a common requirement used to determine retail investing suitability.
In light of a government risk guarantee, tighter capital requirements. leverage ratios
Bove also notes that the capital penalty for a bank making construction loans is unusually high and that “rules related to mortgage securitizations in the private market are simply brutal.” Bove did not provide analysis of the tougher rules relative to the government risk guarantee backing up many of the largest banks as he discusses “punitive regulations like Basel III” and the related leverage ratios that require a higher percentage of assets required to be placed with the Fed.
Wrapping up the one page investment note, Bove hit on the current Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) debate. “The nation decided to restructure the housing finance system,” he concluded. “It did so and now it is complaining that the system is not working. A look at history will tell you that more houses are built and sold when prices and rates are rising than when these inputs are falling.”
