Social Unrest Could Catalyze Fannie Mae, Freddie Mac Reform: Bove

The law of unintended consequences has many potential ramifications. Related to this, Dick Bove of Rafferty Capital Markets suggests that the ongoing social unrest in Ferguson, Missouri could have a silver lining in terms of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform. In his investment report dated Wednesday, August 20th, Bove makes the case that “social turmoil begets government action”.

Fannie Mae, Freddie Mac: Historical precedent

Bove begins by pointing out that the U.S. housing industry is practically speaking already the largest subsidized industry in the nation, and then also makes the claim that “the reason that the industry is so heavily subsidized.”

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While this latter assertion is somewhere between a gross simplification and an inaccurate over-generalization, there is more than a kernel of truth to Bove’s perspective. Owning your own home is unquestionably an important part of the American Dream, and by the same token, the U.S. government has indubitably facilitated individual home ownership in a number of ways, including through legislation such as the establishment of mortgage loan guarantors Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

The report also highlights the fact that the social upheavals of the depression and the 1960s led to significant financial reforms that opened up the housing market to the middle class.

Riots in Ferguson could serve as catalyst for Fannie Mae, Freddie Mac Reform

According to Bove, the riots in Ferguson are not “the heart of the trouble”. He suggests that “deep-seated demographic and economic issues” (such as lack of jobs, income and representation) actually underlie the ongoing social unrest in Missouri.

He also advances the argument that this kind of violent social unrest — especially continuing social unrest — will put pressure on our political leaders in Washington DC to do something to address the underlying issues.

Bove elaborates on his point of view below.

“Ferguson is not Watts, or Detroit, or Newark. However, if the unrest spreads, Congress will act. It will use housing as a tool to create jobs and more stable neighborhoods. It will remember why this country wanted a sophisticated housing finance system. It will remember why we need Fannie Mae and Freddie Mac.”