It seems like there’s a new controversy about Fannie Mae brewing up every week. Dick Bove of Rafferty Capital Markets published an investment update on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) on Friday, September 25th. In the update, Bove highlights that the new report from the Office of the Inspector General claiming the GSE’s current practices expose then to risk is good news for banks but bad news for mortgage companies.
OIG says Fannie Mae and Freddie Mac are exposed to risk
Bove boils down the report recently released by the Office of the Inspector General on the operations of the government sponsored enterprises to say it is “criticizing the Federal Housing Finance Agency (FHFA) for its lack of oversight of the companies who provide mortgages to Fannie Mae and Freddie Mac.” He explains further by saying the OIG is basically complaining that the GSEs accept mortgages from anyone without knowing the financial status of the other parties and the quality of the financing for those who submit the loans. The OIG report quite rightly notes that this practice opens the GSEs to significant risk of loss.
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Boon to banks bust to mortgage companies
According to Bove, the implications of the new OIG report are quite positive for banks and potentially negative for mortgage companies. “This report is important because banks are losing market share to the very companies being questioned by the OIG. If these mortgage bankers are now going to be required to provide detailed reports concerning their financial status to the GSEs then many may be forced out of the business. This will increase the strength of the banks in originating mortgage loans in the United States. Not bad if you are a bank stock buyer. Not good if you have a mortgage company. However, one wonders why the OIG cares since Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are to be shut down by the end of 2017.”