Federal Housing Finance Agency director Mel Watt’s speech earlier this week gave most people following Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) the impression that he was planning for the future, not preparing to eliminate the GSEs currently in conservatorship. Rafferty Capital Markets VP of equity research Richard Bove actually reached this conclusion after Watt’s speech at the Brooking’s Institution earlier this year, and Watt’s recent remarks give him confidence that government policy on GSE reform has turned a corner.
“Mr. Watt is reshaping Fannie Mae and Freddie Mac so that Congress may never be forced to vote on their status again. He is acting, undoubtedly with the President’s blessing, to create a new entity that will be the Fannie and Freddie of the future,” Bove writes. “These companies are likely to be merged but they are not going away and the shareholders in these companies are not going to be eliminated as Judge Lamberth believes should be the case.”
Fannie Mae, Freddie Mac will be de facto merged with CSP
First, Bove points to the different ways that Watt is trying to attract more business for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). The regulator is clarifying and to some extent relaxing the rules around mandatory loan repurchases so that mortgage originators don’t face as much risk, as well as allowing low down payment loans that Bove calls a ‘slap in the face’ to CFPB’s qualified mortgage guidelines. Watt also signaled that he may reconsider lowering guarantee fees to attract more business.
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On top of that, the Common Securitization Platform (CSP) and Common Securitization Securities (CSS) will force the two agencies to work closely together, paving the way for fully integrating them somewhere down the line. If the GSEs stop acquiring mortgages themselves, Bove points out that they will have practically been merged already.
Congress continues ceding authority to agencies
Bove, who has been long on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) for about the last year, sees this as a positive sign for shareholders, even though Watt has expressly said that they aren’t his concern.
Bove also puts this FHFA-led GSE reform in the proper legislative context, pointing out that “Congress in recent years has continually given up its powers to govern to a series of omnipotent agencies that cannot be controlled by Congress.”
He doesn’t cite any examples, but they’re easy enough to find. Everyone in Congress has an opinion on the war against ISIS (or whatever you prefer to call it), but there hasn’t been a vote; extraordinary action from the Fed (the monetary authority) has been partly blamed on inaction from Congress (the fiscal authority) to pursue painful structural reforms. With legislative GSE reform ground to a halt, non-legislative reform is apparently the order of the day.