Mortgages as we know them are going away in the next fouryears, warns Dick Bove, vice president of research at Rafferty Capital. Bove,one of the most widely-respected banking analysts in the world, is certain thatwill have devastating consequences for housing and the rest of the Americaneconomy.
The removal of the two most important players in Americanmortgages – the Federal National Mortgage Association ("Fannie Mae")and the Federal Home Loan Mortgage Corporation ("Freddie Mac") – threatensthe very foundation of the American economy, according to Bove.
These two government-sponsored entities – along with the smallerGovernment National Mortgage Association ("Ginnie Mae", a governmentcorporation that broke off from Fannie Mae) – issued 98% of the $1.4 trillionin mortgage-backed securities in the United States so far in 2013. Thesesecurities are sold in order to add liquidity to the mortgage market, therebymaking funds available to borrowers.
But, since September 2008, both Fannie Mae and Freddie Machave been under a conservatorship run by the Federal Housing Finance Agency(FHFA). During the financial crisis, both faced billions of dollars in lossesand went to the government for a bailout. Fannie Mae received $116 billionwhile Freddie Mac took $71 billion. The two have nearly paid back everything theytook from Uncle Sam and the government is expected to see profits beginningsometime in 2014.
The bailouts also came at a steep price for Fannie Mae andFreddie Mac – they will be phased out by 2018 under a plan developed by theObama administration (see the Treasury Department's white paper: "ReformingAmerica's Housing Finance Market" - .pdf). Congressional Republicansand Democrats also want to see an end to Fannie Mae and Freddie Mac, though theydon't agree on what should be done to replace them.
For Bove, the end of Fannie Mae and Freddie Mac willradically shake up the kind of mortgages most Americans will get.
"If Fannie and Freddie go away, what then happens tothe mortgage markets?" asks Bove. "Theanswer to that question is that we no longer have things like 20-year and30-year mortgages because banks are not going to put that type of mortgage ontheir balance sheets. And we won't have fixed-rate mortgages."
Unlike the rest of the developed world, most homes in the USare bought with long-term fixed mortgages. Prior to the Great Depression,mortgages often required 50% down with interest only payments for five yearswith the principal due in full after just five years. To stabilize the mortgagemarket during that economic crisis, the Federal Housing Administration (FHA) helpeddevelop the 30-year fully amortizing fixed-rate mortgage which it would insure.Fannie Mae's original role was to package FHA-insured loans from individual lendersand sell them to the markets; it is now also the largest purchaser and sellerof residential mortgages.
Bove says the banks he spoke with won't be able to provide30-year mortgages in large quantities without Fannie Mae and Freddie Mac in themarkets. "I've called a number of very large banks – the largest issuersof mortgages in the United States – and asked them, 'If there was no Fannie andFreddie, what would be the typical mortgage in the United States?' And, theanswer is a 10- to 15-year adjustable rate mortgage."
The end of Fannie Mae and Freddie Mac is a major sea-change inhow the government views affordable housing, according to Bove.
"It is no longer the goal of the United States governmentthat every household should have its own home," say Bove. "In myview, that's a call for a return of public housing and all of the ills thatwent with public housing."
But, it's not just affordable housing that will go away withFannie Mae and Freddie Mac, says Bove. It's also home equity and the addedconsumer spending that goes along with it.
"If your mortgage cannot be a 30-year fixed-ratemortgage – [if] it's a 10-year adjustable rate mortgage – then, the monthlycost of owning a house goes up dramatically," says Bove. "And, if themonthly cost of owning a house goes up dramatically, the price of the housegoes down. There is no equity buildup in order to have home equity loans inorder to buy cars, boats, what have you. So, it has an impact on the overalleconomy, not just Fannie Mae and Freddie Mac."
To see the rest of Bove's take on what the endof Fannie Mae and Freddie Mac means for mortgages in the United States, watch thevideo above.
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