Real Estate

This could shock US housing market: Bove

Mortgage meltdown brewing? Dick Bove
Mortgage meltdown brewing? Dick Bove

The Treasury Department is looking to wind down Fannie Mae and Freddie Mac, but without these organizations, there would be few buyers for 30-year fixed rate mortgages, bank analyst Dick Bove told CNBC on Tuesday.

Banks would be happy to step in and offer variable rate five- and 10-year mortgages, but those shorter maturities would increase monthly payments for borrowers and lower the overall cost of housing—a situation that would send shock waves through the U.S. housing market, said Bove, vice president of equity research at Rafferty Capital.

"Is the United States ready to take a shock to housing prices because we're getting rid of 30-year fixed rate mortgages?" he said during a "Squawk Box" interview.

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Bove said banks have admitted to him privately that they cannot make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages.

Consequently, the industry wants to make loans that it can sell to Fannie Mae and Freddie Mac, he said. The two government-sponsored enterprises help increase the number of loans that can be made by buying mortgages from banks so they can reinvest in new loans.

However, the Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.

"So the question becomes, 'Who's going to buy these mortgages?' And if we're talking about 30-year fixed rate mortgages, which are yielding less than 4 percent, who's going to be crazy enough to buy [them] or put [them] on their balance sheet?" Bove asked.

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To say that 30-year-fixed rate mortgages do not make sense is to say that housing prices in the United States do not make sense, he said. Currently, he said, Americans buy houses based on the deposit they must put down, and the cost of their monthly payment.

Eliminating Fannie and Freddie would essentially eliminate the 30-year-fixed rate mortgage, leaving shorter-term, variable rate mortgages to fill the vacuum. That would lead to major changes in how much Americans pay month to month, and consequently, the overall cost of a home.

"I don't think there's a private market for 30-year fixed-rate mortgages, and I think that's the issue," he said. "The issue is not whether they're good or bad. The issue is you have them. The issue is that a large portion of people in the United States who own houses own them as a result of a 30-year fixed-rate mortgage."

The United States can switch to a market currently in place in Canada, where the average mortgage has a three-year maturity, but the question is what happens to the housing market when you go from one paradigm to another, he said.