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President Donald Trump's budget proposal this week has some potentially major implications for the housing market.
Within the details of the $4.1 trillion spending plan is a change in language regarding government-sponsored enterprises. Specifically, the budget calls for improvements in the housing finance system, but not for the elimination of Fannie Mae or its sister agency Freddie Mac.
That's an important position shift from Trump and deviates from the course former President Barack Obama wanted to follow, according to banking analyst Dick Bove.
"There are significantly different wording changes in the 2017 budget proposal submitted by President Obama and the 2018 proposal submitted by President
Fannie and Freddie had served as the cornerstone of U.S. mortgage finance before the financial crisis. The agencies bought mortgages on the secondary market and provided a vital backstop for banks by assuming the risks associated with home loans.
However, the financial crisis changed that. The agencies ran into financial trouble when loans to less-qualified buyers defaulted, requiring a government bailout that triggered public outrage.
Fannie and Freddie then were effectively nationalized during the crisis and have been pushed to tighten mortgage quality.
In an interview with CNBC last week, Bank of America CEO Brian Moynihan lamented that he would like to see down payment requirements for mortgages at 10 percent rather than 20 percent. However, unless the secondary market is willing to take on loans with a higher loan-to-value level than 80 percent, that is unlikely to happen.
Bove, though, believes
The Administration has publicly expressed its desire to work with members of Congress to facilitate a more sustainable housing finance system. Any reform of the housing system likely will impact the cash flows attributable to the GSEs in the 2018 Budget projections in ways that cannot be estimated at this time.
The 2018 statement differs from language in the Obama 2017 budget message that states "the housing finance system must be reformed, and Fannie Mae and Freddie Mac should be wound down."
Bove believes the difference means that "there will not be any elimination of Fannie Mae."
As an investing matter, Bove sees a continued risk to holders of common stocks, though some preferred stock owners could see some return. Fannie and
Ramifications for the housing finance industry are that Fannie and Freddie could become one entity that will focus solely on mortgages, Bove said. He envisions that new agency paying a fee to the government as a guarantee for mortgages the agency purchases, which would be securitized and sold back into the market.
"Clearly at this
Watch: Mnuchin says we need to fix Fannie & Freddie