Mortgages as we know them are going away in the next four years, warns Dick Bove, vice president of research at Rafferty Capital. Bove, one of the most widely-respected banking analysts in the world, is certain that will have devastating consequences for housing and the rest of the American economy.Affordable Housing Nonsense
The removal of the two most important players in American mortgages – the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") – threatens the very foundation of the American economy, according to Bove.
These two government-sponsored entities – along with the smaller Government National Mortgage Association ("Ginnie Mae", a government corporation that broke off from Fannie Mae) – issued 98% of the $1.4 trillion in mortgage-backed securities in the United States so far in 2013. These securities are sold in order to add liquidity to the mortgage market, thereby making funds available to borrowers.
"If Fannie and Freddie go away, what then happens to the mortgage markets?" asks Bove. "The answer to that question is that we no longer have things like 20-year and 30-year mortgages because banks are not going to put that type of mortgage on their balance sheets. And we won't have fixed-rate mortgages."
Bove says the banks he spoke with won't be able to provide 30-year mortgages in large quantities without Fannie Mae and Freddie Mac in the markets. "I've called a number of very large banks – the largest issuers of mortgages in the United States – and asked them, 'If there was no Fannie and Freddie, what would be the typical mortgage in the United States?' And, the answer is a 10- to 15-year adjustable rate mortgage."
The end of Fannie Mae and Freddie Mac is a major sea-change in how the government views affordable housing, according to Bove.
"It is no longer the goal of the United States government that every household should have its own home," say Bove. "In my view, that's a call for a return of public housing and all of the ills that went with public housing."
The results of "affordable housing" programs speak for themselves.
In the last decade, hundreds of "affordable housing" programs at the federal and state level did anything but make housing affordable.
Together with president George Bush's inane "ownership society", the price of homes skyrocketed, as did taxes on homes. And cities did not use those tax dollars very wisely, did they?
Low interest rates, declining lending standards, ownership promotion mentality, 95% mortgages, and a host of other silly ideas fueled the biggest housing bubble in history.
Then when housing prices crashed, the Fed and government bureaucracies at every level (city, state, federal) acted in unison, hoping to force home prices back up.
So spare me the sap about "affordable homes". Neither the Fed nor government bureaucrats really want "affordable housing".
I highly doubt Dick Bove does either. But if by some miracle he does, he sure as hell does not know the best way to achieve that goal.
Oh The Horror
Bove laments "If there was no Fannie and Freddie, what would be the typical mortgage in the United States?' And, the answer is a 10- to 15-year adjustable rate mortgage."
If Bove is correct, that would be a great thing! People would not over-leverage, prices would be stable, and at the end of 10 years people would actually "own" something.
California Commercial Banker Chimes In
A California Banker friend (ACB) sent me the above link and also chimed in with his thoughts.
I’m sure you’ve written before about closing down Fannie and Freddie. I too support the idea. In essence, we should return lending to the free market. The government sponsored lending boom via GSEs, together with cheap money from the Fed and declining lending standards, led to artificially high real estate values culminating in various bubbles.
Bove’s research with bank executives leads to the conclusion that all mortgages in the future will be 10-15 year loans on variable rates. I find that odd, because I’ve been a Commercial Banker for 20 years, we write variable rate commercial real estate loans on a 25 year amortization due in 5, 7 or 10 years all the time.
I do agree that most mortgages will be variable/adjustable, as a bank you just can’t take the interest rate risk by offering longer term fixed rates if you hold those loans on your balance sheet.
Another possibility would be something along the lines of bonds (not government backed) to support some fixed rate lending. The underwriting criteria behind these loans might be and should be stronger, say a minimum 25-30% equity, 28% front end debt/income ratio, prudent back end ratios, upper tier credit history, and strong job history. In essence, left to its own accord, the market would rid itself of the flimsy underwriting under the old Freddie and Fannie model.
Then, if Freddie and Fannie went away, wouldn’t major banks who write most of the mortgage loans have to pay a little better interest rate on certificate of deposits (benefiting seniors) to attract capital into the banks to make mortgage loans?
We’ve become so government dependent, we fail to understand the free market will solve the alleged mortgage problem quite easily.
Lending should be a prudent thing, not a government sponsored free-for-all for political purposes.
ACB and I welcome a return to lending sanity and an end to boom-bust cycles sponsored by the Fed and government bureaucrats.
Bove believes government can and should promote "affordable housing" even though history (and common sense) suggest the idea is ridiculous.
Mike "Mish" Shedlock