Fannie Mae, Freddie Mac: FMIC Nationalizes Housing Finance IndustryVW Staff
Rafferty Capital Markets‘ Richard X. Bove chimes in once again on the continuing tug of war that has Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) pulled on from all sides by private investors and the US government, among other interested parties. Bove, having digested the proposed Johnson/Crapo bill, is incredulous that such a measure will come to pass, going into detail about what he sees as the fatal flaws in the bill.
Full Faith and Credit of the United States
I have now read the bulk of the Johnson/Crapo Bill. It appears to have a major contradiction and it is clearly outlining the nationalization of the bulk of the housing finance industry in the United States. Indications are that the political will to accomplish this result is very high. Thus, the risk still exists that the investments in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) could be wiped out.
I find it difficult to believe that the Congress will pass a Bill that increases the cost of owning a house while at the same time increasing taxpayer risk. Time will tell but I am staying with the Buy ratings on Fannie Mae and Freddie Mac.
Fannie Mae, Freddie Mac: Taxpayer Protection
The short title of the Johnson Crapo Act includes the words ”Taxpayer Protection Act.” The many provisions of the Bill reference the need to protect taxpayers against upsets that can occur in the housing finance industry.
Yet, the Bill indicates that the debt of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and the insurance placed by the newly created Federal Mortgage Insurance Corporation (FMIC) will be backed by the “Full Faith and Credit of the United States.” In effect, the Bill would have the United States government explicitly accept an obligation that it legally does not have at this moment.
It makes the taxpayer 100% accountable for any losses or financial problems that impact that portion of the housing finance markets associated with the new government program. How the taxpayer is being protected by accepting 100% of a liability that s/he has legally zero percent of now is confusing to me.
Based on current numbers the Federal debt could rise by $5 trillion if this Bill is passed. The debt ceiling that was the focus of a major political battle last year would have to be raised immediately to a level that no one could conceive of a year ago. Plus, if the new system created by this Bill is successful, as the FMIC grows in size so would the U.S. budgetary obligation. Based on all the reports I am receiving Republicans as well as Democrats think that this is a good idea.
Fannie Mae, Freddie Mac: Nationalization
Note the following:
- The newly proposed Federal National Mortgage Insurance Corporation (which would replace Fannie Mae and Freddie Mac) would be a government agency with its governing Board selected by the President.
- The Mortgage Insurance Fund that it creates would invest 100% of its reserves in government securities.
- The FMIC would establish a number of Small Lender Mutuals. Their capitalization, fees, dividends, acquisitions and other activities would be controlled by a government agency (the FMIC). The initial board of the Mutuals will be put in place by a government agency.
- The Securitization Platform’s initial directors will be nominated by a government agency. All of the rules that the Platform must conform to will be approved by a government agency. The product it buys and the suppliers of that product are determined by a government agency. The method under which it insures a portion of covered securities will be based on rules established by a government agency.
- Repeating from above any losses accrued from this system above 10% will be absorbed by the taxpayer.
In sum, the government will create a nationally sponsored entity that will have the full faith and credit of the United States behind it, and that the government will totally control. This nationalized entity will compete in the housing finance market against private home finance companies that will not be backed by the government.
The American people will elect no person associated with the new agency (as was the case with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)). The agency will increase the cost of a mortgage to homeowners by at least 50 to 75 basis points according to observers. The agency will be immune from any demands made by the President, Congress, and the American people because it will be funded by its constituents – those selected by the government. If this is what the Congress wants for this nation, so be it.