In a report dated March 1, Richard X. Bove, vice president of equity research at Rafferty Capital markets, warned that the government is too deeply entrenched in the mortgage market.
The government currently insures a quarter of all new residential mortgages and purchases one sixth of them. Fannie Mae, Freddie Mac and Ginnie Mae – all government-sponsored enterprises – own or insure three fifths of all outstanding mortgages in the United States, according to a report by ValueWalk.
According to Bove, that heavy government involvement is a recipe for trouble. And the problem, as he sees it, is getting worse. In 2009, Fannie Mae and Freddie Mac owned or insured 41.9% of the mortgage market. Today, they own or insure 45.9% of it. And Ginnie Mae is growing so rapidly that it’s usurping market share not only from the private sector, but from Fannie and Freddie as well, Bove said.
So how could this spark a crisis? According to Bove, the current situation – in which Fannie and Freddie must turn over all profits to the government as dividends – means the agencies are, for all intents and purposes, insolvent. While most lenders assume that Fannie and Freddie are guaranteed by the government, Bove questions how long this will remain true.
“What would happen if the politicians heard that the Treasury had bankrupted Fannie Mae and Freddie Mac?” Bove wrote.
“I do not believe that the current Administration could defend its actions in bankrupting both companies or in driving them into insolvency,” he added. “The whole government approach to financial stabilization, which is now not trusted because bank stocks are plunging, would be called into question. Time is ticking on the GSE issue because they are totally incapable of meeting their obligations if the country slips into recession – and (FHFA director) Mel Watt, the GSE regulator, knows it.
“If Fannie and Freddie seek more money from the government, the lynchpin will have been pulled on the government owned mortgage markets. The little boy will have pulled his finger out of the dyke and housing will be inundated.”
At least one expert thinks the U.S. may be headed for a new mortgage crisis as early as this summer.