In a new report, Rafferty Capital Markets analyst Dick Bove discussed what he sees as an imminent threat in the U.S. mortgage market. According to Bove, a downturn in the U.S. economy could set in play a chain of events that could lead to disaster in the mortgage market.
Since the United States placed Federal National Mortgage Assctn Fnni Me (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC) under conservatorship, the U.S. government now owns or insures about 60 percent of outstanding U.S. mortgages. Together, Fannie Mae and Freddie Mac own or insure 45.9 percent of the market.
The problem with this situation, Bove elaborated, is that Fannie and Freddie are turning over all of their profits each quarter to the U.S. Treasury and are on track to have no capital by the end of 2017.
Bove said that the market is assuming that the conservatorship means the U.S. government has taken control of both GSEs and will step in to guarantee their debt. Bove warned this is a dangerous assumption to make.
“I would argue that if either of these companies were to seek money from the government during this Presidential election it would become an explosive issue,” he explained. “If Fannie and Freddie seek more money from the government, the lynch pin will have been pulled on the government owned mortgage markets.”
Rafferty has Buy ratings on Fannie Mae and Freddie Mac.
Disclosure: The author holds no position in the stocks mentioned.
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