Even a slight decline in the U.S. economy could trigger a crisis in the country’s mortgage markets, according to a recently released report.
Rafferty Capital Markets vice president (equity research) and analyst Richard Bove said in his report that the federal administration’s latest move to take control of Federal National Mortgage Assctn Fnni Me (Fannie Mae) and Federal Home Loan Mortgage Corp (Freddie Mac) might mislead the market into thinking that the government will simply guarantee any debt.
Under the current set-up, the government owns or insures approximately 60% of outstanding U.S. mortgages, with Fannie Mae and Freddie Mac collectively responsible for 45.9% of the market. Bove said that this is rife with risk, especially considering that the Treasury Department has effectively stripped the two companies of their common equity by collecting their quarterly earnings.
“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,” Bove stated in the report, as quoted by Benzinga
“If Fannie and Freddie seek more money from the government, the lynch pin will have been pulled on the government owned mortgage markets,” he added.
Fannie Mae and Freddie Mac are projected to have no more capital by December 31, 2017—a situation that Bove feared could unbalance the entire market in conjunction with an economic downturn.