President Trump’s $4.1 trillion spending plan contains a stark shift in language regarding government-sponsored enterprises. Specifically, the President’s proposed budget calls for improvements in the housing finance system, yet it makes no mention of the elimination of Fannie Mae or Freddie Mac.
According to Dick Bove, Vice President of equity research at Rafferty Capital Markets, this language is notably an important position change and clearly differs from the course that the former administration intended. In essence, President Donald Trump’s budget appears to reverse previous calls to “wind down” Fannie Mae and Freddie Mac.
Bove noted that Obama made it clear he intended to eliminate the entities while “President Trump makes no such statement,” Bove said in a research note. “This is a major change in policy,” he added.
As former cornerstones of the US mortgage industry, Fannie and Freddie played important roles before the financial crisis. However, when the agencies ran into financial trouble, mortgage loans to less-qualified buyers defaulted and the government bailout that ensued triggered a great deal of public outrage. As a result, Fannie and Freddie then were effectively nationalized during the crisis.
In a recent interview with CNBC, Bank of America CEO, Brian Moynihan, expressed his desire for mortgage down payment requirements to be set at 10% rather than the 20% where they sit currently. Moynihan’s desires are unlikely to come to fruition unless the secondary mortgage market is willing to take on loans with a higher loan-to-value level than 80%.
Analyst Bove, however, believes language in the Trump budget statement implies changes ahead and points to some potentially major implications for the housing market.
Specifically, Bove referenced language that states:
The Administration has publicly expressed its desire to work with members of Congress to facilitate a more sustainable housing finance system. Any reform of the housing system likely will impact the cash flows attributable to the GSEs in the 2018 Budget projections in ways that cannot be estimated at this time.
The 2018 statement differs from language in the Obama 2017 budget message that states “the housing finance system must be reformed, and Fannie Mae and Freddie Mac should be wound down.” Consequently, Bove believes the difference in verbiage means that “there will not be any elimination of Fannie Mae.”
“Clearly at this point no one knows what the outcome will be. However, it seems likely that a comprehensive housing finance reform package will be presented to Congress possibly by year-end,” Bove said. “What is very clear is that the outlook for this company has changed. It will be there to guarantee your great grandson/daughter’s 30-year fixed-rate mortgage.”