Fannie Mae Will Be Strengthened For Housing In 2021

Analyst Dick Bove of Odeon Capital has long been arguing against buying the common shares of Fannie Mae and Freddie Mac, but his latest argument in favor of housing reform could offer reasons to buy those common shares. He believes Fannie Mae and Freddie Mac will be strengthened next year because of the need to provide a boost to housing, and he suggests that history may repeat itself to make that happen.

History repeating itself

Bove drew comparisons between the current situation and what was happening in the late 1960s. At that time, civil rest resulted in multiple cities being torched, while currently, civil unrest has led to multiple rights. In the 1960s, the Black Power movement was growing in popularity, while today, it’s the Black Lives Matter movement.

In the 1960s and now, unemployment among the young and non-white has been high. At that time, the Vietnam War was going on, and there is also a crisis today, although COVID-19 is of a different sort. The 1968 election was extremely contentious, just as today’s election is.

Further, Bove noted that the Great Society Program was pouring fiscal stimulus into the U.S. economy in the 1960s, while the U.S. government and the Federal Reserve are now funding record levels of stimulus.

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A history lesson on housing and Fannie Mae

Congress voted the Housing and Urban Development Act into law in 1968 as part of the Great Society Program. The law required the U.S. government to build or rehabilitate 26 million housing units by 1978. It also created Ginnie Mae and mortgage-backed bonds. Further, it set up the 235 and 236 subsidy programs, which set mortgage rates at 1% for low-income households. The law also promoted a series of urban housing programs.

By 1970, lawmakers realized that the housing finance system wasn’t adequate to find the funding needed to build the 26 million housing units. Thus, Congress passed the Emergency Home Finance Act, which created Freddie Mac, provided funds to the Federal Home Loan Bank System and facilitated greater use of private mortgage insurance.

Bove explained that these two housing laws were designed to create partnerships between the public and private sector that would attract funds to the housing industry. The need to attract those funds was to build housing, thus stimulating economic growth and calming civil unrest because the Douglas Commission said at the time that people wouldn’t burn down their own houses (see 30 most expensive US cities to rent a house).

The need to stimulate housing and support Fannie Mae

Whether Donald Trump or Joe Biden wins the election, Bove believes lawmakers will face the same problems of improving the economy and calming civil unrest, and he argues that stimulating housing will be the answer. Thus, he expects both parties to recognize that they need public/ private cooperation to find the money to finance housing, and Fannie Mae and Freddie Mac are the answer.

To stimulate housing, lawmakers will have to find a way to keep the 30-year fixed-rate mortgage financed, and Fannie and Freddie are the only entities that can do that. Bove pointed out that over the last 10 years, numerous bills have been introduced to eliminate the government-sponsored enterprises. However, none of those bills ever made it to the floor of the House or Senate for a vote because lawmakers realized that housing finance is closely tied to Fannie and Freddie. Getting rid of them would eliminate the 30-year fixed-rate mortgage and send housing prices plunging.

Bove believes that the same thinking that has kept those bills from coming up for a vote will result in the recognition that Fannie Mae and Freddie Mac are needed to stimulate housing growth. Thus, he argues that whether Democrats or Republicans are on control, the GSEs will be strengthened.

How to strengthen Fannie and Freddie

In order to strengthen Fannie Mae and Freddie Mac, Bove believes they must be released from their conservatorships. Their senior preferred shares must be considered to have been paid, and the dividends on the junior preferred shares must be restored. Common equity must also be raised.

“The need for Fannie Mae and Freddie Mac is growing as the need for a housing revival grows to support economic growth,” Bove wrote. “This suggests that these companies will return to the private sector with some type of government guarantee. This is likely whether the Republicans or Democrats are in power.”

He also says it makes sense to own the junior preferred shares in Fannie and Freddie, but we would argue that he has also made a case for owning their common shares as well without actually meaning to.