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Bove: Mortgage Meltdown Brewing (Dick, You’re A Little Late To The Party!)

Dick  Bove appeared on CNBC and warned that a mortgage meltdown is brewing. He has a related interview as well.

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The Treasury Department is looking to wind down Fannie Mae and Freddie Mac, but without these organizations, there would be few buyers for 30-year fixed rate mortgages, bank analyst Dick Bove told CNBC on Tuesday.

Banks would be happy to step in and offer variable rate five- and 10-year mortgages, but those shorter maturities would increase monthly payments for borrowers and lower the overall cost of housing—a situation that would send shock waves through the U.S. housing market, said Bove, vice president of equity research at Rafferty Capital.

“Is the United States ready to take a shock to housing prices because we’re getting rid of 30-year fixed rate mortgages?” he said during a “Squawk Box” interview.

Bove said banks have admitted to him privately that they cannot make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages.

Consequently, the industry wants to make loans that it can sell to Fannie Mae and Freddie Mac, he said. The two government-sponsored enterprises help increase the number of loans that can be made by buying mortgages from banks so they can reinvest in new loans.

However, the Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.

“So the question becomes, ‘Who’s going to buy these mortgages?’ And if we’re talking about 30-year fixed rate mortgages, which are yielding less than 4 percent, who’s going to be crazy enough to buy [them] or put [them] on their balance sheet?” Bove asked.

Who is crazy enough to buy 30 year fixed-rate mortgages and/or put them on their balance sheets? The Federal government and their proxies Fannie Mae and Freddie Mac, of course!

But first of all, Dick, 2018 is a long way off and I wouldn’t announce the obituary for Fannie Mae and Freddie Mac quite yet.

Second, Michael Lea and I have been saying for a long time now that banks do not want to put 30 year mortgages on their books. Why? 30 year fixed-rate mortgages pose a number of risks to the lender/investor (interest rate risk, prepayment risk, default risk, underwriting risk, etc).  Banks would prefer to hold short-term adjustable rate (aka, variable-rate) mortgages that have shorter duration (less risk exposure).  Here is our Mercatus paper entitled “Do We Need The 30 Year Fixed-rate Mortgage?” In short, the US is the only country with an obsession with the 30 year fixed-rate mortgage. France, hardly the model of a healthy economy or banking system, is second with 67 percent of long-term fixed-rate mortgages.

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Third, Dick, the mortgage purchase application market has already melted down.

mbapsa022515Fourth, big banks are not originating a heck of lot of mortgages even when they sell them to Fannie Mae and Freddie Mac.

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Fifth, households continue to deleverage in terms of their mortgage debt. The US is back to 1981 levels when 30 year mortgage rates exceeded 18 percent. But today 30 year mortgage rates are south of 4 percent.

gr10morg The mortgage rates for jumbos (loan amount higher than the conforming loan limits at Fannie Mae and Freddie Mac) used to have a wider spread over conventional (non-jumbo) mortgages until 2013. Now the spread is smaller.

jumbotefaaaaIf we go back to 1998, the jumb0-conforming spread was low BEFORE the financial crisis and the government takeover of Fannie Mae and Freddie Mac. The spread has finally declined to pre-crisis levels of 31 basis points.

jumboconfltspeadEven at near historic low mortgage rates, the mortgage market for single-family residential housing is still in meltdown.

If I compare the 30 year fixed-rate with the 3/1 ARM rate (fixed for 3 years and adjusts every year after the initial 3 year period), the 3/1 ARM rate is HIGHER than that of the 30 year fixed. Typically, ARM rates are lower than fixed.

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If I compare the rates on 5/1, 7/1 and 10/1 ARMs, we can see that the mortgage market is functionally dead for home purchases even at 3.48 percent on the 5/1 ARM.

armratesHow about the 15 year mortgage versus the 30 year mortgage? Even a 93 basis point rate differential, a 3 percent 15-year mortgage can’t jumpstart the residential mortgage market for the middle class.

fr3014So, Mr Bove, the residential mortgage market for the middle class has ALREADY melted down. As Billy Preston sang, “Nothing From Nothing Beats Nothing.”

Speaking of nothing from nothing, I wonder if Fed Chair Janet Yellen showed THIS chart to Congress?

mbapfed022515

Here is a tape of Fed Chair Janet Yellen lecturing Congress on how The Fed’s zero interest rate policies and QE have helped the middle class and the residential mortgage market.

Below is Senator Rand Paul with Fed Chair Janet Yellen.

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