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Analyst Warns of Potential Mortgage Crisis

mortgage-messAs commentators ponder what's in store for home sales in the coming months, one analyst foresees trouble ahead for the mortgage market.

In a note sent earlier this week, equity research analyst Richard Bove at Rafferty Capital Markets warned clients of a potential mortgage crisis in the making, according to a report from CNBC.

With the Federal Reserve on track to end its monthly bond purchases (currently at a rate of $25 billion and falling), Bove cautions that the loss of one of the tools used to help lift housing out of its post-recession rut could hurt the market, especially as interest rates start to tick back up.

Another cause of concern in Bove's mind is the push from Washington to wind down Fannie Mae and Freddie Mac—which together control about 61 percent of U.S. mortgages, he estimates—and replace them with a new government corporation.

While the proposed Federal Mortgage Insurance Corporation has some support on Capitol Hill, critics—including Bove—argue that investors would be unwilling to take a proposed 10 percent front-end loss on defaulted loans, spelling the end of the 30-year fixed-rate mortgage, considered the cornerstone of the mortgage market.

"This means there will be less money available to fund housing, and the terms of the available funds will be considerably more onerous than what was available under 30-year, fixed-rate loans," he reportedly said. "This means higher monthly payments and lower housing prices. It means a crisis in the mortgage markets—and the economy."

Not everyone agrees with Bove's assessment, however. In a response, CNBC real estate correspondent Diana Olick called Bove's note a "dramatic overreaction," asserting that investors are hungry enough to pick up the Fed's slack in purchasing mortgage-backed securities and that policymakers aren't likely to end the popular 30-year fixed mortgage any time soon.

"Even when the Fed finally pulls out entirely and Fannie Mae and Freddie Mac start to wind down, rates could go up slightly, but they're not going to go up suddenly and not enough to suddenly crash the housing market," Olick said.

Instead, she said low demand and tight credit standards are the main issues to worry about.

"What's wrong with housing right now? Not enough people want to get mortgages. ... That's the problem, not a crash coming this winter," she said.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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