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History repeats: Dick Bove warns new mortgage crisis coming

Dick Bove is back. Not that the bearded-bank analyst ever really went away, but Bove is making headlines today with a post on CNBC.com that argues "another potential mortgage crisis" is brewing.

You can read Bove's piece here but I would sum it up thusly: 'Onerous regulations have made private mortgage lending uneconomical and the government is once-again (still) overly reliant on Fannie Mae and Freddie Mac to carry the burden, putting the U.S. taxpayer at risk. Be afraid, be very afraid.'

Three things to note here:

  • First, Bove has issued similar warnings in the recent past.

  • Second, since before, during and after the financial crisis Bove has been steadfastly bullish about financial stocks.

  • Third, Bove has a point. Other observers, myself included, have noted with some alarm recent moves by the Obama administration and new Federal Housing Finance Agency director Mel Watt to re-expand Fannie Mae and Freddie Mac's role in the housing market and make it easier for Americans to buy a house with little or no money down.

 

Related: America's housing policy: The definition of insanity

On some level, this is a Rorschach test for what you view as the primary cause of the housing crisis. If you believe it was Fannie and Freddie working in collusion with liberal politicians to help poor people become homeowners, aka "it was all about the Community Reinvestment Act", then Bove is preaching to the choir. If you think the root cause was reckless bankers run amok after conservative politicians gutted the nation's regulatory apparatus, then Bove's warnings sound like they're coming from an apologist for the financial services industry.

As is so often the case, the truth belies such simplistic, partisan analysis and lies somewhere in the middle. Yes, government policy aimed at helping the poor helped fuel the crisis; and, yes, the gutting of financial market regulation by both the Clinton and Bush administrations helped fuel a bubble in mortgage-backed securities that encouraged borrowers to lend money to anyone who could fog a mirror. Other factors contributed, including: the compliant rating agencies who blessed those MBS with once-vaunted triple-A rating, demographics and the Fed's easy money policies after 9/11, which left investors scrambling for yield and prompted individuals to speculate on real estate because other options didn't look so good.

A bubble has many fathers but its aftermath is orphaned of people willing to take the blame, to paraphrase JFK.

A bubble also typically takes a long time to form and we're a long, long (long) way away from an era where "everybody" wants to buy a house because you "can't lose" in real estate. Indeed, the pendulum has swung so far in the other direction that many Americans who can qualify for mortgages are foregoing a house purchase even though affordability levels are historically strong due to low interest rates and surging rental prices in much of the country.

Related: Rent affordability will deteriorate over next two years: Zillow CEO

In the end, I view Bove's warning as backward-looking as it's thinly-disguised rehash of the debate over the cause of the financial crisis and the government's response. This week's 9-month low existing home sales data and today's better-than-expected Case-Shiller data are also backward-looking, albeit looking at the more recent past, and paint a mixed picture of the housing market. Some recent coincident indicators, such as Toll Brothers' and Home Depot's earnings, suggest the housing market is faring better and there's scant evidence a crisis in the housing market is imminent, as Bove suggests.  

For an alternative view of housing's future, I recommend my recent interview with Zillow CEO Spencer Rascoff, who predicts 2015 will be "a year of slowing growth" for housing prices but nothing cataclysmic. "We think housing is best when it's boring and 2015 is going to be kinda boring for housing."

While "boring" doesn't make for great headlines, it's a better outcome than either "renewed crisis" or "Bubble 2.0" so let's hope Rascoff is right.

Related: Zillow CEO says housing market doesn't look so bad

Aaron Task is Editor-at-Large of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

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