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Takeaway: Mel Watt is bullish for housing, big banks and mortgage insurers.

(Editor's note: Hedgeye Financials Sector Head Josh Steiner responds below to some big news out of Washington.)

Housing Watt(age) - und55

Senator Harry Reid (D-NV) just threw down the gauntlet and went with the nuclear option. He’s rewritten the rules to prevent filibustering on all Presidential nominees aside from Supreme Court Justices.

The biggest takeaway here is the potential for a Lazarus-like rise of Mel Watt to potentially head FHFA (the overseer of Fannie and Freddie.) As a reminder, if Watt gets confirmed, which it now looks like he can/will, it would be very good for the following stocks: MTG, RDN, BAC, WFC, C. It would also be very good for housing as an asset class.

Here’s an excerpt in a research note we wrote back when Watt’s candidacy first surfaced.

Another Positive Catalyst - Big Banks, Mortgage Insurers

It's being reported this morning that President Obama is likely to nominate Congressman Mel Watt (D-NC) to be the new head of FHFA, replacing current director Ed DeMarco. While it remains to be seen whether Watt can be confirmed, we've been clear that DeMarco's eventual replacement will be a positive catalyst for housing, big banks and mortgage insurers. DeMarco has opposed underwater principal forgiveness for GSE borrowers, a stance we agree with as taxpayers.

That said, it's clear that if a new director were to green light underwater principal forgiveness it would represent a transfer payment from taxpayers to large banks and mortgage insurers. Large banks have large second lien portfolios that would be in far better shape if the default probabilities on the first liens were improved. Based on the administration's history, we think it's unlikely that the banks would be compelled to offer comparable forgiveness on the seconds. The same logic is even more applicable to the mortgage insurers. Reducing first lien principal is a huge boon for MIs with legacy GSE exposures. MTG & RDN's frequency and severity profiles would improve significantly if Watt is confirmed. 

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