Luke 532

Just FYI, that was from the Bethany McLean/Bill Ackman event 2 or 3 years ago.

Given what Muchin has said in the past I'm glad to read this (if true)... https://www.insidemortgagefinance.com/imfnews/1_1429/daily/-1000047390-1.html As for GSE matters, who Trump might pick to succeed Mel Watt as director of the Federal Housing Finance Agency continues to be a topic of speculation. Then again, it’s highly unlikely that Trump will be personally involved in the choice. The pick – from what we’ve been told the past 12 months – is clearly in the hands of Treasury Secretary Steven Mnuchin…

FWIW, Trump seems to like Sweeney. http://uscfc.uscourts.gov/announcements President Trump designates Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims. On July 12, 2018, President Donald J. Trump designated Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims. For Chief Judge Sweeney’s biography, please click here.

Mnuchin hung out with John Paulson and Bill Ackman, among others, this weekend: https://www.bloomberg.com/news/articles/2018-08-27/milken-mnuchin-in-the-hamptons-with-blankfein-to-fix-the-world Edit: they were at the same event, no idea if they "hung out" or not.

CBO report... From Peter A. Chapman The entire "Effects of the Transitions on Fannie Mae’s and Freddie Mac’s Existing Operations" section in the Dec. 2014 report is gone. The third paragraph on the last page says, "Helpful comments were also provided by . . . Edward Golding of the Urban Institute. . . ." Urban Institute wasn't consulted in connection with the Dec. 2014 report.

Report from CBO out yesterday... Transitioning to Alternative Structures for Housing Finance: An Update August 23, 2018 Report https://www.cbo.gov/publication/54218 CBO analyzes four alternative structures for the secondary mortgage market, in which the government would play varying roles in guaranteeing mortgage-backed securities, and provides estimates of federal costs under each approach.

Good thing my thesis doesn't depend on the courts. With that said, a court win would be a nice bonus to speed up the process.

"One GSE watcher..." Hah! Might as well be me, but it wasn't. Still funny how the narrative at IMF (i.e. David Stevens) has dramatically changed in recent months. Brooks as CEO? Yes, please. Even if it doesn't happen the fact that IMF (Stevens) is testing the waters with this kind of stuff seems like a positive. https://www.insidemortgagefinance.com/imfnews/1_1422/daily/-1000047236-1.html One GSE watcher told us that Brian Brooks, who currently serves as Fannie Mae’s EVP, general counsel and corporate secretary, would make a good successor to departing company CEO Timothy Mayopoulos. However, this observer added: “He’s not going to take a pay cut.” Congress capped GSE CEO pay at roughly $600,000 per year. Before joining Fannie in November 2014, Brooks was vice chairman of OneWest Bank, a bank Treasury Secretary Steve Mnuchin once owned a stake in.

https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx Searched "meeting" and "meet" under Organization. The two results are Moelis (7/26/18) and Andrew Davidson & Co. (6/21/18) Davidson last year: http://knowledge.wharton.upenn.edu/article/why-competition-wont-lead-to-better-outcomes-for-fannie-mae-and-freddie-mac/

The date on the Moelis comment is August 1. If MBA was going to speak out against it, we would have heard it by now. That further drives the point home that MBA isn't balking at the Moelis plan. Thank you.

Two super interesting quotes (to me at least), "Moelis is an independent investment bank, and is currently engaged as a financial advisor to certain non-litigating preferred shareholders in the GSEs" (page 6) Seems to me to be more confirmation that non-litigating and litigating shareholders are in the same boat. "This also follows the same general approach laid out in the Moelis Blueprint and is consistent with GSE reform proposals put forward by other major market participants (e.g., the Mortgage Bankers Association)" (page 7) If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised. As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks. This has been much more frequent than at any point in the past few years.

Tim Howard comments... https://howardonmortgagefinance.com/2018/07/10/some-pre-comment-comments/comment-page-1/#comments I just saw this. My initial reaction is that this very is good news for current investors in the companies’ securities, but less good news for mortgage borrowers and, potentially, the purchasers of the new equity the companies will issue if as Moelis advocates they are allowed build capital and released from conservatorship. I’ve only skimmed the Moelis presentation–and will analyze it in much more depth shortly–but I already get its import: something very close to the capital proposal FHFA put out in June will be the “price” for getting the Financial Establishment (the banks and Wall Street firms, and also Treasury) to accept an administrative solution to mortgage reform in which the companies are allowed to emerge from conservatorship. I already suspected something as much when I saw that the risk-based capital numbers FHFA contortedly had backed into in its June proposal were very close to the capital numbers Moelis had advocated in its plan last year. And the statement they make in their Summary of Conclusions on page 7 leaves little doubt that this is the consensus “way out” for the companies: “The differences between FHFA’s rule and U.S. bank capital requirements, or the requirements proposed in the Moelis Blueprint, are minor, explainable and defensible.” So this is the very good news: it looks as if a broad-based consensus has emerged on a path to getting Fannie and Freddie out of conservatorship, which will require settling the lawsuits. I made three major criticisms of the FHFA capital proposal in my latest post: it is a mistake to align the Fannie-Freddie capital requirements with bank capital regulations (since the companies deal only in a single product whose losses are much less than the assets banks finance); the cushions FHFA has built into the risk-based standard, coupled with the countercyclical nature of that standard, will force Fannie and Freddie to hold large amounts of excess capital, which FHFA isn’t taking into account; and its treatment of CRTs is one-sided (not counting their expense), and thus gives Fannie and Freddie an incentive to substitute an inferior form of capital for a superior one. Of these, Moelis only addresses the third. Again, I get not addressing the “bank-like capital” criticism–overcapitalizing the companies is the price that will have to be paid to get them out of conservatorship. The excessive conservatism of the risk-based standard is a different matter. I sent a note to the Moelis team about this the day I did my blog post, so I know they’re aware of the issue. I believe they either don’t agree with my analysis of it, or think if it becomes a problem FHFA can fix it later, by regulation. (If FHFA doesn’t fix this, I believe the “reformed” companies will have to price their new business in a way that will have a significant negative impact on their business volumes, and hence their value as going concerns.) I would lean toward the second explanation: let’s not put any obstacles in the path of getting a deal done. On CRTs, I see Moelis does think FHFA is giving the companies too much credit for them, and proposes giving less capital credit. I’m going do more work on the risk-based capital dynamic (the fact that the way FHFA has structured the test will require much more capital just at the time that capital will be hard to come by, which I don’t think FHFA understands or intends), and address this in more detail in my comment letter to FHFA. And I’ll still make the point about the illogic (and damaging effect on mortgage rates) of using bank capital ratios for mortgages that have one-tenth the loss rates of the types of loans banks make, but I understand I’m not going to win that one.

Moelis met with FHFA two weeks ago -Go here: https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx -Search "Moelis" Results: Meeting on 7/26 Moelis uploads report 8/1 7-26-18_Meeting_with_Moelis_and_Co_LLC.pdf 32_Moelis_and_Co_LLC-u.pdf

Lobbying on the GSE Issue Moves from Congress to the Executive Branch https://www.insidemortgagefinance.com/imfnews/1_1415/daily/lobbying-on-the-gse-issue-moves-to-the-executive-branch-1000047121-1.html

https://www.insidemortgagefinance.com/imfnews/1_1413/daily/white-house-assembles-team-to-find-watt-successor-1000047055-1.html?ET=imfpubs:e11221:73599a:&st=email&s=imfnews Meanwhile, two industry sources who spoke under the condition they not be identified said the White House has assembled a dedicated team to find a successor to Watt, believing an early departure is a possibility. Maybe these two stories are connected. Maybe not.

Unconstitutional ruling, Watt under investigation for sexual misconduct with his employee, now this below. Tough couple weeks for FHFA... Investigating the investigator: Fannie-Freddie watchdog under scrutiny https://www.politico.com/story/2018/08/02/fannie-freddie-watchdog-scrutiny-laura-wertheimer-mel-watt-720176

Seems like David Stevens' mouthpiece is slowly but surely coming around. Heck, if Stevens gets a little piece of the pie for banks then it's a win-win, so might as well start angling for this end-game to take place sooner rather than later as the earlier timing is better for all. Especially since he is retiring the end of September. Yesterday https://www.insidemortgagefinance.com/imfnews/1_1411/daily/treasury-wants-hud-to-make-fca-changes-1000047046-1.html QUOTE OF THE WEEK: “Watch for an end to the [GSE] conservatorships under a Republican director at the FHFA. GSE preferred stock will be converted to common and dividends will end to build capital.” – Tim Rood, chairman of The Collingwood Group. Today https://www.insidemortgagefinance.com/imfnews/1_1412/daily/mick-mulvaney-shows-interest-in-fannie-freddie-1000047053-1.html By the end of September, Fannie Mae and Freddie Mac will roll their wheelbarrows full of cash down to Pennsylvania Ave. to dump $6.1 billion worth of dividend payments into the collection box at the U.S. Treasury. Needless to say, certain factions of the mortgage industry are not happy. “The money should be retained as capital [by the GSEs] and used to protect taxpayers and housing markets,” said the Community Mortgage Lenders of America. “If it is swept into general revenues, it’s just a tax on mainly younger buyers. And since most of the federal budget is entitlements to older Americans, it’s an inter-generational transfer of wealth…” We’ve heard chatter around Washington that acting CFPB Director Mick Mulvaney has taken an interest in GSE reform. As to why…

https://www.insidemortgagefinance.com/imfnews/1_1411/daily/treasury-wants-hud-to-make-fca-changes-1000047046-1.html?ET=imfpubs:e11211:73599a:&st=email&s=imfnews “Watch for an end to the [GSE] conservatorships under a Republican director at the FHFA. GSE preferred stock will be converted to common and dividends will end to build capital.” – Tim Rood, chairman of The Collingwood Group.

That might be wishful thinking. It reads to me like he is diversifying a bit other than his massive position in St. Joe. Odd for a guy like Berkowitz to diversify but he was down to something like 3 or 4 positions so perhaps he felt the need, and the heat from his investors, to spread it out a bit.

The news certainly is concerning. On one hand I love the thesis and the odds of administrative reform into a utility/Moelis/etc. seem to get stronger as time goes on and news is released. On the other hand one of the largest players who is in on a major lawsuit has reduced his position. Perhaps it's redemptions (but he didn't reduce St. Joe's and he has bought other new stuff). Perhaps he thinks the time it takes to win is going to still be a few years (and he thinks St. Joe's and other new investments will appreciate in a shorter time period). Perhaps he has lost faith in his thesis. Perhaps he knows something from his lawyers that will be detrimental to his case. Berkowitz doesn't hold very many large positions, but he still does have a large position in the GSE's. Clearly St. Joe's is his favorite holding at the moment. Personally, I'm not selling any of my holdings as all-told I still really like the investment, but him selling this much is concerning.

Some vaguely interesting language in Freddie's 10-Q. In my reading, there wasn't discussion of post-conservatorship or exiting conservatorship in previous 10-Q's. I could be wrong. On page 59 (page 61 of 216 in PDF format)... These returns may not be indicative of the returns that would be generated if we were to exit conservatorship, especially as the terms and timing of any such exit are not currently known and will depend upon future actions by the U.S. government. Our belief, should we leave conservatorship, is that returns at that time would most likely be below the levels calculated above, assuming the same portfolio of risk assets, as we expect that we would hold capital post-conservatorship above the minimum required regulatory capital. It is also likely the we would be required to pay fees for federal government support, thereby reducing our total comprehensive income. Freddie_10-Q_2018_Q2.pdf

Calling Judge Kavanaugh The Fifth Circuit tees up a major separation of powers case. https://www.wsj.com/articles/calling-judge-kavanaugh-1532895994

Mayopoulos stepping down... https://www.cnbc.com/2018/07/23/fannie-mae-ceo-timothy-mayopoulos-to-step-down-by-years-end.html

Hank/Henry

Moelis: 3.25% FHFA: 3.24% Treasury: "Mr. Phillips noted the importance of the FHFA’s action and stated that the proposal, which would establish a risk-based capital requirement and a leverage capital requirement, helped create a public, regulatory framework for the two enterprises." I don't know how else to explain the above. One either sees it or they don't. This has been discussed on this message board before. Search for it to see possible reasons why this would be stated.