investorG

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined). That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly). 20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone. This whole thing about "no dividends until $175B in common equity" is way, way off. you are right, it's not all or nothing until 175bn. but it's important to look at the leverage ratio also. the minimum leverage ratio excluding buffers is 152bn in tier1 capital. if you assume 25-50bn for preferred, that's around ~115bn common equity. throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid. still a lot. edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

excess buffers = banks > consumers. not good.

p.9 of fact sheet: "As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)." so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent? looks reasonable. what am I missing? yes $76bn is the most bullish case which would be solid news. however i think there's also likely a restraint on the leverage ratio side. they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232. subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite. well, I am still in the fact summary...it will be a long time until I get to p. 231. leverage test (p.3) is "The proposed rule would establish a minimum leverage requirement of 2.5 percent of an Enterprise’s adjusted total assets..." so I dont see that being a problem. p.9: "The adjusted total capital requirement of $135 billion would have represented 2.22 percent of adjusted total assets..." spoiler alert: 2.5pct of 6.1trn of adjusted assets is $152bn.

I believe significant amount is possible, just not par. regarding dividends they might not be possible until $175bn of common equity is in place on first glance.

p.9 of fact sheet: "As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)." so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent? looks reasonable. what am I missing? yes $76bn is the most bullish case which would be solid news. however i think there's also likely a restraint on the leverage ratio side. they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232. subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite.

So you say. I wish we get par but i've believed for years we likely won't. not enough leverage and possibly bad optics. there's no requirement dividends come back on for a long time. the companies need $175bn common equity for even the option for dividends to turn on. I was told prior that a dividend was required for an initial capital raise but that doesn't appear likely unless they do $150bn+ at once.

When? This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all. The companies are worth "X"bn. Taking away one of the consumers of that value leaves extra portions for the existing common + Potential jr converters + new equity. Plus no one wants a govt overhang of more secondary sales after the primary ones. That's not how capital works at all. Core capital is common equity plus non-cumulative pref equity plus additional paid-in capital plus retained earnings. You're talking about market cap. Treasury will exercise the warrants before the re-IPO. That removes any concerns about holdings and timing. in reality they are likely inter-related. with highly visible figures like ackman odds favor an orchestrated plan that delivers X value to different groups. the capital rule and Tsy plan releases suggest precision. they could also sell a portion of the warrants up front rather than exercise and hold.

highly likely jr pref isn't getting par.

When? feb interview on bloomberg

When? This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all. The companies are worth "X"bn. Taking away one of the consumers of that value leaves extra portions for the existing common + Potential jr converters + new equity. Plus no one wants a govt overhang of more secondary sales after the primary ones.

The important pages to read are 231 and 232. Common equity requirements are $110bn for FNMA and $65bn for FMCC for $175bn total. The other higher numbers can be filled with easier to raise preferred stock, sub debt, general loan loss reserves to get to the max headline #'s of ~$240bn. The $175bn figure above is far higher than reasonable but it does include some different transition levels if they wanted to get released with consent before the full $175bn is reached. Potentially as low as the ~$125bn range. edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

I wonder when we'll get the wsj / bloomberg / politico article talking about another delayed capital rule release.

Another week goes by of Mnuchin and Calabria unnecessarily hurting their boss's re-election odds through artificially creating a tight mortgage market. It's time for them to settle Collins (which would domino end the rest of the lawsuits) and at the same time co-ordinate a private equity injection into the companies so they can spread the wealth to homeowners with a strong balance sheet. Waiting for 7 weeks for the Seila outcome is wasting valuable time.

perhaps you can catch more flies with honey...

Just because the value of the GSEs are reinforced doesnt ensure with a change in leadership at FHFA, Congress, and Tsy that a push to return them to private markets continues. Google some of brad sherman's comments, its easy to see a Dem organization propping up the GSEs but keeping them as extensions of the govt inside conservatorship indefinitely. waiting for a lame duck for a potential 4th amendment is lazy. I believe private equity would invest tomorrow in conjunction with a collins settlement that puts their fresh convert preferred investment at the top of the capital structure. Even in a downside receivership type scenario, the waterfall of cash flows could provide them value. It's up to Mnuchin/Trump and Calabria to make it happen with the help of their advisors. Plus, it helps citizens to get $ into the GSEs.

Very good analysis but it doesn't change the fact that the base case is for modest (or worse) profits for the next 1-2 years. 7% unemployment at year end is highly unlikely and home prices aren't likely to be flat as the virus expands when lock downs come off (now) and seasonality worsens later this year. The visibility into massive public reIPOs is poor even looking out to 2021. Private equity capital can have longer time horizons and importantly can be quietly negotiated behind the scenes.

supreme court opinions out on thursday. i won't keep posting this but they put out on their web site in advance the days they will release opinions.

There is no constructiveness in your post. May has little to do with anything. We're at 5% now, our guru estimates 15%, and it's very possible we go way above that. To avoid that obviousness is counterproductive, given that experts have estimated ~50% of pop contracting virus but only a fraction has to date. You know what would be productive? if some of you boardmembers entrenched in FnF for a decade (like me), but far more knowledgeable, would help us understand poor scenarios, instead of the same old 'the treasury is going to void their $200b because we're special' The retirement of the sr pref imo either needs a) a definitive court win and/or b) a concurrent announcement of a private equity capital raise + full or partial warrant exercise / monetization. It's up to the leaders to take a stand, do the required work, and right the (nws) wrong, going on the backup plan if rule of law's Seila analysis doesn't come to fruition. I'm not aware of a court case that would kill the seniors. The NWS, of course, but not the seniors themselves. I know I keep harping on them but they've always been my greatest concern. Even when at 10% FnF had no ability to draw down, so they sat, in perpetuity, as "debt" which would consume the majority of our earnings. And I just don't see the treasury dumping them, no matter if by doing so it contributes to a capital raise. Or maybe they become our capital raise. They could be converted to non-cum and sold, and a lot easier than $200 bil of common, imo - after the way the 2 firms have been treated for the past decade. collins would. if the govt loses, no way they send a $125bn check and hope to make it up on the back end.

There is no constructiveness in your post. May has little to do with anything. We're at 5% now, our guru estimates 15%, and it's very possible we go way above that. To avoid that obviousness is counterproductive, given that experts have estimated ~50% of pop contracting virus but only a fraction has to date. You know what would be productive? if some of you boardmembers entrenched in FnF for a decade (like me), but far more knowledgeable, would help us understand poor scenarios, instead of the same old 'the treasury is going to void their $200b because we're special' The retirement of the sr pref imo either needs a) a definitive court win and/or b) a concurrent announcement of a private equity capital raise + full or partial warrant exercise / monetization. It's up to the leaders to take a stand, do the required work, and right the (nws) wrong, going on the backup plan if rule of law's Seila analysis doesn't come to fruition.

Mortgage rates are around 3.25%. If they reverted to their historical spread to Tsy's they'd be 2.5% or lower. This would obviously be stimulative 6 months out from the election. it's better public policy to inject private equity $$ into FnF (who could then move quickly under calabria's direction to reverse the semi freeze in the mortgage mkt) than the Fed buy additional hundreds of billions of MBS.

The GSEs need private equity capital ASAP imo. The earnings reports were solid. The mgmts probably backed into a credit loss provision which ensured some modest headline profits but at the same time started the Loan loss reserve build. LLR rose by 0.1pct at each to 0.4% (fnma) and 0.3% (fmcc). It's very low odds imo this is the end of the lowered (or negative) earnings period from higher loan loss provisions and the companies / Calabria / Mnuchin know this. Material organic capital build is likely not happening for a while at least --- a repeat of 1q for the next 6 quarters in terms of modest but positive cumulative profits would be good news imo. I know what the mgmts said but I've seen this before and models have plenty of subjectivity. Unemployment benefits are turbo charged thru Aug1. When benefit payouts drop 50-75pct after that, the forbearance rate will almost certainly surge again unless Trump (unwisely politically) declares the window closed. Home prices in some areas may well turn negative. Even though the companies' books entered the crisis in good shape, material losses are likely. I continue to believe it's important that they not wait until after the election for movement. The team imo should: a) settle collins in conjunction with a 4th amendment which deems sr pref paid off but forgoes the 30bn credit from Tsy while maintaining the govt backstop (paid-for) b) exercise half the warrants and forgive the other half and c) issues [30]bn convertible preferred (equal seniority to outstanding jr pref) to private equity. The capital rule may or may not come out this quarter but I personally don't see the original / ACG plan in terms of consent decrees, conversions, pre-ipo planning as reliable. I noticed there was no follow up commentary from the FMCC about hiring their own advisors.

And now we're at 5.6% www.cnbc.com/amp/2020/04/24/mortgage-bailout-balloons-by-half-a-million-more-loans-in-one-week.html 4.9% with Ginnie at 7.2%. But this guy ("in line with the expectations of other analysts") believes it will reach 20-30%: https://nationalinterest.org/blog/buzz/can-fannie-mae-and-freddie-mac-handle-coronavirus-mortgage-crunch-147776 Good read. Learned a few new terms today, and one is particularly ugly: "actual/actual" It's in Trump's political interests to get it up to 20-30pct ASAP. his poll numbers are tanking this is an easy win to get private or public (non pspa) capital into the GSEs asap (while settling collins) and turn them loose to soothe the mortgage mkt (servicers included) and ease the citizens' pain. Yeah, you need to convince yourself that all of this is on the backburner, because it is. Far more important goals to accomplish first, like getting the country right. As far as Trump, I'm sure he's already counting his election winnings. Biden is a joke. Disagree. Trump's #'s are down and he's concerned, the election is a referendum on him with Biden viewed as an establishment figure head non factor. Aggressive and generous forbearance is the cheapest form of Main street economic stimulus on the menu. Hard to do that without capital into the GSEs, if Calabria holds his ground. I do agree that re-IPO, conversion, etc are likely dormant for a long while. edit: see ny post editorial today entitled 'Fannie Mae not doing enough to help with mortgages during coronavirus crisis'. This is an unforced political error. They are trying to protect FnF with the 12 month Forbearance with -- as you pointed out -- a complicated script. They don't want 20pct+ forbearance but they should want it because that's extra cash in the economy during election season, and unlike other actions to date its mostly a middle class benefit.

And now we're at 5.6% www.cnbc.com/amp/2020/04/24/mortgage-bailout-balloons-by-half-a-million-more-loans-in-one-week.html 4.9% with Ginnie at 7.2%. But this guy ("in line with the expectations of other analysts") believes it will reach 20-30%: https://nationalinterest.org/blog/buzz/can-fannie-mae-and-freddie-mac-handle-coronavirus-mortgage-crunch-147776 Good read. Learned a few new terms today, and one is particularly ugly: "actual/actual" It's in Trump's political interests to get it up to 20-30pct ASAP. his poll numbers are tanking this is an easy win to get private or public (non pspa) capital into the GSEs asap (while settling collins) and turn them loose to soothe the mortgage mkt (servicers included) and ease the citizens' pain.

I know you are expecting retro but punting or finding constitutional from these prices could be bullish compared with the widely-speculated probable outcome of prospective only if it's deemed to insulate calabria from a dem president.

I'm not a former CFO and am somewhat guessing but i'd be shocked if there was no reserve build. At a minimum they should stop releasing reserves which would lower earnings from before. @investorG there can be both retrospective and prospective relief in seila. not either/or. the latter is a close call; I dont see the former a close call. also note J. Roberts mentioning twice during orals how the combination of removal only with cause AND no congressional appropriation was particularly troubling...setting the stage for a concurrence on unconstitutionality where the man/plurality opinion focuses only on removal as for reserves, I trust Tim Howard more than either of us re accounting...though as a deal lawyer I was an unofficial accountant... reading Shanmugam's comments at the beginning of the oral arguments suggests that congress might need to get re-involved if it's retro without prospective. I'd guess retro needs prospective to be included for a chance. if Roberts unexpectedly squeezes into constitutional and/or punts, and Prez Dem XYZ fires calabria jan 2021 for some bogus claim of inefficiency, would calabria remain in power during the likely court challenges or would he have to leave right away? if it's the former, i'd lean that way for the outcome. if the latter, then Roberts might as well go ahead and decide unconstitutional and figure out the remedy now.