Midas79

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" Do consider the source. Pinto is in that group that would see a red EXIT light in a movie theater and yell "Fire!" if he thought it would hurt FnF. I do wonder if his estimates for the percentage of loans in forbearance per month is even accurate. He has it going from 4-8% at the end of April to 8-18% in May, 20-25% in June, and 30% in July. But how many people are there really who were able to make their April payments and will take the forbearance later? Shouldn't the percentage of loans in forbearance should peak much sooner than July? Pinto also misses the fact that FnF only have to start advancing the money themselves after 4 months have passed in forbearance. The servicers are on the hook until then. That means FnF won't have any obligations in this regard at all until August, and even then only for the (so far less than 10% of) loans in forbearance in April. A servicer liquidity facility, if it is big enough, should remove the need for FnF to ever have to deal with this. I would hope that by August some of the forbearance borrowers will return to paying status too.

You linked to the wrong version; yours doesn't have any mention of forbearance at all; a search for "forbearance" yielded no results. Instead of S 3548, you should refer to HR 748, which is the version that was passed into law, and says in Section 4022: https://www.congress.gov/bill/116th-congress/house-bill/748/ I will admit that the penalty for lying about a hardship is my own assumption. However, if there was no need for assertion or documentation of any kind as to economic hardship, I don't think (B) would have been there at all. I am clearly not the only one that interpreted this the way I did, for example: https://www.consumerfinance.gov/about-us/blog/guide-coronavirus-mortgage-relief-options/

Clarity is absolutely needed. I don't think the CARES Act specified whether servicers are allowed to ask for the forborne (is that right?) payments as a lump sum at the end of forbearance. Perhaps they were counting on incentives; a wave of delinquencies helps noone and gives all parties involved a reason to iron something out. I don't think there's much of a chance of the forbearances lasting all the way through the end of 2021, though. After the initial forbearance period the borrower actually does have to assert economic hardship to get the extra 6 months, presumably with penalties for fraud. Unfortunately, it seems that at least some servicers have taken to threatening forbearance requesters with balloon payments later to save their own asses. I do think the servicers will need a liquidity line soon, if for no other reason than to stop doing this. As long as it's from the Fed, while leaving FnF out of it, I don't have a problem.

I hadn't yet joined the investing world during the 2008 financial crisis, but I have heard many stories that a lot of banks were forced to recapitalize at what turned out to be a really bad time for pre-raise shareholders. Massive equity raises at low prices in a time of crisis. Is this true? If Nomura really is invoking this comparison, it's hard to see how the commons go to $5 given where they trade now. Then again, raising capital right now is impossible due to the lack of a capital rule and PSPA 4th amendment.

Now Treasury gets 90% instead of 80% for the warrants? Why don't they just send $125B to moot all the lawsuits and get 99.5% of the commons instead? Saying that Treasury's interests are aligned with existing commons' only applies if the warrants stay at 80%. If Treasury gets to start upping that percentage then the reverse becomes true: Treasury gets the most money by leaving behind as little as possible for the existing commons. If recapping FnF is such a priority, wouldn't Calabria try to do the re-IPO ASAP? Or are you saying that there won't be enough appetite in the capital markets to provide the money Calabria will want?

So Treasury is just going to write FnF a huge check with no strings attached? Consider me highly skeptical on this front. How much were you thinking, and why would Treasury just give this money up for free rather than do something like increase the seniors' liquidation preference by that amount? Prefs' placement in the capital structure vis a vis the commons does not only work in liquidation. If that were true then pref series like FNMAO (that have a near-zero div rate right now) would be worth almost nothing, right? Instead we see the opposite, that the liquidation preference part of the prefs' value (as opposed to the dividend value) is substantial. The prefs' combined market value right now is somewhere around $7B while for the commons it's around $3.5B. If neither is getting a dividend for the foreseeable future and liquidation preference doesn't matter, why aren't those numbers closer together? Also, the juniors won't be redeemed (either at full par or at a discount) because that depletes capital at a time FnF need to be building it. The only way to get the juniors to accept a haircut is in conjunction with a voluntary exchange for commons, and you can be sure that they will only take a deal that works to their advantage. This would necessarily be to the existing commons' disadvantage in relative terms. The juniors might not have as much leverage as I think, but one thing I am certain of is that the commons have no leverage whatsoever in comparison. Treasury writing off the seniors and sending FnF $25B, even if it's a tax credit, should moot all cases other than direct claims in Sweeney's court, and those plaintiffs can be settled with individually at a low cost relative to the size of the recap. What is the treatment of the seniors in your slow capital build scenario? If they still exist then both the juniors and prefs will trade at around today's prices at best because there would be no real end in sight; at what point would they go away, and why would Treasury not just convert them into a whole mess of commons like they did with AIG? To edit 1: Calabria said "It has always been my view that an exit from conservatorship is going to require a large capital raise by Fannie and Freddie." That means he won't be releasing them before the re-IPO; alongside it looks more likely. To edit 2: I agree. It's just that there is no way to a recapped FnF that doesn't involve heavy dilution of the commons (either Collins 1 with warrants + re-IPO or Collins 2 with senior conversion) or Treasury just gifting FnF a ton of money.

Barring a rapid V shaped recovery, there's low odds for the Re-IPO in 2020 or 2021. Best to get capital into them ASAP, Plan B. Public (non-pspa) first, private equity, second if needed. The talk of jr pref conversions, AIG plan, modest discounts to par are likely fairy tales. The Fed is facing heavy backlash, they are probably reluctant to add on new areas. A freshly capitalized FnF (post-Collins settlement and Sr pref writedown) can - among many other benefits - help save select servicers, winning MBA's support for the plan. How do you propose FnF get capitalized without the re-IPO? Where is that much money going to come from? A senior pref writedown, with a concomitant return of $25-30B from Treasury to FnF, doesn't fully capitalize them; they would be around $75B short. This is also unlikely to happen fast enough to save the servicers, if that is even the purpose of the exercise. Anything more than a modest discount to par for the prefs means the commons go to near-zero. Placement in the capital structure matters.

According to GSE haters this is solely due to them being in conservatorship. The correct view, of course, is that FnF debt is viewed as this safe with $23B of capital and a $250B Treasury backstop. It stands to reason that it would be viewed as even safer with $150B of capital and a similar or larger Treasury backstop. (I know I'm preaching to the choir here; I made that last comment on Twitter a while back)

The seniors must be either extinguished or converted to a form of capital that counts as core capital (non-cumulative prefs or commons). This would add $193B to core capital instantly. FnF's core capital was negative $170B at the end of 2019. They will never get to a reasonable core capital number (Watt wanted either $103.5B or $139.5B) without such treatment of the seniors. Getting rid of the seniors also ends the NWS because NWS dividends are payable to the holders of the seniors. Bottom line: recap and release cannot happen with the seniors in place. Getting rid of them (via a PSPA 4th amendment) is the single biggest step Calabria and Mnuchin can take, and the single most important one to us FnF shareholders. Not to mention that a future administration could not reinstate them, at least not easily. On this note, I think Treasury converting the seniors to 0%, non-cumulative, convertible prefs is better than converting them straight to commons. Treasury could then unwind its position at its own pace and never have to worry about the 80% balance sheet consolidation threshold, the 50.1% controlling shareholder threshold, or having any voting rights. Just put in a provision that Treasury itself can never exercise the conversion option, only whoever buys them from Treasury (who could do so at any time, and presumably would do it immediately because 0% prefs themselves aren't worth much). If Treasury can offload enough of them fast enough, they could structure things so that they send some or all of the proceeds to FnF up to $125B (or whatever number they agree on), which accomplishes the recap in full.

I get your thinking, but I just think the credit markets will give credit to that prepaid asset and lend as if a discounted amount of that asset was actual capital on the b/s. that prepaid asset is money good over the period needed to earn it out I'm more concerned with whether this asset would end up increasing core capital by that amount. I don't think the PSPA amendment and potential $30B return (no matter what form it takes) will happen nearly quickly enough, though. That seems like a Q4 thing to me.

I don't know the answer to your question. The reason I brought up alternatives to Treasury writing that huge check is to show that the senior cramdown remedy is possible without it.

@cherzeca I don't think Treasury would need any additional authority to convert the seniors to either non-cumulative convertible prefs or straight to commons. I also don't think either of these would count as a new security purchase because there would be no actual purchase, but I could be wrong there. If it does then I think HERA's purchase sunset clause of 12/31/09 would scuttle the idea. @orthopa #3 by far. The seniors disappearing (whether extinguished or converted to common) plus FnF retaining this year's earnings should fully capitalize the juniors. At that point the juniors have no reason to accept a haircut. Also, a "haircut" is just a term to make it seem like junior pref shareholders "lose". But an exchange for commons involves two variables: the % of par and the common price. The quotient of these is the number of shares each junior pref shareholder gets per share. FHFA could easily offer an exchange at 80% of par at $2, for example, even though it's equivalent to 100% of par at $2.50, and call it a "haircut". The common exchange price doesn't have to be the market average from the previous X days, it can be anything FHFA damn well pleases. @beaufort A senior cramdown doesn't have to be bad for the juniors, but it can be. It depends on the terms. Of course, if those terms are too unfavorable to the juniors they will just refuse and keep the shares. I also think that in the end, very little of FnF will be left for existing common holders. Probably enough to make some money from here, but not as much as the prefs. That's why I don't own the commons right now.

1) Perhaps Treasury can give FnF a credit of $125B rather than sending a check, similar to the idea that they would give FnF a $25-30B credit in the seniors-extinguished remedy. It could also be an arrangement where Treasury sends FnF 80% (or some other number) of all cash proceeds from the sale of its (converted from senior) common stock up to $125B. That would guarantee Treasury a profit. I don't know if this liability would count towards the debt ceiling, though. 2) Treasury had a 92% stake in AIG at one point and I don't think they had to consolidate AIG's balance sheets onto the government's, though I could be wrong. Does anyone here have knowledge of how that transaction was structured? 3) Treasury should easily be able to structure a senior conversion to avoid 80% ownership, or even 50% if controlling shareholder issues matter. One option is to convert the seniors to convertible non-cumulative prefs (which count towards core capital), but with a provision that Treasury can convert them to commons at any time up to a specified date, at which point the conversion to common would be forced. This allows for an easy piecemeal conversion over time that gives Treasury an eventual 99.5% common stake (or whatever number is enough to recoup the $125B plus whatever the warrants would have brought in) but doesn't ever trigger the 80% or 50% thresholds. The unwinding of Treasury's stake basically is the re-IPO here, but this resolution allows for immediate release (because FnF would be fully capitalized), or at the very least before the election. Releasing FnF and getting rid of the seniors (and thus the NWS) are the two major irreversible steps this administration can take. Incidentally, this scenario answers the questions of how Treasury gets paid and how hedge funds don't make a huge windfall. The juniors do go to par here, but I don't see a recap/release scenario that doesn't involve this. Maybe FHFA and Treasury can strong-arm the juniors into accepting a "haircut" exchange for commons (at less than par) as a condition for going through with recap and release at all?

I have to admit, I don't know what you're talking about here. Treasury already has warrants for 79.9% of the common, what more do they get for "reinvesting half of their sr profits"? 95%? And what does the "infusion" have to do with the warrants?

I think the idea would have to originate with Treasury, not FHFA. But why would HL not like this option? not really a live option, so why mention it as a possibility, except to show that you were thorough Why is it not a live option? I just want to hear the argument against it, if for no other reason than to assure myself that it isn't a possibility. A senior cramdown is not great for the prefs compared to a share exchange followed by the re-IPO anyway. I don't see a reason why Treasury would have to send the $125B in cash, by the way. If the $25-30B overpayment could be "returned" by giving FnF that much credit against future taxes and commitment fees, while still increasing core capital (perhaps it would be booked as a prepaid tax/fee asset in the asset section of the balance sheet and an increase to retained earnings in the equity section), then why couldn't the $125B be treated the same way? And if that form of overpayment return doesn't count towards core capital (whether it's $25-30B or $125B) then ACG is wrong about it reducing the size of the offering. I'm playing devil's advocate here. I don't think this senior cramdown will or even should happen, but I can't yet convince myself that it's completely off the table. It allows for a much, much faster recap than the re-IPO route.

I think the idea would have to originate with Treasury, not FHFA. But why would HL not like this option?

One remedy the Collins plaintiffs suggested, as a way to unwind the NWS, was for Treasury to send $125B to FnF and keep the seniors. Treasury would then presumably convert the seniors to commons (basically super-warrants) to recoup that money and then some. The warrants themselves would be superfluous at that point. These two actions taken together amount to an instant recap for FnF. Core capital was negative $170B at the end of 2019. Add $125B to that for the cash payment and another $193B for the senior-to-common conversion. Suddenly core capital is positive $148B, which is higher than the greater of Watt's two alternative minimum capital standards of $103.5B and $139.5B. I believe this would also instantly moot all the NWS lawsuits seeking injunctive relief because the cash payment represents a return to what things would have been like without the NWS, and the conversion means the NWS is gone going forward because the NWS dividends were always paid to the holders of the seniors, which would no longer exist. It should also moot all derivative claims in Sweeney's court. There would be no need to settle these cases, would there? This provides FnF with enough capital to take whatever measures FHFA, and presumably Treasury as a condition of agreeing to this course of action, deems necessary to support the housing market. With $2T already having been spent, an extra $125B (which will come back with interest when Treasury unwinds its converted-senior common stake) shouldn't be politically difficult. I'm trying to see what I am missing here, but this seems to check all the boxes.

The serious risk to the housing market is a result of doing nothing and not having private capital in front of the taxpayer. The risk we are hearing about now relates to mortgage servicers and is manageable and frankly on them/Fed. The majority of what is being discussed relates to capital at FnF and the path to raising it. It does not involve housing policy or the housing market. Your conflating the two. I think the big turnaround will come when the consensus becomes that recap and release for FnF is less risky than not doing it.

You called the top in the first post I responded to, saying "I think a major top is right here." That's one data point. You also clearly didn't come here to help at all. Everything you have said today is either gloating, self-defense, or an attack against me. As such, it is deserving of hostility in return.

You're the one that brought up a single data point, not me. You're also the one that calls your system TA, which generally implies a high (if not 100%) level of mechanism. I don't understand why your system works or why it should work. If you have had sustainable success with your system, good for you. But a value investing forum is not the place to be gloating about a result of a system that is, from a value investor's perspective, indistinguishable from guesswork.

Gloating over what amounts to a lucky guess is poor form. From what I remember, some of us didn't disagree with your conclusions but instead the methods used to come to them. There is nothing to suggest that your investing method produces reliable results. Perhaps you really do have a real alpha-generating system that the rest of us just don't understand. But one data point doesn't prove anything.

Congress is the ultimate wild card. They can go from wiping all current shareholders with no recourse to forcing Treasury to write off the seniors and give FnF oodles of money. For the record, I don't want them getting involved with FnF at all unless it's only some sort of limited fund to cover the wave of payments due to MBS investors that won't be offset by revenue due to the forbearances allowed by the CARES Act. That said, going to the Congress or the Fed is a last resort, which seems clear to me from what Calabria said. If it does end up becoming necessary then there is downside for current shareholders. I'm not nearly so scared of the Fed acting because I don't think they have the power to wipe shareholders out. I also don't fear receivership at the moment. If FnF were to exhaust all of their capital and require a draw from Treasury (which, as Tim Howard recently pointed out, would be mitigated by the protection afforded by CRTs and FnF's own income), Calabria could probably technically impose receivership. However, that would immediately be challenged per HERA from at least a dozen people/institutions. As long as losses do not exceed $150B, those challengers can argue that if the NWS had not happened, FnF would have $150B of capital right now (though the seniors would still exist) and would have never lost enough money to allow Calabria to legally trigger receivership.

I've made a point to listen for that. In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury." He is making a point by excluding them as even a possibility. I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day. I think take-up will be high, unfortunately. Same here. I don't see a reason why the take-up rate won't approach 100%. There is no downside for any individual to take the forbearance. FnF have an extra $250B to draw from Treasury if worse comes to worse. The companies will survive. Shareholders are in a much more precarious position, with only $23B worth of capital cushion. We survived the last draw from Treasury in Q1 2018, but that was with Watt in charge. I don't know if Calabria would feel compelled to wipe out shareholders in the event of a draw from Treasury. Some clarity on this is sorely needed. If anyone knows a journalist who could ask him this, please reach out. This is also why I believe Treasury's backstop will survive recap and release, notwithstanding Trump's insistence on an "explicit" and paid-for backstop. I put "explicit" in quotes because it's not the explicit MBS guarantee that the Trump administration wants, but instead it's just for FnF.

FnF have to pay MBS investors, but have less than the usual amount of money coming in due to the forbearance. The difference depletes their capital cushion of $23B combined, and if the difference exceeds that then technically FnF are insolvent and would have to draw from Treasury to make up the difference. Calabria might be able to trigger a shareholder wipeout at that point, though I don't know if he would have to invoke receivership to do so. The court cases do help, because without the NWS the seniors would still be intact but FnF would have an extra $125B in capital. If FnF end up blowing through $150B (due perhaps to the crisis lasting a long time and/or a huge takeup rate for forbearances), though, us shareholders might be wiped out after all, regardless of the court cases. This is exactly the specter that mortgage servicers face because they don't have direct contractual Treasury support to draw on, by the way. If by "the last time govt screwed shareholders" you mean the NWS, I don't think this would be that ugly because the forbearances are authorized by law. FnF shareholders might end up having to bear the brunt of Congress's not accounting for who bears the brunt of the forbearances. And if you meant anything from 2008, that stuff is all going to stand anyway.

Fannie and Freddie will be fine. Calabria, though, has said on multiple occasions that if they go insolvent (presumably along with a draw from Treasury) he will wipe out shareholders. That's the risk weighing on my mind, at least. The companies will survive, MBS investors will get 100 cents on every dollar contractually owed to them, but shareholders don't have to survive. Treasury won't even necessarily lose its stake if FHFA allows Treasury to port over its seniors and warrants to whatever comes out of the restructuring. Today Calabria said that Fannie and Freddie can weather 2-3 months at a 20-25% takeup rate (of the mortgage forbearance in the CARES Act), but if it becomes 6 months or if the rate goes to 40-50% there will be some stress. What I'm wondering is: what's stopping the take rate from approaching 100%? Many people are short-sighted and would view a suspension of mortgage payments as something to be taken advantage of, even if they don't need to do it. In my opinion, Calabria made a big mistake in today's interview by asking people to keep making their mortgage payments if they are able in order to support the housing finance system. Nobody is going to do that, or at least not enough to matter. If I were him I would have played up the fact that interest will continue to accrue if payments are not made. Emphasize that failing to make payments when you are able to hurts you in the long run. Frame it as self-interest and the takeup rate will go down. What I don't understand is the common valuation. With the juniors at 20% of par the commons shouldn't be trading much above 30 cents if the capital structure means anything at all. If FnF have enough capital to cover the juniors then the juniors should be close to par, and if not the commons should be close to zero.