Cox022
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Calabria on the Cato Institute Daily podcast. https://www.cato.org/multimedia/cato-daily-podcast/mortgage-markets-covid-19?utm_source=dlvr.it&utm_medium=twitter
Nothing groundbreaking but a solid 6-7 minutes of Calabria talking about the GSE's, starting at 19:30.
some rough notes, part quote, part paraphrase:
-2021/2022 they may do some sort of public offering
-How GSE's raise capital is up to them, I just set the rules and mileposts
-They can either build earnings, sell off assets, or raise public or private capital
-they've hired advisors, it's early, everything is on the table
-we are talking hundreds of billions of dollars at the end of the day that need to be reaised by retained earnings, public or private offerings
-potentially largest public offerings in history and certainly not something done in a short amount of time
-I'm an independent regulator, my term runs to 2024, I have every intention of serving that term
-I hope my successor, because I think I am just carrying out the laws as congress decided it, I'd like to think my successor will take the same perspective
-in my 15 months here the dialogue around this has really changed [to follow the law instead of sticking to conservatorship limbo], and quickly, it's heartening, and I hope that sticks
-I'll add a caveat that it will be very, very difficult to raise capital if we see housing market have a big decline or the equity markets have a big decline
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Can someone correct me if I've got this wrong?
(1) Currently, FHFA is constitutional and FHFA director cannot be fired at will.
(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will.
If (2) occurs and Trump loses, Calabria is out in Q1 2021.
If (2) doesn't occur and Trump loses, Calabria remains FHFA director until his term ends in 2024.
If Trump wins, Calabria remains FHFA director regardless.
Intelligent legal analysis suggests SCOTUS will *very likely* rule CFPB unconstitutional sometime this summer.
There are reasons to be hopeful, but it's still *very uncertain*, that SCOTUS grants relief we want in Seila.
[thanks to rolg's past work, which can be reviewed here: https://tinyurl.com/y9odyjka . May be worthwhile since Seila ruling expected soon (i think)]
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Jamie Dimon yesterday on forbearance:
○ 1/3 of people who ask for it, never actually use it
○ I suspect a lot of people who did use it are doing so as a safety precaution
○ My hope would be, as we see first people coming off forbearance, that the people who start repaying is higher than people think, not lower
§ This by the way gives them a chance to do a re-fi, which could be really smart for them in certain cases
○ We will start to see the first cohort of people coming off of forbearance in June
○ In the old days, it was a danger that once you stopped paying your mortgage, you never started again
§ But remember last time around, home prices were down 40%, there was a good reason not to pay, you weren't going to lose any equity value in your home, whereas today, it’s the opposite,
there are very few people underwater in their homes today
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A little more:
The primary factors that impacted our single-family provision for credit losses in the first quarter of 2020 were:• Expected credit losses as a result of the COVID-19 outbreak, which was included as an adjustment to modeled results. Given the rapidly changing and deteriorating market conditions in recent weeks as a result of the unprecedented COVID-19 outbreak, we believe our model used to estimate single-family credit losses as of March 31, 2020 does not capture the entirety of losses we expect to incur relating to COVID-19. As such, management used its judgment to increase the loss projections developed by our credit loss model to reflect our current expectations relating to COVID-19’s impact. These judgments included adjusting our modeled results for (1) the expected impact of widespread forbearance programs, including the rate of borrower participation, and the volume and type of loan modifications as a result thereof, (2) the effect of TDR accounting relief from the CARES Act, and (3) lower expected repayment volumes given the sharp rise in unemployment rates that are expected to stay elevated over the near term. In developing the model adjustment shown in the table above, management considered the current credit risk profile of our single-family loan book of business, as well as relevant historical credit loss experience during rare or stressful economic environments.
• A decrease in our expectations for home price growth. We revised our forecast to reflect near zero home price appreciation on a national basis for 2020 due to COVID-19 market disruptions. The actual and forecasted home price impact shown in the table above reflects our revised forecast. Lower home prices increase the likelihood that loans will default and increase the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately increases our loss reserves and provision for credit losses.
• These factors were partially offset by lower actual and projected mortgage interest rates. As mortgage interest rates decline, we expect an increase in future prepayments on single-family loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the expected impairment relating to term and interest-rate concessions provided on these loans and results in a benefit for credit losses. The actual and forecasted interest rate impact shown in the table above reflects our modeled results. As noted above, we adjusted downward our modeled expectation of prepayment volumes due to the COVID-19 outbreak, which reduced this modeled benefit from interest rates.
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small snippet from FNMA 10-q:
Our credit-related income or expense and our loss reserves can also be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses. The January 1, 2020 CECL standard implementation introduces additional volatility in our financial results as credit-related income or expense now includes expected lifetime losses on our loans and thus are sensitive to fluctuations in the factors detailed above.The primary driver of credit-related expense for the first quarter of 2020 was an increase in our allowance for loan losses due to losses we expect to incur as a result of the COVID-19 outbreak, using an expected lifetime loss methodology. Estimating the impact of the COVID-19 outbreak on our expected credit loss reserves required significant management judgment, including estimates of the number of single-family borrowers who will receive forbearance and any resulting loan modifications that will be provided once the forbearance period ends. Under our CECL methodology, depending on the type of loan modification granted, loss severity estimates vary. In determining our allowance for loan losses as of March 31, 2020, we estimated that 15% of our single-family borrowers and 20% of our multifamily borrowers would ultimately receive forbearance due to a COVID-19-related financial hardship.
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marketwatch: Fannie Mae, Freddie Mac to roll out new mortgage-payment deferral option for homeowners facing financial trouble
At the direction of the Federal Housing Finance Agency, the two mortgage companies are rolling out payment deferrals, which will serve as an alternative to forbearance and loan modifications for borrowers who are struggling to remain current on their home loans.Borrowers who are granted a payment deferral will see their delinquent principal and interest payments deferred. That balance will come due either on the mortgage maturity date, the pay-off date or upon the sale of the property, whichever comes first. The term of the loan and payment schedule will remain the same.
Under a traditional repayment plan, borrowers are required to spread out their past-due amount over several months in addition to their normal monthly payments. With a forbearance plan, a borrower can suspend or lower payments for a specified time period, but must make full or partial payments for the amount owed during that time when the forbearance period ends.
Servicers, which are the companies who collect monthly mortgage payments from borrowers, will be able to start evaluating borrowers to see if they are eligible for payment deferrals beginning on July 1.
To qualify, borrowers must have encountered a financial hardship that has been resolved, and they must have the capacity to make existing monthly mortgage payments based on their contract and not require a payment reduction unlike a loan modification or forbearance.
Additionally, the mortgage must have been originated at least 12 months prior to the evaluation date. Borrowers must be between 30 and 60 days delinquent and have not received a previous deferral nor failed a non-disaster related loan modification.
The new deferred payment service would benefitted both borrowers and mortgage investors, said Mike Fratantoni, chief economist for the Mortgage Bankers Association, a trade group that represents lenders.
“Payments are then tacked on to the end of the mortgage loan, so the investors are made whole through this but it gives the borrowers a chance to get back on their feet,” he said.
Sorry for all the text but I thought it was good, clear info.
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Thanks for the bloomberg screenshot.
I cant help but notice it reads that the GSE's 'might have to operate under consent decrees.' If that is in fact a quote, I wonder under what circumstances would the GSE's 'have' to operate under consent decrees.
My first reaction is that this indicates Calabria is in a hurry, but I'm not 100% sure if I'm thinking about that correctly yet.
The wording of the ACG analytics tweet is different by suggesting they 'could' be released with a consent decree.
I'm reading too much into it but I guess I'm just antsy for useful information!
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Thanks for the comments, Wiggins. Seems like poor form, at a minimum, for VW to be so vague.
Separately, I've read that Calabria, Mnuchin, and Carson are expected to testify in front of the House Financial Services Committee towards the end of this month. I don't think that's been nailed down quite yet so keep an eye out for that.
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https://www.valuewalk.com/2019/10/fannie-mae-freddie-mac-preferred-shares/
I suppose it was a Bove note that came out 3ish days ago that may explain the price drops. I dont have the actual report.
I think the risk of a footprint reduction is minimized because I don't think Calabria or anyone else in DC has the guts to do anything to make it harder for Americans to buy a home.
As it relates to delays, any long term GSE investor knows that a slower than expected timeline is a risk. Bove does a good job embodying a short term investor; by the time the skies clear and he reacts by recommending the securities again (which he already admits are really attractive over the long term...go figure) they will be less attractively priced than they are today.
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For those that want a link to FHFA's press release:
Referring to the Fannie Mae letter agreement text in above link...
Does part III refer to a future amendment to the PSPA?...The big one we are all looking forward to? If so, I wonder why this language was put into this letter agreement; any thoughts on that?
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Every once in a while someone (snarky maybe) asks: what could go wrong, what is the downside?
I'd love to hear your answers...For argument's sake: if we knew 2 years from now we would be really disappointed, what would you say is the most likely cause?
My top answer, as most likely, is Treasury for whatever reason never gets around to making the big changes to the PSPA and status quo continues.
This seems more likely to me than the actual recapitalization being disappointing. Hence, I'm quite bullish but constantly worried if I'm missing something.
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Calabria live now: https://www.bloomberg.com/live/us
"4th Q 2020 for IPO, lot has to happen before we do that..."
Asked about settlement due to recent court ruling: "Looking to rebuild capital and once NWS ends which is part of our plan then a lot of these suits go away." Didn't say no to settlement, didn't say yes to settlement.
Thanks Luke. I missed it, can someone post a link when available?
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Just pointing out peculiar word choice and phrasing from Mnuchin...
I found this word choice interesting as well, using "amendment"... could the amendment be done this month instead of simply replacing sweep with commitment fee? Could things on the amendment be done prior to December? Very interesting if so, but probably he wasn't choosing his words carefully and he just meant NWS replaced by commitment fee...
“That’s something that the FHFA (Federal Housing Finance Agency) and we are working on. We are actively negotiating an amendment, and I think our objective is to try to get it done by the end of the month,” Mnuchin told CNBC in an interview.
This was from April, just FYI. Not sure what to conclude, if anything.
He has no immediate plans to curtail the existing sweep of the companies’ profits to the Treasury Department, part of an arrangement related to the firms’ conservatorship. Such a move would allow the firms to keep profits and begin to build up capital, eventually operating without taxpayer support. The change could be considered as part of a separate package of changes negotiated with Treasury, he said, adding he doesn’t wish to amend the existing arrangement more than once. Allowing the pair to retain their profits is widely seen as an initial step toward ending the conservatorship. -
Just pointing out peculiar word choice and phrasing from Mnuchin on CNBC today at 12:00. https://www.cnbc.com/2019/09/12/treasury-secretary-mnuchin-says-trump-has-approved-reform-plan-for-fannie-mae-and-freddie-mac.html?__source=sharebar|twitter&par=sharebar
"What we would be doing is allowing Fannie Mae and Freddie mac to increase capital, and that’s an important step on the way to recapitalizing them. And what we are negotiating is making sure the taxpayers receive proper compensation for that delay."The simplest explanation is that he just meant 'compensation for deferred or forgone dividends' but I thought I'd point that out in case anyone else saw a different meaning.
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Building off what WBfan said earlier...
Is it logical to think the 80% ownership threshold will prevent Treasury from converting its Senior Preferred into common stock since they already have warrants for 79.9%?
Can we evaluate the future based on these 2 near-certainties?
1) The senior pref cannot remain in its current place, and
2) the government will not go over 80% ownership
Where does that leave us...an increased likelihood the Senior Pref gets cancelled?
[Midas, does this line of thinking change your thinking from what you said earlier today?]
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It surely is an exercise in speculation and short termism but are everyone's thoughts?
My thought is, the value of a business is the sum of its earnings it can produce for its shareholders over its lifetime. In just a matter of days, according to the press, the government will state that the GSE's shareholders' interest in these profits will go from zero to $10-$15B.
How that pie gets sliced remains to be seen. In a theoretical sense, the expected value of the securities should increase, imo, meaningfully but I wouldn't presume to know how the market reacts in the short term-that consistently surprises me. If the market prices today are 'fair', then theoretically they would move up after the announcement if it doesnt contain something out of left field. But again, I have no evidence to think I have skill predicting short term movements, I'm just riffing here.
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I'm speculating, but with so many journalists and others seemingly aware of the plan, it seems like it would just be a matter of days until details of the plan surface to the mainstream. The circumstance where so many are away of the plan and its movement yet don't know its detailed contents can't last long.
I know this isnt useful and doesn't imply anything favorable/unfavorable to us as investors, but just a thought I had. Maybe this kind of development shows up in the 'TA' before the mainstream news flow, idk. Maybe MuscleMan is about to have his day in the sun!
Edit: i spoke too soon, this is already happening it seems. See WSJ Ackerman article. There is still room for more details to be reported. We will see.
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Would someone mind posting a link to a list of Fannie and Freddie preferreds that trade on the market,including par values?
I'm running into roadblocks doing this on my own. For instance, Fairholme reported owning Freddie Mac Series Z in their 2018 annual report but I can't find the offering/similar documents on the Z series.
Thanks!
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Calabria, one month ago in prepared remarks:
link:https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-Bankers-Association-National-Secondary-Market-Conference-Expo-2019.aspxI will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly. And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital.Calabria, yesterday, in prepared remarks:
We will continue to engage with Treasury to develop a responsible plan to end the conservatorships – with a clear road map and mile markers – and to adjust the Treasury share agreements accordingly. And by sometime next year, my hope and expectation is that we will be on the path where Fannie and Freddie can start to build capital. -
https://www.abalert.com/search.pl?ARTICLE=183913
I know nothing about this website and maybe its b.s., just sharing a link i came across on twitter. This article reports that a shareholder 'spoke' with Calabria last week. The article uses pretty strong, high-confidence language that an IPO will happen.
Obviously this can't be verified so I don't know how to judge how meaningful this is.
thanks for posting this cox. today you have an interesting case of variant perception: the Bloomberg article to which the street is reacting to, and the asset back alert that is read mostly by the securitization industry as opposed to the general stock investing public. what makes a market, and perhaps some money
Sure, thanks to you others that commented on the publication.
Yes a good example of the noise vs signal we will have to parse out until this all gets settled. Mnuchin says he prefers an explicit guarantee and a big institution like Bloomberg declares "Mnuchin Dashes Investor Dreams of Quick Fannie Freddie Windfall." For me this was an, "Am I taking crazy pills?" moment.
It is an uncomfortable position to maintain the courage to stick to your beliefs while also having the courage to change them.
It's amazing to me that we sit just weeks away from the unveiling of this big plan, yet all the people from WSJ, NYT, BBerg, all the other people who make a killing being paid to know this kind of information before everyone else....yet they all appear to know nothing. One mistake is thinking you know better than everyone else, but it is also a mistake to assume these other people know more.
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https://www.abalert.com/search.pl?ARTICLE=183913
I know nothing about this website and maybe its b.s., just sharing a link i came across on twitter. This article reports that a shareholder 'spoke' with Calabria last week. The article uses pretty strong, high-confidence language that an IPO will happen.
Obviously this can't be verified so I don't know how to judge how meaningful this is.
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I think the reporting we will see on this imminent plan from Tsy will likely conflate Administrative action and legislative recommendations.
At first read, the WSJ article's mention of 'substantial changes to the business models of the companies, including steps to reduce their footprint over time' worried me, but the article elsewhere also says:
'If carried out, the companies could return to a status similar to how they operated before the financial crisis. Still, administration officials would prefer that Congress act on a more sweeping remake of housing finance, and their plan would also make a series of recommendations for lawmakers to consider.' -
Don Layton, CEO of Freddie. This was damned informative. You can infer what is happening behind the scenes. I'm still digesting so I dont have anything immediate to say.
If you are short on time start at 35:55 and watch until the end (9 minutes).
edit: one thing i will say is that anyone reporting on his comments today that says he is skeptical about release from conservatorship is totally wrong, imo.
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Thanks for the great discussion lately-great content. The mounting info and evidence seems to be tipping the scales in the right direction.
Sorry my question has been covered but I am rusty on the points.
What are the main reasons we generally assume the senior preferred will be treated as repaid/reduced as opposed to the senior preferred being converted to common equity?
Berkowitz thought reasonable action by the government would mean AIG would be 80% diluted, instead it turned out to be 90%+. This matters because the value of X assuming 80% dilution drops to 50% of X when dilution turns out to be 90% instead. This seemed like a point worth revisiting in case others are rusty on the topic as well.
Thanks
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
Posted
Good point, and at multiple times during the interview too.