allnatural

In what world is this guy (https://www.housingwire.com/blogs/1-rewired/post/43640-monday-morning-cup-of-coffee-ben-carson-backtracks-on-plan-to-raise-rents-for-poor) going to end up in any seat on the Trump admin???

Not sure if there is anything to make of this letter. These are the same groups that have been trying to get FHFA to stop the sweep for the last few years already... sending letters on a pretty frequent basis.

Are we talking about this article? https://www.americanbanker.com/news/is-gse-capital-proposal-an-academic-exercise-or-a-whole-lot-more

Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

That is exactly what Moelis suggests. Keep the current Treasury credit line for a fee (only to be tapped in catastrophic circumstances), and redeem the senior prefs as fully paid back.

I am pretty much all in and adding in small increments every month. I think this is a material step towards any reform as it lays how much capital the GSEs will be required to raise / retain in a recapitalization / privatization scenario (and is one of the steps proposed by the shareholder friendly Moelis plan). He can say its not meant for recap/release all he wants but this will guide discussions on capital going forward.

I'm in your camp. Only hope for 2018 is a positive court ruling to prompt admin action or a direct Trump push by deciding he wants $100b for his wall asap and Mnuchin gets to work. 2019 is put up or shut up year for GSE reform. I won't be suckered into another year of this past that! :)

http://www.freddiemac.com/investors/pdf/investor-presentation.pdf Freddie Mac investor presentation from today. See page 6 where Freddie admits that ADMIN might determine future and that its "PERHAPS LIKELY" that we will see significant changes in the near term. "Our future structure and role will be determined by the Administration and Congress, and it is possible, and perhaps likely, that there will be significant changes beyond the near term." Was this language included in prior presentations?

@Snarkypuppy Re: Watt holdings things up: I wrote this in a previous comment, but its possible Watt is anti-admin reform even though he is pro GSEs. Or as Cherzeca said, maybe Mnuchin was just stating facts. "Watt's an interesting player in the drama. For any administrative action, you need FHFA to sign off. Although Watt has expressed pro GSEs / pro shareholder thinking (desire to rebuild capital + the FHFA blueprint on reform), he has also stated multiple times that its up to Congress to decide the future of the GSEs, not himself/FHFA. Maybe with Watt so close to the end of the term, he is the one that isn't willing to "dance" and that's why Mnuchin made his comments last week about potentially replacing him with someone else in January (who may be more willing to sign off on an administrative action). "

Interesting bloomberg article: https://www.bloomberg.com/news/articles/2018-05-18/fannie-mae-advocacy-ban-doesn-t-stop-lawyer-from-pushing-views Apparently this Brian Brooks fellow, who is on Fannies general counsel, is in Mnuchin's ear telling him the facts and that GSEs should be recapped / released administratively inline with FHFA's blueprint laid out earlier in the year. He also worked with Mnuchin at OneWest Bank. At least someone over there isn't laying over.

The derivatives actions in these suits always baffles me. Yes shareholders are suing on behalf of the GSEs, if they won't, who else will? That's because the FHFA is in bed with the UST, and the GSEs are controlled by the FHFA, which is an inherent conflict of interest. In what world would the FHFA ever be expected to sue itself (on behalf of the GSEs) for an agreement it entered into on its own free will (or forced into) with the UST? There is legal precedent that plaintiffs cite that when a conflict of interest such as this presents itself, shareholders should be able to sue on behalf of the harmed entity (GSEs). @muscleman I'm not sure what happens in that scenario. Let's hope we don't have to find out. If this isn't resolved by 2019 then Mnuchin really dropped the ball on an issue he has repeatedly claimed he will address time and time again.

@muscleman The Sweeney case has dragged out because discovery took 4 years to complete. This was bc the defendants fought tooth and nail to keep ~11,000 documents private by claiming boogus privelage claims. Now that discovery wrapped up a few months back with plaintiffs in possession of all the evidence needed, the case is back on schedule where the final filing is due in Dec. and a ruling expected sometime in 2019.

@Sunrider You are probably correct. But it's one thing not to mention the GSEs, but another to not mention the entire housing market at all? Whether or not he had prior affiliation with the GSEs, he has definitely had involvement in the housing/real estate market (and it affects all Americans). It also may be a sensitive issue for him given his affiliation to Paulson / Schwarzman.

Watt's an interesting player in the drama. For any administrative action, you need FHFA to sign off. Although Watt has expressed pro GSEs / pro shareholder thinking (desire to rebuild capital + the FHFA blueprint on reform), he has also stated multiple times that its up to Congress to decide the future of the GSEs, not himself/FHFA. Maybe with Watt so close to the end of the term, he is the one that isn't willing to "dance" and that's why Mnuchin made his comments last week about potentially replacing him with someone else in January (who may be more willing to sign off on an administrative action). Side note, does anyone else find it strange/interesting that Trump has never once mentioned the GSEs or mortgage market during his election campaign/current term, considering he made his wealth in the real estate market and the significant role housing has in the the economy.

The response to the mutualization model is the same response to any reform plan that involves receivership. "Hey Trump, let's try executing the single largest receivership/liquidation in financial history and cross our fingers / hope it has zero negative impact on interest rates, affordable housing, mortgage market, economy, etc." The idea of beta testing a new housing system is easier said than done. There is a reason that paper is close to 2 years old with zero traction (that i'm aware of?).

Thanks for the thoughtful response. I agree with your sentiment that this is not a 100% full proof thesis (nothing is). But I do strongly believe at current share price levels, there is a material mispricing as evident by the market is telling us there is >75% chance that the GSEs are a 0. The probability weighted risk/reward skews in our favor at current levels when attempting to size up the various scenarios / alternatives (imo). My fallback remains the Takings case, while I believe admin action is around the corner (6-12 months). If you have been reading the tea leaves lately, you have noticed for the first time ever Corker himself said the admin can act alone and expects them to. Additionally, Crapo made comments recently saying he is supportive of admin action. This is a 180 when compared to last years comments that admin shouldn't do anything w/o congress. Congress is clearly raising the flag and handing this off to the admin for the first time ever. These are all new developments that IMO have been flying under the radar. Mnuchin has always stated that he HOPES for bi-partisan reform, leaving the door open for admin action, but it looks like he will finally have his cover post midterm elections (maybe i'm just a Mnuchin apologist!) At this point we all know the thesis, its beaten to date. Lets see where we are in 2019.

Other than Mnuchin missteps on timing, I can't point to any commentary to date that Mnuchin has said which is anti-GSEs. In fact most of his comments continue to remain pro GSEs, pro private capital, pro government guarantee, and in an interview just a few months ago, he said point black he would not go as far as to get rid of the GSEs. His stance has always remained the same, he wants to end the conservatorship of the GSEs, not replace / get rid of them. If you find any language that he has said to date that implies the opposite, please share. The rationale behind the status quo being unsustainable is quiet simple, we all know this already, aside from a small capital buffer of $3b, there is no capital in place to support ~$5tn of liabilities. There are a few key issues with this status quo, 1) The government bears the full risk of another down cycle due to no capital (read taxpayer bailout)- Mnuchin has acknowledged this point in the past, 2) It will be difficult to reintroduce new private capital to the market based off how previous legacy investors were treated (Larry Kudlow, Trump’s recently appointed top national economic advisor, agrees- and we know Mnuchin wants private capital back), and 3) No matter how small the odds may be, the government continues to face a $100b+ overhang in litigation (this is a potential $200b+ PnL swing vs government monetizing its stake), and unless I missed it, no court has ruled on any constitutional claims yet. We have continually lost the same APA case over and over. Most importantly the takings claim is where motive (read evidence) matters. Not that its part of my thesis, but the same could be said to Trumps largest donors/contributors, Paulson, and more importantly Steve Schwarzman of the Blackstone GSO group. If the admin is truly looking out for themselves, this continues to be a path where Trump can chalk up a political win in addition to pulling $100b+ out of a magic hat as a "deal maker". The warrants cant be monetized until a reform plan is put into place. They weren't able to replace the GSEs back when they had momentum behind their back and were unprofitable. Now that they are more profitable than ever and Corker and Hensarling are on their way out, what makes you think any of the reform plans being presented is anything other than noise at this point? Additionally, the GSEs are the foundation of the U.S. housing market and are too systemically important to be wound down and replaced. It has in the past and remains a risky proposition to replace a functional system that has been in place for over 50 years with a new untested system that may or may not perform as intended. I don't see Trump admin as ones that would want to role the dice on the economy given current state of affairs and deficit issues. They were able to justify the recent draw due to a one time accounting hit. The combined draw totaled less than $4b due to some earnings and a timely settlement. The same cannot be said if a material draw is needed. Regardless of how PR will spin the GSE failure, the PR will crush Trump and the republicans for allowing that to happen under there watch, especially when one of his first mandates was to end taxpayer bailouts. Again, motive has yet to matter in any of the cases BUT the takings case. This was always a issue of takings and no court has yet to rule on that matter. Unfortunately for shareholders, the discovery process dragged this case out for 4 years. Luckily that's wrapped up now and we are in the briefings stage. I understand the frustration, you are not alone, hence the share price today. Perhaps you are not aware how shareholder claims are treated in courts, but we are all equal. There is no settling with 1 private party loophole here. That has never been a risk to the thesis.

Investor fatigue is definitely kicking in! Hello all- long time lurker first time poster here. Apologies in advance for the gibberish, just threw this together. I have been following the saga alongside everyone for a few years now and figured I would share my 2 cents given the recent negativity. I think the shares depressed because 1) it doesn’t seem like congress is up to the task this year (or ever), 2) investors are fatigued after 10 years (just got delayed another year), and 3) the largest holders are putting technical selling pressure on the shares due to redemptions and/or funds shutting down. The preferred shares today are implying that there is greater than a ~75% chance that the preferred shares are worthless and ~25% chance par value will be recouped. To me, the shares are materially mispriced (I believe there is >90% chance that GSEs aren’t going anywhere anytime soon as the GSEs are more so the foundation of the US housing market today than anytime in history). Instead of thinking what has to go right, it's always interesting to think of what needs to go wrong. In this specific situation, a series of low probability events have to occur simultaneously. Administratively is Mnuchin going to reverse his positive commentary to date (end the conservatorship, wants private capital, understands the counter-cyclical role gses provide, etc.) and agree to forfeit up to $100b+? Legislatively will congress ever find a viable alternative to the GSEs while not disturbing the housing / mortgage market (e.g. not negatively impacting affordability, liquidity, or interest rates), and in litigation no judge has yet to rule on any constitutional issues. I believe an administrative resolution will happen sometime in 2019 (I am not going to attempt repeating the rationale as Karen Petrou eloquenty lays it out for us- http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance), with optionality for a late 2018 event if we were to get a favorable court ruling. Regarding litigation, it’s clear the issue has always been the nationalization and takings of shareholder property. While the courts have been disappointing thus far, no judge has yet to rule on this matter. And with discovery wrapped up, the Sweeney case is finally beginning to progress with a decision expected in early 2019. There are also interesting developments taking place in the Collins case which we should hear back soon enough. I believe after the summer/midterms it will get very bumpy as GSE reform picks up steam. It will only take one headline to send shares soaring, while risk seems priced out at these levels. Best of luck to everyone!