Wiggins

@Midas I'm not in commons at all anymore because I think we are closer to the finish line and it's a bit risky. But like you, perhaps I will get back in a little bit if it stays favorable or becomes more favorable. My miracle trade (again, 99% luck, 1% skill) was in the fall of 2018 when I loaded up on commons. I then rode them from the low $1s to the high $3s where I sold most. The skill (if you can call it that), was my thesis on this trade based on reasoning for tax losses. At the time, the preferred and commons were significantly lower than they had been earlier in the year, and they were hitting new lows. I knew there would be a lot of selling pressure at tax loss season, which there was. I also thought that in January they would pop up because most people knew the thesis was still intact. For those who wished to harvest tax losses, they key is to do it a bit early (e.g. October or early November) and then buy back in BEFORE the end of the year. I had some tax loss harvesting on some of my positions and that's what I did. This way, you can harvest losses, sit out the required 30 days, but still buy back in before the pop in January. In fact, for those on this thread that are familiar with Benjamin Graham's epic book, he devotes a whole chapter to this strategy. I also lucked out because I was still sitting on that position when the Collins decision came out. Luck, luck, luck. By the way, I find it kind of annoying when people talk about the trade that worked out well after the fact. So, sorry for that as it's not my style. (the trick is to predict, lol!) I only tell the story because I was asked and also I thought some people here would find the tax-loss reasoning interesting, and again it's a Benjamin Graham feature.

thanks for the comments on this everyone (@Midas, @Covid, @cherzeca) @Midas, Thanks for your reply above. It makes a lot of sense to me. I actually have the same general strategy as you, owning mostly mid-range fixed dividend JPS, some 25s and some 50s. That has been my core position for years. I have also picked up FMCKJ and FNMAS along the way when they were low. I have wondered about my strategy on those two that I outlined above, so I'm glad to also have your well-reasoned perspective to add to my own. I have done very well trading in and out of commons (99% luck, 1% skill). @cherzeca I think the most important comments ever made on COBF are the ones that promulgate inclusivity of opinions over excessive stifling of marginal commentary. I know you support this.

Any other thoughts to my post from someone else? Maybe Cherzeca; i believe you said you own FNMAS. Is that just for the liquidity? thanks

The preferred shares have differing dividend rates and redemption terms and these differences may significantly affect the value of these securities as discussed below. Once the NWS goes away, if the GSEs want to clean up the capital structure, they may want to redeem or exchange some of the preferred shares. If they want to exchange them for common at par, or common or cash at some haircut to par, they will need consent from at least 2/3rd of the voters from each series. If they do not get consent, then for most of the series they will have the option to redeem for cash at par plus the quarterly dividend due in the quarter they are redeemed (regardless of whether the dividend is being paid or not). Here's how I see that potentially playing out: For the very-low variable-rate preferred securities (e.g. FMCCS, FMCCJ, FMCCM, FNMAO, FMCCL, FMCCG, FMCCI, FNMAP, FMCCN), there is no incentive to exchange or redeem, even at a haircut. Just turn on the dividends. The dividends are so low on these that they would be valued in the open market at perhaps 1/3rd of par. For all the other securities (except FNMAS and FMCKJ), if they cannot get a vote of 2/3rds of holders, then just redeem at par plus the quarterly dividend. They could refinance at lower rates. For FNMAS and FMCKJ, the GSEs can only redeem (without consent from shareholders) every five years. For FNMAS the next date is 12/31/2020 and for FMCKJ the next date is 12/31/2022. If the dividends are eventually turned back on, FNMAS and FMCKJ will hold more value because they can only be called on these dates. I would bet that after 1/1/2021 FNMAS will go up in value because it will not be redeemable until 12/31/2025, and I expect the GSEs to be released from conservatorship by then. Likewise if FMCKJ is not redeemed by 12/31/2022 then the next date is 12/31/2027. For the above reasons I believe FMCKJ and FNMAS are more valuable than the others. Thoughts? Note: there are other factors such as liquidity and Fannie vs Freddie, etc., which come in to play. But I am just focusing on significance of dividend and redemption terms.

LOL Ask the next tweet why they're not buying. "Ok, please write this guy than: https://twitter.com/SenSchumer/status/1245380988697481216" No thanks. If you're looking for market rationality with the GSEs good luck to you.

GSE shareholders are omnipresent on Twitter and elsewhere. They're viewed as enthusiastic sources of capital at this point, for companies that are bulwarks of the housing finance system. The tides have turned.

Been thinking about this for a while and WSJ had an article spurring the same thoughts: https://www.wsj.com/articles/ppp-loan-terms-amount-to-legalized-fraud-11587422730?mod=hp_opin_pos_2 "the Paycheck Protection Program ... will function as a handout to companies that don’t need it. Billions of ... dollars will never be paid back." Where's all the extra stimulus money going to go once it's clear the economy is coming back to life?

https://www.nhc.org/event/fhfa-to-discuss-covid-19s-impact-on-the-housing-finance-system/

It's clear receivership is off the table. The ACG Zoom call supports this. The housing conference that Metzner referenced is interesting (it was last October, I'll post link below). In that panel hosted by Jim Parrott, the consensus is that the enemies of the GSEs have lost. It's interesting to listen to Jeb Mason. He's a high-level investment advisor in D.C. and a housing specialist, and he's a total lightweight. It shows the idiocy of people that really don't know what the fuck they're talking about wanting to kill the GSEs. Jarod Bernstein is much more compelling. Now, the only real risk to Fannie/Freddie is an absolute Chernobyl-type meltdown of the economy, however, in this sense the situation reminds me of the old joke about a group of campers in the woods being attacked by a bear. You don't have to outrun the bear, you just can't be the slowest runner. Ginnie Mae and others are the slower runners. By the time the GSEs are in trouble everyone else is toast. Treasury and the Fed won't let this happen, so I feel good about where Fannie and Freddie are perched with their 700+ FICO scores. This provides a lot of safety. I'm holding for sure, and maybe adding. (Panel starts at 5:05:30, warning...this thing is boring as it's mostly a bunch of political drivel) https://www.urban.org/events/reimagining-housing-closing-equity-and-supply-gaps 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.

Thanks Luke. great notes

Perhaps MBA is getting some traction although much of this seems like an extension of what they've been kvetching about for days. I don't have a great sense of the political situation here; I'll admit that. I DO think we're very close to the inflection point for Covid-19. According to this model, that's coming far sooner than most anticipated. If you haven't checked it out yet, you may like it. It's updated every day, you can view different countries, the USA as a whole, or US state by state. If this is anywhere close to being true then it's fantastic news. http://covid19.healthdata.org/united-states-of-america

Hi Muscleman Great call last year. What say you now? Bullish, bearish? I bought on Monday and divulged my call yesterday to the group. Best all... 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. I have been bullish all the time last year until the end of September, and you call it "one data point"? If that's your understanding of statistics, then I have nothing further to say. I don't believe a pure mechanical system such as one magical moving average crossing another can provide alpha. My analysis is based on the assumption that Mr. Market may have deeper knowledge than us and watching how Mr. Market reacts to major news may tip off what he thinks.

I did ask; thanks for answering. Selecting the hardest hit sectors (airlines, hotels) as representative of the entire economy is pretty absurd. Why not include ZM, NFLX, AMZN? My point is yes, some sectors are screwed for a while. I wouldn't own DAL right now either. But I believe the economy will be solidly on the upswing within 2 months. That's just what I think. I could be wrong. Thanks for your thoughts. Probably just look at petroleum industry to gauge disconnect. You think if it thought this pandemic would be resolved in 2-3 months, a barrel would be selling for $25? Probably not. Good luck and keep your hedges active. Ok. I'd argue but ok. May I interest you in a few hotel cumulative preferreds paying 20+ divi's than? I mean, all you have to do is wait out 2-3 months and you're golden, right? How about Warren selling his airlines near bottom? He would be doing the opposite if this was just a 2-3 month hiccup. Anyway, you asked and that is my answer. No one knows how long this madness will continue. But I will opine that it's going to last a lot longer then 2-3 months.

Not sure this is the best representative given OPEC and Russia's actions of late. They're reversing too little too late Probably just look at petroleum industry to gauge disconnect. You think if it thought this pandemic would be resolved in 2-3 months, a barrel would be selling for $25? Probably not. Good luck and keep your hedges active.

The role Fannie and Freddie play in a downturn is “not to bail out people in the industry,” he said. “Their countercyclical role is to provide mortgage credit, and I see no evidence that that is not happening.” https://www.wsj.com/articles/fannie-freddie-unlikely-to-aid-mortgage-companies-as-payments-dry-up-fhfa-chief-says-11586289067?shareToken=st0a8ee1e33baa4c79a6f7127c67fef349

chickens coming home to roost

I feel very bullish and hopefully it's not simply because I added yesterday and the JPS are up a lot today. My thinking is: Forbearance provides relief to mortgagers and massively reduces the probability of many defaults. GSEs thus get a lot of protection and yet bear little of the costs of this program (e.g. Rosner's "scheduled/scheduled" vs "active/active"). Much of the earlier selloff in JPS was justified, IMO, since we didn't know how Calabria or Congress was going to respond to this crisis. This would have been a golden opportunity to hobble the positive momentum of the GSEs. But it's now clear Calabria intends to protect the assets of the GSEs, and Congress has not slipped any jumpstart type language into relief bills as they could have. Calabria has confirmed recently his belief they will exit conservatorship as planned, perhaps slightly delayed. ACG which has made a lot of good calls in the last year or so remains bullish. Major stakeholders (e.g. Ackman) remain bullish. Holders of JPS are engaged in a largely binary trade: they will do very well if the GSEs survive and very poorly or be wiped out if they fail. So, how well the economy does and how long it takes to recover and other FUD is largely irrelevant. Actually it does contribute to timing, but the major factor is do they survive or not. Given what we know now, the GSEs are very likely to not only survive but thrive. This will become even more evident after Q1 results. Also, EIDL and PPP loans are going to be pumping billions into the economy. IMHO these latest factors are not very well priced in to the securities, so discounts are to be found. I think the sentiment will change with Q1 earnings release as more capital will be added to the balance sheets and the CEOs reiterate that companies will survive, thrive, etc. going forward despite the Coronavirus. Perhaps also we'll be over the hump of deaths and cases which will help dispel some of the FUD. I'm back to wanting the hear a disconfirming thesis, so I welcome those thoughts.

Why do you think this is a good thing? I see it the opposite. There is already a funding commitment from Treasury, and we know how that backstop works. If Calabria insists on going to Congress instead then this would entail Congressional legislation. I doubt that within this legislation there would be provisions to make shareholders whole or that it would somehow be neutral to shareholders which would be continued limbo. If Congress passes a bill, I think it likely shareholders are wiped out. In fact, Calabria has already stated that if they were bailed out again then shareholders would be wiped out. It worries me that Calabria doesn't just state the obvious that there is a funding commitment from Treasury already on the books so we're good. 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.

So Whalen (and Carney) advocate for the NWS for years and then in a crisis wonder where the money is? It would be funny if it weren't so tragic. More Whalen attached... Convert the prefs to common equity, then sweep goes away and 87% of earnings goes to @USTreasury An improvement from a #fanniegate perspective. This was in response to... Falling on deaf ears until you explicitly state you think the GSE Net Worth Sweep should be terminated. Trust me, that's what will catch the ear of Mnuchin and Calabria.

+1 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. Sure anything is possible. To have come this far in the plan and to have a black swan-ish event possibly blow up the housing system seems less then likely. In all honesty I think its more likely that a final PSPA amendment is done in a hurry to save FnF then to let them go belly up (insert confirmation/position bias). It would be pretty rich for the Treasury to stand by idle and watch FnF fail out of stubbornness over timing of a final amendment instead of recapping them and monetizing either via the Sr Preferred or warrants or FHFA provisioning an accounting measure as discussed by cherzeca to get them through the crisis . Similarly Calabria said today public offering in 2021. To me that means that is the plan and that plan necessitates a resolution of the Senior Preferred and over payments if any etc. Whats the motivation for letting them fail if that means moving up an agreement by a couple months? Principle? Then you have a failed housing system model during a crisis, likely then in receivership on the govs balance sheet. Thats a big 180 from the recapping them in 2021. Not to mention this is stress from an external source caused by a government mandated option to forebear mortgages. I guess if the gov really did wanted to end FnF the way to do it would be by a law that puts them in a helpless position. Im not arguing its impossible but I fail to see the motivation to let the MBS payments bleed FnF dry without coming up with a solution at this point. And I get current shareholders can get wiped out but again the same argument as before applies. Who is going to pony up money in the future when another virus/black swan event comes along when the outcome is shareholders get wiped out. The path of least resistance is to see this forward and fix the system then go the other route. As much as this investment has been blind trust of MC and SM it maybe even more so now. As far as what do now with shares at 20% of par after holding for multiple years why sell now? I say F-it and let it ride.

https://www.insidemortgagefinance.com/articles/217526-the-feds-buying-spree?v=preview Buying agency-backed MBSs helps the agencies. Also, the forbearance is not "forgiveness" at this point. It's just deferring P&I and tacking on at the end. This is helpful to mortgage holders as it entails no lump sum payments. It doesn't hurt the GSEs. https://www.fhfa.gov/Homeownersbuyer/MortgageAssistance/Pages/Coronavirus-Assistance-Information.aspx

Agreed. This will be helpful fodder though for GSE court trials if they're allowed to go on. Very helpful. Mnuchin would be crazy to not resolve the GSEs as well now. They'll just be one of many that are being resolved now so plenty of cover. And they're at the center of relief efforts and financial flows already. Does anyone anywhere question the utility and necessity of the GSEs now? I was concerned when this first happened that anti-GSE language would be snuck in to a relief bill, but that does not appear to be the case. If Mnuchin does not resolve the situation and the courts cases continue, the Government will very likely lose. Am I wrong thinking the following on this? This is gold. Any new warrants the gov't issues will be exercised in calendar year 2020, guaranteed. This does not explicitly include GSE's, but it would be very, very odd for the gov't to make profits by exercising warrants in other companies and not the GSE's. Might as well exercise all warrants the gov't holds, make money for the taxpayers, and use that in the month or two leading up to the election to get re-elected. Leads me to believe this is going to happen this year, and probably in the Summer at the latest. See attached for screenshot from the CARESAct. As cherzeca said I dont necessarily think your wrong or right but it does look a little hypocritical to afford another bailed out entity quick resolution with the warrants while the GSEs fester. As I believe mnuchin has said before the Govt made significant investment in the GSEs and continues to backstop them effectively. As much as I dont like it I wonder if GSEs would be thrown into a "this is different" category. The bailouts are of different vintages. Anger and hate of the 2008 bank/GSE bailouts and this one which was induced by a mandated shutdown. Technically the investment activities are identical but the flavor is different. In the end though if rule of law and property rights are to be respected then hopefully exercise timing is similar. Hopefully in the end as you mention just another reason why this can/will happen in the back half of the year.

The stigma of being bailed out has dropped. The GSE houses may need repair, but the neighborhood has gotten so bad that the GSEs are now relatively speaking among the nicest houses on the block.

Because they're being asked to suspend mortgage payments but it's not their fault but the virus' fault. He's actually protecting shareholders.

I appreciate reading these disparate thoughts on how this is going to play out politically. I don't know the answer with certainty but want to offer yet another scenario to add to the mix, which is how I think this plays out: The virus is not contained virtually anywhere on Earth, a major exception being South Korea where they have exchanged one problem (immediate infection) with another (delayed second and third waves and a protracted process overall). Excepting South Korea, other areas on Earth are not contained and looking at a maximum virus infection somewhere around May 6th, give or take, and then a rapid drop off from there as an equilibrium takes place between no one left to infect on one hand versus herd immunity on the other. The different infection rates around the Earth (e.g. Italy vs NYC vs North Dakota) are merely a consequence of being at different points on the same trajectory. Thus, we're all headed for a very, very rough patch followed by an equally rapid and dramatic falloff. With this as a backdrop, while Trump mishandled the early stages badly, the point is ultimately there was very little he (or anyone) could have really done to stop it. Furthermore, what this suggests is that the really important part is how the US and everyone else handles the situation NOW (e.g. ventilators, other medical support, supplies, beds), and the Trump admin still has the opportunity to step up and do some good. Italy and other parts of Europe are paving the way to show the world what to do and what not to do. The world has been inoculated. China never contained it and is lying through their teeth. When they locked down Wuhan they gave an 8 hour advance notice before doing so and thousands left and inoculated the rest of the country. Wuhan is recovering because they are on that point of the trajectory described above. People in the far reaches of China are still dying and their media is covering it up. Italy also gave advance notice before locking down Lombardy and the same thing happened: 10,000 people left and inoculated the rest of Italy and some went over the Alps. We're all inoculated and there's nothing we can do about it. The extensive lockdown procedures around the world are mostly not helping and are just causing major economic damage. It's all understandable given we've never been through something like this and people are scared. Good luck all and stay safe. The good news is it will be over sooner than most people think. In a recession the incumbent very rarely wins re-election. But what about war time? Do incumbents have a higher chance to win re-election in a war time? A recession is possible here but it is not Trump's policies causing the recession.