FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[Mephistopheles]

Looking at the specifics of 3 of the Fannie preferred classes, Series F and G (FNMAP and FNMAO) are redeemable only on one date, every 2 years. And series S (FNMAS) only every 5 years. Of these, FNMAS is most interesting not only because its redemption period is the least frequent, but because its dividend is set to be 7.75% minimum (or LIBOR + 4.23% if its greater). The next redemption date is 12/31/20. Assuming this gets resolved within a year, FNMAS holders could be looking at 7.75% interest minimum for like 3-4 years, which would cause it to trade above par.

 

However, that's assuming the settlement, or court, honors that term. For instance, if the court determines its a liquidation, then all the shares may just be redeemed regardless of the date. Or they could settle by converting to common from day 1, since obviously the company has no capital. There are 280 million shares of FNMAS with par value of $25, so I'd say fair chance these terms are not honored given the capital shortfall.

 

Thoughts anyone?

 

[investorG]

Looking at the specifics of 3 of the Fannie preferred classes, Series F and G (FNMAP and FNMAO) are redeemable only on one date, every 2 years. And series S (FNMAS) only every 5 years. Of these, FNMAS is most interesting not only because its redemption period is the least frequent, but because its dividend is set to be 7.75% minimum (or LIBOR + 4.23% if its greater). The next redemption date is 12/31/20. Assuming this gets resolved within a year, FNMAS holders could be looking at 7.75% interest minimum for like 3-4 years, which would cause it to trade above par.

 

However, that's assuming the settlement, or court, honors that term. For instance, if the court determines its a liquidation, then all the shares may just be redeemed regardless of the date. Or they could settle by converting to common from day 1, since obviously the company has no capital. There are 280 million shares of FNMAS with par value of $25, so I'd say fair chance these terms are not honored given the capital shortfall.

 

Thoughts anyone?

 

imo dividends are likely a stretch given the capital needs, unless HERA is thrown out and the excess payments of 63bn go back into retained earnings.

 

many preferred shareholders would want a liquidity event, and thus I believe an exchange offer into the more liquid common would likely be an option.

 

the regulators have tilted towards a preference for common stock over preferred for banks, I dont see why this should change going forward and thus I don't envision additional preferred issuance nor the need to 'turn back on' dividends for a long while.

[Flynnstone5]

Tim Howard was kind enough to answer a question I asked in regards to the biased Moody's article.

 

Many opponents of Fannie and Freddie have been saying for the past few years that it’s not possible for Fannie and Freddie to be brought out of conservatorship without their having to hold so much capital they would not be able to function effectively. It looks like the author of the Moody’s study found a few of those people.

 

When Fannie was forced into conservatorship in September 2008, it had a $3.1 trillion book of business and $47 billion in capital. Even with all the toxic mortgages it talked itself into buying in a foolish attempt to win share back from the private-label securities market–including loans like interest-only ARMs and no-doc mortgages that can no longer be made today–it still did not lose money on an operating basis between 2008 and 2011. Technically, its meager $47 billion in capital would have been enough for the risks it took. Today, Fannie’s book of business is still $3.1 trillion (unrounded, it’s 2.3 percent larger than it was pre-conservatorship), and the credit quality of its loans is much higher than it was then. In addition, its mortgage portfolio today is one-third the size. So–where does this need for “hundreds of billions of dollars” in capital come from, per the Moody’s report?

 

The people who don’t want Fannie and Freddie to exit conservatorship can and do come up with all sorts of invented obstacles that seemingly make it impossible. But let’s turn it around and say, “we’ve determined that the Fannie and Freddie business model is the best alternative for the U.S. secondary mortgage market going forward; so, how do we reform them, bring them out of conservatorship, and recapitalize them?” I believe that’s a question that will be asked in the negotiations between the Mnuchin Treasury and the plaintiffs in the lawsuits, and I think they’ll come up with a much more workable alternative than the author of the Moody’s report did. I’ll give my own thoughts on this topic in my next post, which I intend to put up on Monday.

[SnarkyPuppy]

Is there a risk that Congress passes something effectively winding down F&F before Mnuchin has an opportunity to settle this?  Or a risk that Congress can/will override Mnuchin's "going concern" actions?  Or are the Treasury Secretary's actions immune to any response in the House?

[Mephistopheles]

Highly unlikely that Congress debates and creates reform eliminating F&F before Mnuchin comes up with a plan. Even if that does happen, Trump can veto, which would be hard to override given Republicans don't have enough of a majority and Democrats are unlikely to support elimination.

[BTShine]

For the more intelligent posters on here.

 

Is it possible for President Obama and his crew to legally delete the emails, docs, etc on the NWS so that the Trump Team cannot see them?

 

 

[Guest wellmont]

Looking at the specifics of 3 of the Fannie preferred classes, Series F and G (FNMAP and FNMAO) are redeemable only on one date, every 2 years. And series S (FNMAS) only every 5 years. Of these, FNMAS is most interesting not only because its redemption period is the least frequent, but because its dividend is set to be 7.75% minimum (or LIBOR + 4.23% if its greater). The next redemption date is 12/31/20. Assuming this gets resolved within a year, FNMAS holders could be looking at 7.75% interest minimum for like 3-4 years, which would cause it to trade above par.

 

However, that's assuming the settlement, or court, honors that term. For instance, if the court determines its a liquidation, then all the shares may just be redeemed regardless of the date. Or they could settle by converting to common from day 1, since obviously the company has no capital. There are 280 million shares of FNMAS with par value of $25, so I'd say fair chance these terms are not honored given the capital shortfall.

 

Thoughts anyone?

 

imo dividends are likely a stretch given the capital needs, unless HERA is thrown out and the excess payments of 63bn go back into retained earnings.

 

many preferred shareholders would want a liquidity event, and thus I believe an exchange offer into the more liquid common would likely be an option.

 

the regulators have tilted towards a preference for common stock over preferred for banks, I dont see why this should change going forward and thus I don't envision additional preferred issuance nor the need to 'turn back on' dividends for a long while.

 

yeah I agree 100%. unless there is a recap, which might even involve the jnr pref, these pref won't see dividends for years. there is no legal reason to pay one. i think the reason that some trade higher than others is one, due to liquidity, and two, the "models" that the quants use to value these things simply spits out higher numbers for the higher yielders. there may be some idiosyncrasies in individual names that the quants have in their models as well. But I don't believe that these models factor in the possibility that there could be an exchange offer that would put them all on more or less equal footing. and that presents the opportunity in the less liquid, lower yielding names.

[Guest cherzeca]

For the more intelligent posters on here.

 

Is it possible for President Obama and his crew to legally delete the emails, docs, etc on the NWS so that the Trump Team cannot see them?

 

Once identified during the discovery process litigants can't destroy evidence. All priv docs have been logged and if destroyed would lead to sanctions

[waynepolsonAtoZ]

I look for Trump and/or Putin handing over the 12,000 or so documents to wikileaks on January 21, 2017.

[Mephistopheles]

Here's a contrarion thought: Trump's been needing Obama's help with much of the transition and possibly a fair amount of the actual Presidency. And it seems he actually likes the guy. Maybe it's in his best interest to keep the documents hidden!

[valueyoda]

Just interesting to note that there is no value investor that has a bearish view. There seems to be an one-sided positioning here. Some of the variables used in the models on this forum assume really bullish outcomes for shareholders. What if the Treasury under Trump wants to extract the best deal for the Treasury by exercising the warrants, yet extracting the highest possible guarantee fee and not cancelling the senior preferreds.

[Seahug]

Odds on Mnuchin confirmation?

 

https://morningconsult.com/2016/11/30/democrats-unload-mnuchin-signaling-senate-confirmation-fight/

 

I would think they precleared him w their party. They control senate? Wouldn't nominate if DJT dint think he would be confirmed. Giuliani withdrew.

 

Also I note based on the language of the warrant, it's possible that they govt could convert the jprefs before exercising their warrants & they would still end up w 80% for the same .0000001/share. That would hurt...

[Flynnstone5]

Great piece by Tim Howard.

https://howardonmortgagefinance.com/

[investorG]

for those who are actively trading, the liquid preferreds are now cheap to common, imo, in relation to the historical unoffficial 2:1 ratio

[Guest cherzeca]

Just interesting to note that there is no value investor that has a bearish view. There seems to be an one-sided positioning here. Some of the variables used in the models on this forum assume really bullish outcomes for shareholders. What if the Treasury under Trump wants to extract the best deal for the Treasury by exercising the warrants, yet extracting the highest possible guarantee fee and not cancelling the senior preferreds.

 

You can't maximize value of warrants and keep senior preferred so next idea please

[valueyoda]

Why would they want to maximize the value of the warrants? They want to maximize the total value of all cash flows (guarantee fees, dividends on preferreds) and the value of the warrants, so the package value. Treasury's interests are definitely not aligned with that of other shareholders or preferred holders.

[Guest cherzeca]

Why would they want to maximize the value of the warrants? They want to maximize the total value of all cash flows (guarantee fees, dividends on preferreds) and the value of the warrants, so the package value. Treasury's interests are definitely not aligned with that of other shareholders or preferred holders.

 

So when did mnuchin say that government ownership and control of GSEs was a good idea?

[Flynnstone5]

Why would they want to maximize the value of the warrants? They want to maximize the total value of all cash flows (guarantee fees, dividends on preferreds) and the value of the warrants, so the package value. Treasury's interests are definitely not aligned with that of other shareholders or preferred holders.

 

Removing from gov control and doing it "relatively quickly" means settling the lawsuits as Tim Howard wrote about today. The P's at the table and the Treasury will be aligned in determining the best outcome that allows an exit and ends the litigation. The real focus of the admin. will be to increase access to affordable home ownership, which has been one of many drags on the economy since 09'.

 

 

23:24 - worth a listen again

[SnarkyPuppy]

Serious question- has anyone looked into how much stock comp Tim Howard has outstanding?  He obviously makes very strong points but it's always good to know the incentives behind people you're listening to...

 

Edit:  meh- didn't realize he departed in 2004, so probably difficult to say how much of a bag he was holding in ~09

[investorG]

today's stock drop might have been caused by a cnbc article reminding that mnuchin should have an eventful confirmation hearing due to his foreclosures at indymac.  it also mentioned tillerson, who is even more controversial. 

 

obviously this is a risk for shareholders.  the keys, I believe, will be a) no new bombshells and b) no / limited republicans jumping ship verbally over the next month.

[SnarkyPuppy]

Another interesting note with respect to capital, seems that the proposed reduction in corporate taxes would have a significant impact (negative) on the GSE's deferred tax asset balances...

[Peregrine]

I don't think many people understand what they're getting into by buying into these companies.

 

It is clear that the former system with Fannie and Freddie as private entities with implicit government backing was unsustainable and led to perverse market effects. There is strong bipartisan opposition to turning these two GSEs into the hands of private ownership again.

[Mephistopheles]

I don't think many people understand what they're getting into by buying into these companies.

 

It is clear that the former system with Fannie and Freddie as private entities with implicit government backing was unsustainable and led to perverse market effects. There is strong bipartisan opposition to turning these two GSEs into the hands of private ownership again.

 

Except that one side wants to get rid of the entities all together by starving them of their capital. The other side wants them recapitalized to ensure affordable housing, and would rather see them in private hands than in constant jeopardy as they are in their current state. Furthermore, it's all up to the Executive Branch anyway, and if not, the Judicial Branch. Congress is the least important of the three.

[Mephistopheles]

Why would they want to maximize the value of the warrants? They want to maximize the total value of all cash flows (guarantee fees, dividends on preferreds) and the value of the warrants, so the package value. Treasury's interests are definitely not aligned with that of other shareholders or preferred holders.

 

At first glance this makes sense. Would you rather have 100% of cash flows or 79.9% ownership minus junior preferred? Obviously the former. But Treasury changes every 4-8 years. So, contrary to what a private investor might seek, Treasury would much rather take all of that cash up front and use it for budgeting rather than a limited amount every year, for a limited time. In this case, everything Trump has said indicates massive deficits going forward, with massive infrastructure spending. It's in his best interest (and Treasury's) to maximize the value of the warrants upfront and IPO the shares. For this reason, I predict we will see very gradual capital requirement buildup over time, rather than all at once - along the lines of what Ackman has said, similar to the Basel III requirements for banks. Couple this with Mnuchin's public comments and John Paulson's financial and personal connections to the administration, it's very obvious exactly what Treasury wants to happen.

 

At the risk of sounding like a fool a year from now, I think at least the preferred investment thesis is a slam dunk.

[Guest cherzeca]

I don't think many people understand what they're getting into by buying into these companies.

 

It is clear that the former system with Fannie and Freddie as private entities with implicit government backing was unsustainable and led to perverse market effects. There is strong bipartisan opposition to turning these two GSEs into the hands of private ownership again.

 

This is treasury's and FHFA's negotiation with plaintiffs. Senate will do its passive/aggressive thing giving mnuchin a hard time at confirmation hearings then confirm, then complain about what mnuchin does, then move onto their next photo op