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

[investorG]

I’d been wondering why contents of the Senate bill would be leaked to Bloomberg, by those not friendly to GSEs. Now it makes sense, to prepare the ground for this capital retention perhaps?

 

congresspeople (r's especially) / Bloomberg / mba / banks / wsj / carney ---- all on the same team. 

 

I cant figure out if they truly want to see us in pain or just simply to help out their big bank donors and friends and don't care about us (even if we receive some shareholder rewards).

[Guest cherzeca]

the reason why the senate banking committee bill was leaked to press by MBA etc is that MBA etc was drafting it with committee staff

[rros]

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx

 

Thank you for posting this. Here are what I think are the most important points:

 

• The Fourth Quarter Dividend section says that the entire NWS dividend minus $2.4B will be paid on December 31.
  

• Notwithstanding the foregoing, for each Dividend Period from January 1, 2018, and thereafter, following any Dividend Payment Date with respect to which the Board of Directors does not declare and pay a dividend or declares and pays a dividend in an amount less than the Dividend Amount, the Applicable Capital Reserve Amount shall thereafter be zero. For the avoidance of doubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no Dividend Amount shall accrue or be payable for such Dividend Period.

  If Watt tries to hold back any money the capital reserve immediately falls to zero.
  
• The Increase in Liquidation Preference section says that Treasury's liquidation preference has increased by $3B for each company.
  

 

My initial thoughts:

• Overall I don't think this is slam-dunk great news, or even very good news at that. Watt basically cannot choose to hold back capital from this point forward; if he does then the reserve amount drops to zero, making it extremely costly (an extra $3B per company added to Treasury's liquidation preference) to do so.
  
• The liquidation preference went up by $3B (per company) anyway. This is essentially a draw of $3B for each company, though that section may have only been included so that Treasury "gets something out of the deal."
  
• The NWS continues. The only possible positive spin here is that the only purpose of this agreement was to get it in ahead of any HR 4560/Jumpstart language that could be included in an end-of-year spending bill. HR 4560 states that any agreements made between FHFA and Treasury after January 1, 2018 could not change NWS-type language established before that date, so Treasury and FHFA had to act quickly.
  
• The language in FHFA's statement is interesting.
  

  We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.

  The words "contemplate" and "exigent circumstances" leave a lot of wiggle room, even though the letters themselves don't seem to.
  

If reauthorization of jumpstart fails a larger liquidation preference isn't a huge concern. After Jan 1st Trump can do away with all Sr. shares, anytime.

[Guest cherzeca]

pure speculation here, but i imagine watt reached this conclusion awhile ago, and was waiting for mnuchin's high five, and mnuch said he didnt have time to address it until tax reform passes

 

edit:  if i am right, this would indicate that watt is willing to follow mnuchin's lead

[DocSnowball]

pure speculation here, but i imagine watt reached this conclusion awhile ago, and was waiting for mnuchin's high five, and mnuch said he didnt have time to address it until tax reform passes

+1 seems to be something put in place a while ago. The legalese is beyond me, but glad it does not take away from the catalyst of upcoming threat of a draw when DTAs change

 

Here's another WSJ article from today - their new found appreciation of FnF's business model is almost too good to be true.

 

https://www.wsj.com/articles/treasury-will-allow-fannie-freddie-to-retain-small-capital-buffer-1513867331

 

Quoting part of it

 

"The Treasury agreed to modify the terms of the U.S. backstop of the companies after discussions initiated earlier this year at the request of FHFA, said senior Treasury officials on Thursday.

 

Fannie and Freddie have reported strong profits in recent years because they have dramatically restructured their underlying business of guaranteeing mortgages that are bundled into securities and sold to investors. They have raised the fees they charge lenders and are guaranteeing higher-quality loans than they did before the housing bubble burst in 2007.

 

Through September, Fannie and Freddie have paid around $276 billion in dividends to the Treasury, while they were forced to borrow some $187 billion in the years after the 2008 financial crisis."

[investorG]

Only reason Watt did this buffer is to save his job for bringing down these two to their knees with zero capital. He would be fired anyways. Hope.

Need to keep an eye on HR4560 and on Warner-Stevens-Corker bill. Don't underestimate: Corker can insert HR4560 through others just like he inserted tax provision to enrich himself indirectly, using others.

 

imo we should all thank Mel Watt for his patience in 2017 -- a deal like this with Treasury on board is better than dancing alone.

 

[investorG]

do you think there's a chance they split FNMA into 2 parts: a wind-down business with the legacy book and a new company with a fresh charter? 

 

existing shareholders would go with the wind-down legacy portion and get paid as cash flows (minus expenses) come in over future years, and the sr preferred gets morphed into an ongoing commitment fee for providing explicit support until the legacy book winds down?  this could settle lawsuits, provide relief for shareholders, and also allow them to craft whatever new company they wanted going forward to satisfy the congressional R's.

[investorG]

pure speculation here, but i imagine watt reached this conclusion awhile ago, and was waiting for mnuchin's high five, and mnuch said he didnt have time to address it until tax reform passes

 

edit:  if i am right, this would indicate that watt is willing to follow mnuchin's lead

 

I agree, mel watt prefers to co-operate rather than run solo.

[no_free_lunch]

Another WSJ piece on the GSE's.

 

Far more significant for the long-term future of the companies—as well as for banks, homeowners and investors in mortgage-backed securities—is a plan being discussed in Congress. As The Wall Street Journal has reported, bipartisan Senate legislation that could be introduced early next year would set up private competitors to Fannie and Freddie, remove the two companies’ government backstops and replace it with an explicit government guarantee on mortgage-backed securities.

..

If the aim were to eliminate Fannie and Freddie, as earlier plans proposed, it would make little sense now to let them begin accumulating capital. But if the aim is to put them in competition against new private companies, Fannie and Freddie will need some capital to compete effectively.

 

https://www.wsj.com/articles/how-the-great-fannie-and-freddie-dustup-could-end-1513880901?mod=e2tw

[rros]

Only reason Watt did this buffer is to save his job for bringing down these two to their knees with zero capital. He would be fired anyways. Hope.

Need to keep an eye on HR4560 and on Warner-Stevens-Corker bill. Don't underestimate: Corker can insert HR4560 through others just like he inserted tax provision to enrich himself indirectly, using others.

Not sure if you heard the recording of the markup where Jumpstart was discussed before being added to the omnibus bill 2 years ago. But it wasn't really sneaked in while senators were asleep at the wheel. It was discussed. Specially by Sherrod Brown and Chuck Shumer who wanted an assurance that Jumpstart would not interfere with any court ruling. Given current circumstances any renewed push for any language resembling Jumpstart may face greater resistance.

 

Today's move, watered down through language, firmly stopped capital leak. It eliminated one important clause from the 3rd amendment, first one needed to begin any recapitalization. Although it looks like a baby-step, it is major progress. Cleverly opening the door for more things to come. Maybe next quarter? We are moving in the right direction.

 

If we were going backwards, the first action before we could move forward was to stop. Capital levels are set at 3 billion.

[Midas79]

I believe this is the text of the House spending bill that was passed today.

 

http://docs.house.gov/billsthisweek/20171218/BILLS-115HR1370-RCP115-52.pdf

 

Please correct me if I am wrong. Searches for keywords "Fannie", "GSE", "senior", "preferred", "FHFA", etc. gave no results, though I didn't actually read the bill.

 

If this is the actual bill that extends the debt ceiling to January 19 and the Senate passes it as-is, then those favoring a Jumpstart extension have likely lost their chance. I would expect the Senate to go into recess for the remainder of 2017 upon approving this spending bill. This combined with Trump's potential signing of the tax bill tomorrow, triggering an immediate DTA writedown, means that I expect fireworks in the first half of January once the administration finally has its hands untied. Any Jumpstart-type stuff would wait until closer to the deadline on January 19, and the draw date of March 31 would also encourage quick action.

[Luke 532]

I believe this is the text of the House spending bill that was passed today.

 

http://docs.house.gov/billsthisweek/20171218/BILLS-115HR1370-RCP115-52.pdf

 

Please correct me if I am wrong. Searches for keywords "Fannie", "GSE", "senior", "preferred", "FHFA", etc. gave no results, though I didn't actually read the bill.

 

If this is the actual bill that extends the debt ceiling to January 19 and the Senate passes it as-is, then those favoring a Jumpstart extension have likely lost their chance. I would expect the Senate to go into recess for the remainder of 2017 upon approving this spending bill. This combined with Trump's potential signing of the tax bill tomorrow, triggering an immediate DTA writedown, means that I expect fireworks in the first half of January once the administration finally has its hands untied. Any Jumpstart-type stuff would wait until closer to the deadline on January 19, and the draw date of March 31 would also encourage quick action.

 

Colleague John Roberts rpts Trump plans to sign the stopgap government funding bill and the tax reform package tomorrow. PAYGO waivers were in the CR.

[orthopa]

Another WSJ piece on the GSE's.

 

Far more significant for the long-term future of the companies—as well as for banks, homeowners and investors in mortgage-backed securities—is a plan being discussed in Congress. As The Wall Street Journal has reported, bipartisan Senate legislation that could be introduced early next year would set up private competitors to Fannie and Freddie, remove the two companies’ government backstops and replace it with an explicit government guarantee on mortgage-backed securities.

..

If the aim were to eliminate Fannie and Freddie, as earlier plans proposed, it would make little sense now to let them begin accumulating capital. But if the aim is to put them in competition against new private companies, Fannie and Freddie will need some capital to compete effectively.

 

https://www.wsj.com/articles/how-the-great-fannie-and-freddie-dustup-could-end-1513880901?mod=e2tw

 

Anyone able to get the full text of this? Thanks in advance

[rros]

Another WSJ piece on the GSE's.

 

Far more significant for the long-term future of the companies—as well as for banks, homeowners and investors in mortgage-backed securities—is a plan being discussed in Congress. As The Wall Street Journal has reported, bipartisan Senate legislation that could be introduced early next year would set up private competitors to Fannie and Freddie, remove the two companies’ government backstops and replace it with an explicit government guarantee on mortgage-backed securities.

..

If the aim were to eliminate Fannie and Freddie, as earlier plans proposed, it would make little sense now to let them begin accumulating capital. But if the aim is to put them in competition against new private companies, Fannie and Freddie will need some capital to compete effectively.

 

https://www.wsj.com/articles/how-the-great-fannie-and-freddie-dustup-could-end-1513880901?mod=e2tw

 

Anyone able to get the full text of this? Thanks in advance

PM sent.

[TwoCitiesCapital]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

If the entities are to be retained, and we know they cannot continue as is, we know something has to change. The most obvious thing would be the NWS. So seems like now is the first time that we've really had concrete evidence that the administration is on our side?

[Guest cherzeca]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

If the entities are to be retained, and we know they cannot continue as is, we know something has to change. The most obvious thing would be the NWS. So seems like now is the first time that we've really had concrete evidence that the administration is on our side?

 

i am beginning to think about two things: 1) the difficulty in starting a new business by legislative fiat, as it were, and 2) the collective action problem involved in doing so.

 

1) CW want to introduce competition to FnF.  usually, competition emerges from new entrants that want to enter the business, not from a congressional determination that competition would be a positive policy.  how likely is it that some PMI company wants to go up against FnF? this bill may try to hamstring FnF to make successful competition more likely, but how likely is it that mnuchin will want to hamstring FnF consistent with his notion that the 30 year mortgage is very valuable and must be preserved.  seems like you are incurring a lot of risk to create a more competitive landscape whereas the smarter path would be to bolster the existing players (FnF) and opt for utility like regulation. 

 

2) to achieve more competition, a lot of players have to fall in line...democratic senators not named warner, new competitors.  many fewer players to achieve an administrative solution.  if there was no FnF, then all ideas might be worth pursuing.  given FnF's dominance, how likely is it that a huge adjustment to the competitive landscape can be orchestrated?

[DocSnowball]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

If the entities are to be retained, and we know they cannot continue as is, we know something has to change. The most obvious thing would be the NWS. So seems like now is the first time that we've really had concrete evidence that the administration is on our side?

 

Yes, but over time position sizing has been a lesson learnt here - i have 9-10% portfolio in this, and if it goes close to par it becomes 30-35% which can be held for many more years untouched. It’s hard to put any more at risk based on past history.

[investorG]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

If the entities are to be retained, and we know they cannot continue as is, we know something has to change. The most obvious thing would be the NWS. So seems like now is the first time that we've really had concrete evidence that the administration is on our side?

 

I think there's great value still in the preferred securities, especially in light of this week's news.  however, in addition to the deal risk (ie what could be received), there's also the time risk --- if the cash flows or dividends are paid out over many years then the NPV is obviously lower than the headline amount.  to get a favorable result, i'm guessing the big pref holders are willing to take something that delivers NPV around 2/3 of par - which would make the risk reward strong but not outstanding imo.  of course there are other options too, good and bad.

 

[Cox022]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

Big picture, these developments are very favorable and congrats to those who saw this development coming (finally something common-sensical happened!  We've waited a long time for decision makers to become aware of economic realities that support continued existence of GSEs).  Still a long way to go but odds on average seem to keep improving.

 

With regards to 'backing up the truck', or how to update the odds of a good outcome, I found that Mr. Howard's Comment on his blog (Dec. 19th) helpful.  Here it is without comment since I'm still digesting it:

 

I don’t follow “StockTwits,” but the reason the latest version of Corker-Warner might require the new versions of Fannie and Freddie to raise less capital is that once they finally are transitioned out of conservatorship (in a way that presumably will be described when the draft bill is made public) they will be much smaller, with considerably diminished growth prospects. That’s nothing to cheer about.

 

As I’ve said earlier, I can’t comment on a bill I haven’t yet seen, but the steady stream of stories about it that quote Dave Stevens (including the article you cite) make it completely clear that what Corker and Warner are about to put out is very close to, if not exactly, what the MBA wants. And for at least two decades the MBA, and the large banks, have wanted to reduce the market power of Fannie and Freddie. The new C-W bill will do that by keeping Fannie and Freddie in conservatorship, with FHFA and Treasury running them in a manner that supposedly will give “fully private” de novo companies time and an incentive to raise capital and enter the conventional single-family credit guaranty business. Only then will Fannie and Freddie be released, with new charters, and allowed to try to raise their own capital after their competitors already have raised theirs.

 

I am very interested to see how C-W (and/or the MBA) think this can work. For that, though, it looks like I’ll need to wait until next year. Which I suppose is just as well. All of us can use–and deserve–a year-end break.

 

 

[rros]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

Big picture, these developments are very favorable and congrats to those who saw this development coming (finally something common-sensical happened!  We've waited a long time for decision makers to become aware of economic realities that support continued existence of GSEs).  Still a long way to go but odds on average seem to keep improving.

 

With regards to 'backing up the truck', or how to update the odds of a good outcome, I found that Mr. Howard's Comment on his blog (Dec. 19th) helpful.  Here it is without comment since I'm still digesting it:

 

I don’t follow “StockTwits,” but the reason the latest version of Corker-Warner might require the new versions of Fannie and Freddie to raise less capital is that once they finally are transitioned out of conservatorship (in a way that presumably will be described when the draft bill is made public) they will be much smaller, with considerably diminished growth prospects. That’s nothing to cheer about.

 

As I’ve said earlier, I can’t comment on a bill I haven’t yet seen, but the steady stream of stories about it that quote Dave Stevens (including the article you cite) make it completely clear that what Corker and Warner are about to put out is very close to, if not exactly, what the MBA wants. And for at least two decades the MBA, and the large banks, have wanted to reduce the market power of Fannie and Freddie. The new C-W bill will do that by keeping Fannie and Freddie in conservatorship, with FHFA and Treasury running them in a manner that supposedly will give “fully private” de novo companies time and an incentive to raise capital and enter the conventional single-family credit guaranty business. Only then will Fannie and Freddie be released, with new charters, and allowed to try to raise their own capital after their competitors already have raised theirs.

 

I am very interested to see how C-W (and/or the MBA) think this can work. For that, though, it looks like I’ll need to wait until next year. Which I suppose is just as well. All of us can use–and deserve–a year-end break.

I have only owned and still own the Jrs. So I am biased. Two -humble- thoughts on T.H.'s post. Jrs. aren't equity as in common equity. Lower sales, reduced market share, reduced earnings and diminished growth prospects will not affect the Jrs. so long as there is enough retained earnings for the payouts. As for continued conservatorship, once private capital smells the money it will not take long before there are numerous participants in the market and the companies are let free. Money will not wait a century and the housing market is about to leap forward.

[Cox022]

Is this not the opportunity to back up the truck? As the WSJ states, allowing the companies to retain capital is directly in opposition to the idea of winding them down.

 

Big picture, these developments are very favorable and congrats to those who saw this development coming (finally something common-sensical happened!  We've waited a long time for decision makers to become aware of economic realities that support continued existence of GSEs).  Still a long way to go but odds on average seem to keep improving.

 

With regards to 'backing up the truck', or how to update the odds of a good outcome, I found that Mr. Howard's Comment on his blog (Dec. 19th) helpful.  Here it is without comment since I'm still digesting it:

 

I don’t follow “StockTwits,” but the reason the latest version of Corker-Warner might require the new versions of Fannie and Freddie to raise less capital is that once they finally are transitioned out of conservatorship (in a way that presumably will be described when the draft bill is made public) they will be much smaller, with considerably diminished growth prospects. That’s nothing to cheer about.

 

As I’ve said earlier, I can’t comment on a bill I haven’t yet seen, but the steady stream of stories about it that quote Dave Stevens (including the article you cite) make it completely clear that what Corker and Warner are about to put out is very close to, if not exactly, what the MBA wants. And for at least two decades the MBA, and the large banks, have wanted to reduce the market power of Fannie and Freddie. The new C-W bill will do that by keeping Fannie and Freddie in conservatorship, with FHFA and Treasury running them in a manner that supposedly will give “fully private” de novo companies time and an incentive to raise capital and enter the conventional single-family credit guaranty business. Only then will Fannie and Freddie be released, with new charters, and allowed to try to raise their own capital after their competitors already have raised theirs.

 

I am very interested to see how C-W (and/or the MBA) think this can work. For that, though, it looks like I’ll need to wait until next year. Which I suppose is just as well. All of us can use–and deserve–a year-end break.

I have only owned and still own the Jrs. So I am biased. Two -humble- thoughts on T.H.'s post. Jrs. aren't equity as in common equity. Lower sales, reduced market share, reduced earnings and diminished growth prospects will not affect the Jrs. so long as there is enough retained earnings for the payouts. As for continued conservatorship, once private capital smells the money it will not take long before there are numerous participants in the market and the companies are let free. Money will not wait a century and the housing market is about to leap forward.

 

Good points. It's hard to judge a future competitive landscape without the details of how C-W plans to promote competition.  It is not obvious to me how one promotes competition without negatively hurting the housing market (which I'd speculate would happen if GSE activity was constrained).  Yet another detail to wait-and-see.

 

Supporting rros' point:  if the anti-GSE crowd finally gets a fair shot in the mortgage market (a war they've been waging for decades), then I suppose you could assume they will anxiously enter the playing field. 

[rros]

Someone else is thinking on a conversion bet...

https://www.benzinga.com/analyst-ratings/analyst-color/17/12/10951395/fannie-mae-freddie-mac-preferred-shareholders-could-see

[Guest cherzeca]

Someone else is thinking on a conversion bet...

https://www.benzinga.com/analyst-ratings/analyst-color/17/12/10951395/fannie-mae-freddie-mac-preferred-shareholders-could-see

 

total waste of two minutes reading that

[rros]

Someone else is thinking on a conversion bet...

https://www.benzinga.com/analyst-ratings/analyst-color/17/12/10951395/fannie-mae-freddie-mac-preferred-shareholders-could-see

 

total waste of two minutes reading that

Thank God it was only 2 minutes... Guy could have written an even longer piece!

[Guest cherzeca]

right. not directed to you rros.  just saying the missing detail in the draft bill is the treatment of the outstanding senior preferred.  no one who has reported on it has addressed this issue. so any valuation of junior securities such as jr pref and common cant be done unless we know status of senior pref