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

[Guest Covid-19_Survivor]

To me, receivership/insolvency seems to be the elephant in the room. Calabria said in his November Fox News interview, twice, that if FnF go insolvent he will wipe out shareholders (3:00 and 13:30).

https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

 

It seems quite possible that FnF could sustain losses greater than the $23B of capital they have (combined). Then they would have to draw once again on Treasury's support to avoid mandatory receivership under HERA, which is triggered by 60 consecutive days of balance sheet insolvency (liabilities exceed assets). Calabria could choose to not draw the money if receivership is his goal.

 

I wish Calabria luck on the excuse of insolvency. Treasury raped $140m from our books, and Sweeney analogized the relationship as mafioso in structure. I'd absolutely load up on our then penny stocks.

 

A goal of receivership though, that one has had me thinking. I mean, FnF is a farce, we ARE govt entities, we are not public entities, no matter how much we try to act like one. Once again Treasury is using us to prop up credit markets, forcing us to eat potentially bad debt, albeit with a supposed guarantees, again. Since when is govt allowed to control public entities in such a way?

 

LOL, this is the 2nd time in ~10 years that the govt is handing out trillions to prop up the financial system. "Save the taxpayers" is such a stupid premise. Once the shit hits the fan, taxpayers have nothing to do with it, as will always be.

 

I fear, slightly, that govt will come to its senses and just nationalize us, and then leave our compensation to the courts.

 

On a brighter note; we are the only one's working under the protective shield of the govt., something that CMO, CMI, MFA, etc. have not.

 

[investorG]

 

I fear, slightly, that govt will come to its senses and just nationalize us, and then leave our compensation to the courts.

 

 

There is some chance of this imo due to the crisis / capital levels and a lot of DC is against the hybrid structure.  The compensation side could be decided by the courts or also some negotiated deal. 

 

Does anyone know when Sweeney (if it occurs in 2021) and Lamberth (scheduled for 2021 trial) would reach final stage after appeals? 2022,2023,2024?

[orthopa]

I think as Calabria mentioned a couple of days ago the stress of what is going on will help others realize the importance of FnF and the role they play.

 

Imagine if this was all privatized and the big banks had to take on all of these mortgages, forebarance, and MBS issues? That would be a huge stress to the system now. We are seeing real time the function FnF perform and how valuable they are. They just need more capital, and will get it eventually.

[Luke 532]

I think as Calabria mentioned a couple of days ago the stress of what is going on will help others realize the importance of FnF and the role they play.

 

Imagine if this was all privatized and the big banks had to take on all of these mortgages, forebarance, and MBS issues? That would be a huge stress to the system now. We are seeing real time the function FnF perform and how valuable they are. They just need more capital, and will get it eventually.

 

+1

[Luke 532]

Tim Howard response when asked "If you care to comment on the recent FED actions as it relates to the GSEs and the calls to allow them to buy MBS paper it would be helpful to get your take on the government’s response."

 

https://howardonmortgagefinance.com/2020/01/16/how-we-got-to-where-we-are/#comment-14794

I’m not sure where to begin on this one.

 

Prior to the 2008 financial crisis, Fannie Mae’s portfolio investment business had been the “bete noire” of the Financial Establishment for longer than the 17 years I was responsible for it (from 1988 to 2004). Fannie had indeed almost failed in the early 1980s because of a mismatch between its mortgage and debt durations, but in the late 1980s the company began using callable debt and derivatives to “rebalance” those durations much more frequently and cost-effectively. From the early 1990s, Fannie’s portfolio was not the “snarkily managed hedge fund” the Wall Street Journal labeled it, but instead a consistent buyer of 30-year fixed-rate mortgages that helped keep interest rates on mortgages low, while at the same time being a significant source of profitability for Fannie. This, however, did not stop Treasury from requiring Fannie (and Freddie, which had been a late entry into the portfolio business) to shrink its portfolio by ten percent—later increased to 15 percent—per year after it was put into conservatorship.

 

Well, now portfolio investments in mortgages and MBS ARE risky. The recent sharp widening in mortgage-to-Treasury spreads reflects not just the typical “flight to safety” one sees during times of market stress but also the fact that with short-term interest rates at zero 30-year fixed-rate mortgages originated today could become extremely long-duration assets. A debt-based mortgage investor in new long-term mortgages therefore must have a very large rebalancing budget to cover the risk of having the durations of these loans extend to an unprecedented degree. It doesn’t surprise me that the Financial Establishment would like to have Fannie and Freddie be permitted to add to their portfolios again—the mortgage market is badly in need of support—but its willingness to ignore the interest-rate risk these investments would pose to the companies, which seemed to be of such great concern when those risks were considerably less, can’t be allowed to go without comment.

 

Yet, “be careful what you wish for.” The current vision of Fannie and Freddie as recapitalized and released companies limits their portfolios to purposes incidental to the credit guaranty business, such as aggregating purchases from smaller lenders prior to packaging for sale as MBS, or holding non-performing loans bought out of existing MBS pools. Were Fannie and Freddie to be allowed to rebuild their investment portfolios, Treasury and FHFA almost certainly would have to agree to extend whatever government support they intend to provide for their MBS credit guarantees (most likely continued access to draws of senior preferred stock, for a fee, in the event of financial difficulty) to the debt that funds their newly expanded portfolio business. Buying government-backstopped MBS using debt without such a backstop is not a viable business proposition. (Remember, banks can fund their fixed-rate MBS with FDIC-insured consumer deposits, and incur no capital penalty for the interest-rate risk they take in doing so). The question thus becomes: does the Financial Establishment want Fannie and Freddie’s support as mortgage purchasers over the next few months to a year badly enough to extend to their debt the same type of government support it’s willing to give to their mortgage guarantees in the companies’ post-conservatorship future? Somehow, I doubt it.

[Luke 532]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

[james22]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

 

More than interesting, no? Seems important.

[investorG]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

 

More than interesting, no? Seems important.

 

why is this relevant?  the senate bill likely doesn't create a FHFA with unlimited powers.  and we don't know the format of the investments, it could be mostly loans.  it seems apples / oranges to HERA / FHFA / NWS.

[Guest cherzeca]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

[orthopa]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period. 

[investorG]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date. 

[Luke 532]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

[allnatural]

I imagine anything that removes snr pfds from cap structure would result in extremely bullish action for jr pfds which turn to snr.

 

Anyone else think the GSEs are going to profit handsomely on providing liquidity today as they are increasing the size of their internal portfolio at record wide spreads which should revert back once (if) this all cools down over next 3-6 months? They could theoretically be buying the lows right now.

 

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

[Guest cherzeca]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period.

 

it is Tim Howard's view that near term the GSEs wont suffer an impact to earnings from increased delinquencies (borrowing at near zero to make guaranty payments) as much as CECL and increase in loss reserves.  one hopes that CECL will be deferred in the stimulus bill...affects banks too

[orthopa]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period.

 

it is Tim Howard's view that near term the GSEs wont suffer an impact to earnings from increased delinquencies (borrowing at near zero to make guaranty payments) as much as CECL and increase in loss reserves.  one hopes that CECL will be deferrd in the stimulus bill

 

Agree, and any bailout I was referring to above was for airlines, boeing, etc. I dont think the GSEs are even on the radar for Congress at this time. FnF appear to be doing their job and out of the spot light.

[Luke 532]

Bloomberg Intelligence report out this morning (see attached).  It basically says if the economy (and housing) gets crushed for a sustained period of time, then the Admin plans will be delayed.  If the economy (and housing) has deep problems but rebound fairly quickly, then the Admin plan is still on track for calendar year 2020.  Nothing surprising with that assessment.

 

Probably worth noting the previous comments on this thread about CRT's and the like and how that will soften much of the blow in a recession.

BI_1_3-25-2020.jfif

BI_2_3-25-2020.jfif

BI_3_3-25-2020.jfif

[Guest cherzeca]

this is a self-induced problem, since the reason why there are delinquencies is the lockdown was imposed indiscriminately on the entire population, as opposed to those only at risk.  but the stimulus bill "should" provide a bridge to the time when everyone gets back to work, assuming there is still work to get back to after this massive mistake.  insofar as you mitigate everyone, you wont do a good enough job to mitigate those who really need it.

[investorG]

Mr. Josh Rosner is on a roll.  Thank you.

[Guest Covid-19_Survivor]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

 

Have your answer yet?

 

Depressing how poorly these things are doing today. No deferment of mortgages in stimulus bill; these things should be screaming higher. Money's pouring into MREIT's (and everything else) first though, I guess.

[Luke 532]

Mr. Josh Rosner is on a roll.  Thank you.

 

If the #government expects any #corporations to trust them today they must show goodwill by recognizing #GSEs repayments & writing down the #GSE debt immediately. @USTreasury @FHFA  @realDonaldTrump  @larry_kudlow  @WhiteHouse

[Luke 532]

Have your answer yet?

 

Depressing how poorly these things are doing today. No deferment of mortgages in stimulus bill; these things should be screaming higher. Money's pouring into MREIT's (and everything else) first though, I guess.

 

I wouldn't sweat the daily price action.

[Guest Covid-19_Survivor]

Agreed, and I'm not really. It's been a painful ride down but thesis remains unchanged.

[Guest cherzeca]

PLS had been making a small comeback...now they will be dead in the water for awhile.  once again, GSEs are the only game in town

[orthopa]

Bloomberg Intelligence report out this morning (see attached).  It basically says if the economy (and housing) gets crushed for a sustained period of time, then the Admin plans will be delayed.  If the economy (and housing) has deep problems but rebound fairly quickly, then the Admin plan is still on track for calendar year 2020.  Nothing surprising with that assessment.

 

Probably worth noting the previous comments on this thread about CRT's and the like and how that will soften much of the blow in a recession.

 

I would assume (yeah I know what assume means) that unless there is a complete melt down and FnF have to draw on the Treasury again the recap plan should continue forward. All the upcoming steps really are not dependent on the economy other then raising capital which is still ~12 months away at the soonest. The capital rule is written. Mnuchin and Calabria have been "negotiating" another PSPA amendment for 7 months and I would be quite sure 2 amendments are on the table based on legal outcome.

 

I would still strongly believe that some hedge will be put in place before the election. I think this has been the plan all along as the election is a toss up. Some believe that even if Trump loses the ~3 months afterwards is enough time to get all the ducks in a row before the democrat is sworn in.

 

Two things which were discussed which I hope gain some traction going forward are 1. Just how punitive the bailout to Fannie was when compared to bailouts being done now. 2. Just how much FnF helped during this crisis and their value to the system. The Fed had to step in, in a big way but imagine the banks being on the hook for all of this? Jesus. What a mess that would be.

[allnatural]

From Bloomberg:

 

*CALABRIA: CRISIS DOESN'T YET AFFECT FANNIE-FREDDIE TIMELINE

*CALABRIA: GSES WILL BE STRESSED IF CRISIS EXCEEDS TWO MONTHS

 

He also mentioned he still expects to get them out by 2021, 2022 (im assuming this means the IPO but was pretty vague this time around).