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

[investorG]

Whoa.

 

#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

 

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.

 

read the few sentences prior to that reference in the bill. I believe it references allowing funds to be used in 2021+ to exercise options on warrant deals agreed to in 2020.  likely not applicable.

[Guest cherzeca]

Whoa.

 

#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

 

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.

 

this is a strange provision. as you know the value of a warrant lies in it optionality, being able to be a warrant and not a share for as long a period of time as possible. why should there be a rush to exercise, or if there is to be, why not just issue common shares?  as to read over to the GSEs,  I cant say you are wrong, but I also cant say that you are right.

[Luke 532]

read the few sentences prior to that reference in the bill. I believe it references allowing funds to be used in 2021+ to exercise options on warrant deals agreed to in 2020.  likely not applicable.

 

I didn't see that, thanks.  Admittedly I got the screenshot second-hand so I didn't have proper context.

[orthopa]

Whoa.

 

#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

 

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.

[Wiggins]

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.

 

Whoa.

 

#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

 

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.

[Guest cherzeca]

while I haven't read bill yet, the reported effect seems to have been to grant mortgage forbearance without really thinking through the consequences.  hence, mortgage services are screaming that they will have an insurmountable liquidity problem, and Mnuchin has asked for a report by today as to how to bridge them to reimbursement (by the GSEs for their securitized loans).  but the second shoe to fall of course is the GSEs.  they will be the ultimate forbearance backstop for some 1/2 of all outstanding mortgages to which forbearance has been granted. I have seen no model for how long and how well GSEs will perform this function though I certainly hope the GSEs and fhfa have created some models. and I would think the GSEs will provide color when they report 1Q earnings (which should be quite good).

 

but it should be lost on no one that the MBA-represented mortgage servicers are squealing while the GSEs are doing business as usual.

[investorG]

while I haven't read bill yet, the reported effect seems to have been to grant mortgage forbearance without really thinking through the consequences.  hence, mortgage services are screaming that they will have an insurmountable liquidity problem, and Mnuchin has asked for a report by today as to how to bridge them to reimbursement (by the GSEs for their securitized loans).  but the second shoe to fall of course is the GSEs.  they will be the ultimate forbearance backstop for some 1/2 of all outstanding mortgages to which forbearance has been granted. I have seen no model for how long and how well GSEs will perform this function though I certainly hope the GSEs and fhfa have created some models. and I would think the GSEs will provide color when they report 1Q earnings (which should be quite good).

 

but it should be lost on no one that the MBA-represented mortgage servicers are squealing while the GSEs are doing business as usual.

 

If the forbearance period is 12 months then the GSEs would likely have that time to prepare for the onslaught of delinquencies / foreclosures / credit losses that would come in 2021+?

 

If so, this is likely why Calabria randomly postponed the capital rule until 'late may'.  At that point, as he said, they would be better positioned to determine if this was a short term problem -- where they could let the original plans (think ACG timeline) play out -- or, more likely, it's a major serious situation and a Plan B is needed. 

 

For me, Plan B should entail outside private capital raise (from govt and possibly also private equity) in conjunction with elimination of Sr pref (and perhaps warrants depending on the situation) in addition to dropping all near term re-IPO plans.  Under Plan B, profit motivation for the govt should be out and making FnF a fortress ready to take on losses should be in.

[allnatural]

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

[Midas79]

Thanks,  Do you have an opinion on whether or not the current environment changes for better or worse the expected path out of conservatorship? and if what Pagliara is suggesting could happen or likely? It sounds like all we need is a PSPA amendment this summer right?

 

1) Given the post just above mine, I don't think the current environment will affect the timeline much if at all. Calabria tweeted a link to his Bloomberg interview titled "Fannie, Freddie Conservatorship Exit Not Impacted by Virus"; I'm going to consider that a big tell.

https://twitter.com/MarkCalabria/status/1242953955447013376

2) Some clowns on iHub seem to think that Pagliara was not referring to a pref-for-common share exchange when he mentioned a 10-15% haircut, but that's really the only thing he could have been talking about; FnF don't have the capital to do a subpar redemption. I do believe an exchange is quite likely, for reasons outlined in the post you replied to. Or were you not referring to a share exchange?

3) I believe there are three things we must have before any share exchange and re-IPO: seniors gone (either cancelled or converted to commons; this also kills the NWS), remaining lawsuits where FnF are liable settled (I think this is only Perry, please correct me if I'm wrong; also, killing the NWS should moot many of the cases), and a finalized capital rule.

[Guest cherzeca]

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

 

I have been thinking about GSE loss reserve creation over the next couple of Qs.

 

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

 

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

[Guest cherzeca]

while I am aware that tim pagliara has rendered an important service with IU and he certainly is in contact with P counsel, I have not been particularly impressed with his understanding of the litigation, or seen him as having given cogent analysis re possible outcomes.  I think you may be overbuying pagliara if you think any of his speculation is worth more than that of anyone on this thread.

[Midas79]

This is great analysis, as usual.  but unless things get back to normal soon -- highly unlikely -- this analysis is likely not applicable for the current landscape with tens of millions of Americans losing their jobs.  I'd recommend our sponsors push for more workable immediate solutions that benefit all parties' current goals.

 

Thanks. I don't see why it isn't applicable now, though. Most of my post was a list of why it makes sense for there to be an eventual exchange of prefs for commons, which doesn't really have anything to do with the unemployment rate.

[investorG]

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

 

I have been thinking about GSE loss reserve creation over the next couple of Qs.

 

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

 

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

 

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

[allnatural]

1) The CARES act delayed CECL until end of the crisis at the very least (or end of year, whatever comes first), FHFA still hasnt delayed it for 2 years like banks (TBD).

 

2) Mortgage servicers only have to front 3-4 months worth of payments I believe, then GSEs are on the hook after that, which they can borrow at close to 0% rates to pay the MBS investors like TH pointed out so non-issue until those loans turn delinquent.

 

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

 

I have been thinking about GSE loss reserve creation over the next couple of Qs.

 

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

 

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

 

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

[Guest cherzeca]

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

 

I have been thinking about GSE loss reserve creation over the next couple of Qs.

 

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

 

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

 

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

 

CECL will be deferred by fhfa given that it is deferred for basically all other financial institutions.  should get clarity of this when GSEs report 1q.

 

GSEs absolutely have to pay to mbs pools forbearance amounts.  but this is a separate credit question to loss reserve creation.  I suppose GSEs could just be conservative and assume that anyone seeking forbearance is a credit risk.  but omitting a payment on one's own (default) is a lot different from a credit viewpoint than taking advantage of a statutory right to defer payment

[investorG]

From a sell-side note today.

 

"Forbearance kicking the credit loss can down the road?

The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

 

I have been thinking about GSE loss reserve creation over the next couple of Qs.

 

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

 

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

 

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

 

CECL will be deferred by fhfa given that it is deferred for basically all other financial institutions.  should get clarity of this when GSEs report 1q.

 

GSEs absolutely have to pay to mbs pools forbearance amounts.  but this is a separate credit question to loss reserve creation.  I suppose GSEs could just be conservative and assume that anyone seeking forbearance is a credit risk.  but omitting a payment on one's own (default) is a lot different from a credit viewpoint than taking advantage of a statutory right to defer payment

 

Ok.  I assume then the full amount of the forebearance cash flow does not flow through the P&L / retained earnings?  the asset is written up on the b/s by the amount of the cash outlay since they will (in theory) receive those $ at later point, it's just a timing mismatch?

[Guest cherzeca]

interest expense for higher amount of borrowing does flow through income statement of course.

 

as for debit/credit of forbearance, there "should" be offsetting contra-accounts, crediting cash and debiting the forbearance amount receivable on the left side of B/S.  but it could go another way...lawyer not accountant here.

 

no one has mentioned this, but the added mbs principal amount should give rise to incremental G fee receipts

[Midas79]

while I am aware that tim pagliara has rendered an important service with IU and he certainly is in contact with P counsel, I have not been particularly impressed with his understanding of the litigation, or seen him as having given cogent analysis re possible outcomes.  I think you may be overbuying pagliara is you think any of his speculation is worth more than that of anyone on this thread.

 

I was assuming that Pagliara's speculation was based on said contact with the plaintiffs' counsel, i.e. he is sharing what their goals are. But perhaps his podcast was more of a "keep the faith" message than actual inside knowledge of just how things are going to happen.

[Guest cherzeca]

as covid crisis continues, no one wants the perfect to be the enemy of the good.  and settlement is good.  but I sure want to see the Seila scotus opinion first!

[Luke 532]

Word is American Airlines applying for 12B in aid with warrants.  Pretty soon our situation will look ridiculous and will hopefully be rectified.

[Guest cherzeca]

Word is American Airlines applying for 12B in aid with warrants.  Pretty soon our situation will look ridiculous and will hopefully be rectified.

 

"protect the taxpayer" admonition of GSE-haters loses some of its gravitas when you are putting through multi-trillion dollar stimulus plans on a bi-partisan basis

[Luke 532]

but it should be lost on no one that the MBA-represented mortgage servicers are squealing while the GSEs are doing business as usual.

 

From "seysmont" https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/ePKPF6x8uCc

All I know is servicers did something that makes FHFA shun them and the FED shun them. They are not getting any help now and the only people talking about help and how it will happen is them. So they pissed off the FED and FHFA. That 3 months they are talking about forbearance is just them, the bill provides 12 months rolling into another 12 months. They did something that caused this treatment. Their funding is not in the bill with all the lobbying. I don't know what they did, but they did something unacceptable for the feds to provide timely help when everyone is getting help.

 

It's not an accident the bill provides for servicers to support 12-24 months forbearance with no funding. That was a decision that was made, and it was made for political reasons.

[Wiggins]

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

[orthopa]

Thanks,  Do you have an opinion on whether or not the current environment changes for better or worse the expected path out of conservatorship? and if what Pagliara is suggesting could happen or likely? It sounds like all we need is a PSPA amendment this summer right?

 

1) Given the post just above mine, I don't think the current environment will affect the timeline much if at all. Calabria tweeted a link to his Bloomberg interview titled "Fannie, Freddie Conservatorship Exit Not Impacted by Virus"; I'm going to consider that a big tell.

https://twitter.com/MarkCalabria/status/1242953955447013376

2) Some clowns on iHub seem to think that Pagliara was not referring to a pref-for-common share exchange when he mentioned a 10-15% haircut, but that's really the only thing he could have been talking about; FnF don't have the capital to do a subpar redemption. I do believe an exchange is quite likely, for reasons outlined in the post you replied to. Or were you not referring to a share exchange?

3) I believe there are three things we must have before any share exchange and re-IPO: seniors gone (either cancelled or converted to commons; this also kills the NWS), remaining lawsuits where FnF are liable settled (I think this is only Perry, please correct me if I'm wrong; also, killing the NWS should moot many of the cases), and a finalized capital rule.

 

No I wasn't so much referring to the share exchange. I do think that will happen also. Was just more or less talking about the rapid resolution Pagliara was referring to via a PSPA to get rid of the seniors and an exchange before the finalization of the capital rule, capital plan, etc. Although that would be a nice surprise I still don't see that happening at this point. There obviously has been a plan and cadence to all of this ever since the president requested a plan for the GSEs a year ago. Although it certainly seems to have been delayed multiple times I still feel like all parties involved follow the path they have plotted out unless there is a highly unusual set of circumstances that arises(yes I know there is a worldwide pandemic going on LOL. )

 

That being said some preferred issues allowing 4-5xs returns at near par. I will continue adding.

[Luke 532]

Calabria video: https://finance.yahoo.com/video/landlords-tenants-face-financial-strain-180139659.html

 

Paraphrased, not direct quotes:

-"This goes on for 2-3 months the system is OK"

That's slightly longer than the "2 months we're OK" he said last week.

 

-"This goes on for 6+ months that's a lot of stress on lenders, Fannie, Freddie"

He didn't say anything about the gap between 3-6 months, just 2-3 and 6+.

 

-"At that point might go to Congress or others step in for support"

Again does not mention Treasury, which is great.  Previously he mentioned Congress or Fed, perhaps "others" means Fed or the private market.

 

-"We want to make sure that we're not having to rescue Fannie, Freddie, or the lenders."

 

-"6 months... potentially face rescues, bailouts in mortgage market."

 

For what it's worth, his demeanor seemed more calm than it was last week.