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

[Guest cherzeca]

I have been reading housing analysts and they universally say that housing prices will NOT tank during this crisis.  two reasons mostly:  there has been last few years a chronic undersupply, after absorbing all of the over-supply from immediately after GFC, and housing construction will slow down (even though housing starts had been holding steady).

 

this is important for two reasons:  support wealth effect (most homeowners have far more wealth tied to their home than their investment accounts), and avoid key mailing (most homeowners have at least some equity that they will want to "defend", even if they "take up" forbearance).

 

the biggest variable as far as I see is when we all get the back to work order (outside of NYC and any other hotspots). cant be later than early June.   

[Luke 532]

the biggest variable as far as I see is when we all get the back to work order (outside of NYC and any other hotspots). cant be later than early June. 

 

First or second week of May if we believe Dr. Birx 2-week peak death rate and use the 1918 situation of 7 weeks return to work after start of work from home (mid-March).

[Luke 532]

For those interested in what David Stevens has to say about current events, he is speaking at 12pm Eastern today... https://www.facebook.com/events/674966446573153/

 

-Stevens just said something along the lines of we're getting tremendous pushback from the Admin.

-And something about needing to apply pressure to the Trump Admin.

-Stevens: "right now it's just time to put pressure on them. Mnuchin comes from this industry at One West for God's sake..."

-the more he talks, the more he seems panicked

-Barry Habib: "margin call issue is fixed, the Fed heard what we were saying."

[Luke 532]

Whalen on junior prefs (attached)...

[orthopa]

For those interested in what David Stevens has to say about current events, he is speaking at 12pm Eastern today... https://www.facebook.com/events/674966446573153/

 

-Stevens just said something along the lines of we're getting tremendous pushback from the Admin.

-And something about needing to apply pressure to the Trump Admin.

-Stevens: "right now it's just time to put pressure on them. Mnuchin comes from this industry at One West for God's sake..."

-the more he talks, the more he seems panicked

-Barry Habib: "margin call issue is fixed, the Fed heard what we were saying."

 

I do have to say many who feel wronged by the whole GSE situation probably read this and smile. I wonder why the admin is pushing back so hard? To make them sweat? Teach them a lesson? This would imply that the admin/Mnuchin have sympathized with shareholders and or their treatment from the MBA types but if thats the case they sure have had a weird way of showing sympathy.

 

 

[orthopa]

Whalen on junior prefs (attached)...

 

So now he agrees preferred need to be made whole? Thats rich. Whats with the lever them up comment? Not sure I follow that.

[TwoCitiesCapital]

Bought more $50 par preferred @ $7.50 today

[orthopa]

Bought more $50 par preferred @ $7.50 today

 

Great price, I added more today too. If I go down it will be with guns a blazn.

[Luke 532]

GSE bailout article...

https://www.ft.com/content/575e818e-c35a-462b-8daa-ab784163f604

 

“I’m not the Fed,” Calabria said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

[Luke 532]

Whalen on junior prefs (attached)...

 

More Whalen attached...

Convert the prefs to common equity, then sweep goes away and 87% of earnings goes to @USTreasury An improvement from a #fanniegate perspective.

 

This was in response to...

Falling on deaf ears until you explicitly state you think the GSE Net Worth Sweep should be terminated.  Trust me, that's what will catch the ear of Mnuchin and Calabria.

[Wiggins]

So Whalen (and Carney) advocate for the NWS for years and then in a crisis wonder where the money is? It would be funny if it weren't so tragic.

 

Whalen on junior prefs (attached)...

 

More Whalen attached...

Convert the prefs to common equity, then sweep goes away and 87% of earnings goes to @USTreasury An improvement from a #fanniegate perspective.

 

This was in response to...

Falling on deaf ears until you explicitly state you think the GSE Net Worth Sweep should be terminated.  Trust me, that's what will catch the ear of Mnuchin and Calabria.

[Luke 532]

GSE bailout article...

https://www.ft.com/content/575e818e-c35a-462b-8daa-ab784163f604

 

“I’m not the Fed,” Calabria said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

 

Regulator says US mortgage guarantors have sufficient resources for about 12 weeks

 

Fannie Mae and Freddie Mac, the government-controlled companies that guarantee nearly half of US mortgages, could require their second bailout in just over a decade if the US economy remains in a lockdown for several months, their regulator has warned.

 

The two groups, which collectively underpin the $10tn US housing market, have sufficient resources to last through a lockdown of about 12 weeks, but would then need funds from Congress or the Federal Reserve, said Mark Calabria, director of the Federal Housing Finance Agency.

 

“If we start to go more than two or three months, then there is going to be real stress in the mortgage market, we’re talking in terms of what happened during the great recession,” he told the Financial Times.

 

“If we are talking about a drawn-out period where people are not in a position to pay their mortgages, if we are talking about 25 per cent of people having to ask for forbearance, the system doesn’t have that kind of liquidity. That would require Congress to step in, or the Fed.”

 

Mr Calabria’s warning underlines the potential consequences for the US economy if the current coronavirus-related shutdowns persist beyond summer, as many health experts warn.

 

Donald Trump, the US president, has said national social distancing guidelines would remain in place until the end of April. But many epidemiologists say they will have to be extended.

 

Almost 10m Americans have claimed unemployment benefits in the past two weeks, and Congress passed a bill allowing homeowners to forego mortgage payments for up to a year.

 

About 300,000 borrowers had asked for forbearance on loans backed by Fannie and Freddie as of April 1, Mr Calabria said. Since the agencies make up more than 40 per cent of the mortgage market, he said that implied a total of perhaps 700,000 homeowners seeking forbearance.

 

He said that number was likely to rise: “A lot of people got paid for half of March, so a lot of people who were able to make their payments in March won’t be able to make their May payment.”

 

Those seeking help did not tend to be those who had struggled to make payments in the past. “So far, forbearance is going to borrowers who have always paid on time,” he said. “This is someone who has hit a short-term hardship but has an intention to stay in that house.”

 

Homeowners do not have to prove that they have lost income before being granted a mortgage holiday. That provision would speed up assistance, Mr Calabria said, but could lead to fraudulent claims.

 

“We are operating on an honour system here,” he said.

 

One focus of concern in the industry and in Washington is the mortgage servicers, often banks and non-bank mortgage lenders, responsible for collecting payments from borrowers and passing them on to investors. They are still required to make the payments when borrowers take advantage of forbearance, and are not compensated by Fannie and Freddie for six months, potentially leaving many facing a liquidity crunch.

 

Mr Calabria said that while various solutions were under discussion, additional funds for the servicers would not be coming from Fannie and Freddie, which were placed in a government “conservatorship” during the financial crisis of 2008.

 

“I’m not the Fed,” he said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

 

[DRValue]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

 

[orthopa]

https://www.bloomberg.com/news/articles/2020-04-03/mortgage-servicers-teeter-near-crisis-that-regulators-saw-coming?srnd=economics-vp

 

This quotes are great

 

"Mortgage Bankers Association Senior Vice President Pete Mills said it’s unfair to punish nonbanks for being unprepared for a calamity like the coronavirus because it couldn’t have been predicted."

 

"Over the past few years, academics and government regulators have sounded alarms that nonbanks don’t have the capital or liquidity to withstand an economic downturn. A 2018 paper by researchers at the Fed and the University of California-Berkeley warned that the nonbank mortgage sector “appears to have minimal resources to bring to bear in a stress scenario.”

 

"The MBA, the industry trade group, released its own white paper in 2019 calling the researchers’ warnings “overstated.”

 

Ginnie appears to be the bigger issue

 

If not solved, the epicenter of the nonbank crisis will be with Ginnie, which is part of the U.S. Department of Housing and Urban

Development. The company guarantees $2.1 trillion in mortgage bonds containing loans to low-wealth borrowers, veterans and others.

 

"They" are really letting the servicers hold the bag on this one. Really making them squirm. Is this really payback for lobbying so hard against FnF?

[DRValue]

Is this really payback for lobbying so hard against FnF?

 

 

I really hope it is, but i doubt it.

[Luke 532]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

We'd be fine in that scenario as we have the capital to cover it.  My caution, and my worry in this whole situation, is the line I bolded above: (1) what "default" entails in this situation...same as "take-up" (those taking advantage of forbearance) or something different, and (2) if it's up in the 20-25% range instead of 5%, then it's a different story. 

 

With that said, Calabria said if the "take-up rate" is 20-25% we'd be fine... that's at the 2:20 mark of this video: https://www.cnbc.com/2020/04/01/chief-regulator-says-mortgage-bailout-is-on-the-honor-system.html

[Luke 532]

Is this really payback for lobbying so hard against FnF?

I really hope it is, but i doubt it.

 

It's possible.  Wall Streeters have very long memories. 

 

For example, Dick Fuld in the 1990's wasn't too kind during the Asian crisis.  Then in 2008, guess who wasn't bailed out while many others were, Dick Fuld's Lehman.

[DRValue]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

We'd be fine in that scenario as we have the capital to cover it.  My caution, and my worry in this whole situation, is the line I bolded above: (1) what "default" entails in this situation...same as "take-up" (those taking advantage of forbearance) or something different, and (2) if it's up in the 20-25% range instead of 5%, then it's a different story. 

 

With that said, Calabria said if the "take-up rate" is 20-25% we'd be fine... that's at the 2:20 mark of this video: https://www.cnbc.com/2020/04/01/chief-regulator-says-mortgage-bailout-is-on-the-honor-system.html

 

Default, is 'take-up' yup. Sorry, I've seen some articles today calling them defaults. My guess is that capital and earnings can cover this. A timing mis-match would need a loan from the Fed, which is what I think Mark Calabria is talking about. Good to hear him say that they'd need Congress or the Fed rather than Treasury.

[Luke 532]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

[DRValue]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

 

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

[Luke 532]

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

 

Agreed.  I think he is underestimating the take up rate... however it is reassuring that take up of 20-25% and should be fine.  If it gets above that I think we'll have Fed/Congress do something... Calabria honestly didn't seem too worried about all of this, which ironically, has me more worried that he doesn't seem to be too worried :-)

[Midas79]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

 

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

 

Same here. I don't see a reason why the take-up rate won't approach 100%. There is no downside for any individual to take the forbearance.

 

FnF have an extra $250B to draw from Treasury if worse comes to worse. The companies will survive. Shareholders are in a much more precarious position, with only $23B worth of capital cushion. We survived the last draw from Treasury in Q1 2018, but that was with Watt in charge. I don't know if Calabria would feel compelled to wipe out shareholders in the event of a draw from Treasury. Some clarity on this is sorely needed. If anyone knows a journalist who could ask him this, please reach out.

 

This is also why I believe Treasury's backstop will survive recap and release, notwithstanding Trump's insistence on an "explicit" and paid-for backstop. I put "explicit" in quotes because it's not the explicit MBS guarantee that the Trump administration wants, but instead it's just for FnF.

[Guest Covid-19_Survivor]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

 

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

 

I agree that take-up will likely be high, but specifically because it is available as a free lunch.

 

Earlier, you pointed out that the median mortgage is $1100. That's $~13,000 free to anyone who requests it, with no ratings hit, no add interest or points charge, no questions asked. To anyone. The only downside is that your mortgage is bumped up one year, which given the number of secondary or home equity loans, most people don't seem too concerned about. So, given that no one really knows how long this crisis will last, and if they'll even have their job back when it does end, wouldn't it actually be prudent to increase your family's capital cushion until it blows over?

 

Unfortunately, a lot of what the govt has and is doing is based on the assumption that we curb stomp this virus in 2 months. But this country is the freest, most mobile and borderless country in the world. What happens if it decides to hang around for a bit longer, which I'm sure it will?

 

edit:  https://www.flightradar24.com/32.14,-101.81/5

 

[Guest Covid-19_Survivor]

FNMA and FMCC preferreds. In search of the elusive 10 9 8 7 6 5 4 3 2 3 4 5 6 bagger.

 

 

[Wiggins]

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

 

 

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.