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

[investorG]

For those who have been on this board longer than a couple weeks, the posts currently remind me of the 'should we go all in at 50% of par' but in reverse.  We are actually at a moment for the first time in 8+ years where the name of this board actually applies - in search of a 10 bagger.

 

The court cases are the court cases - your guess is as good as mine.  On one hand I have read the max return in the Lamberth case is well above par with interest but on the other hand we could easily lose and the courts would take years.

 

But what do we expect when Yellen is asked about her FnF plan in a Congressional hearing:   "we plan to restart the NWS to fund affordable housing giveaways", or, "we would like to work with Congress in the coming years to find a permanent solution for FnF that helps all Americans especially those at lower income levels"?  If the former, well then that's no good and so back to the courts or 3.5 years for a potential new admin.  If the latter, should the shares trade here?

 

Many investors held on post January waiting for the SC.   They are exiting at any cost, and offer some series currently at 6% of par.  The companies have $50bn of capital and rising.   I think the market and media are missing that it's not a sure thing that the Biden administration follows exactly what Obama did even though many of the same people are involved.  The situation is different and the BlackRock and Pimco group appears to want the federal guarantee which only comes through Congress.

Edited June 27, 2021 by investorG

[muscleman]

1 hour ago, investorG said:

For those who have been on this board longer than a couple weeks, the posts currently remind me of the 'should we go all in at 50% of par' but in reverse.  We are actually at a moment for the first time in 8+ years where the name of this board actually applies - in search of a 10 bagger.

 

The court cases are the court cases - your guess is as good as mine.  On one hand I have read the max return in the Lamberth case is well above par with interest but on the other hand we could easily lose and the courts would take years.

 

But what do we expect when Yellen is asked about her FnF plan in a Congressional hearing:   "we plan to restart the NWS to fund affordable housing giveaways", or, "we would like to work with Congress in the coming years to find a permanent solution for FnF that helps all Americans especially those at lower income levels"?  If the former, well then that's no good and so back to the courts or 3.5 years for a potential new admin.  If the latter, should the shares trade here?

 

Many investors held on post January waiting for the SC.   They are exiting at any cost, and offer some series currently at 6% of par.  The companies have $50bn of capital and rising.   I think the market and media are missing that it's not a sure thing that the Biden administration follows exactly what Obama did even though many of the same people are involved.  The situation is different and the BlackRock and Pimco group appears to want the federal guarantee which only comes through Congress.

 

You could argue about this at 6% par but it will be dead money for a long time for sure. And who knows what price it will be 1 year from now. Maybe 3% of par.

At least my criteria is to find stocks that are flat for a long time and start to go up, and this one doesn't fit that.

 

[james22]

On 6/27/2021 at 3:29 AM, Parsad said:

...to blame an irrational court decision is silly.

 

Really? Didn't think rationality was to much to ask.

[investorG]

22 hours ago, muscleman said:

 

You could argue about this at 6% par but it will be dead money for a long time for sure. And who knows what price it will be 1 year from now. Maybe 3% of par.

At least my criteria is to find stocks that are flat for a long time and start to go up, and this one doesn't fit that.

 

 

"for sure"?   I don't think much is for sure.  I do believe however that "if" FnF are ever public companies again and paying a common dividend then we are looking at 15x return from current levels.  And the downside is capped at 1x.

Edited June 28, 2021 by investorG

[muscleman]

2 hours ago, investorG said:

 

"for sure"?   I don't think much is for sure.  I do believe however that "if" FnF are ever public companies again and paying a common dividend then we are looking at 15x return from current levels.  And the downside is capped at 1x.

 

Over the years, I've learned that being a trend follower is much easier than being a contrarian. Right now I could see that since the NWS started in 2012, the trend is to kill it. Trump gave us high hope to reverse that course but somehow neither him nor Calabria did anything. That just tells us how strong the trend is to kill FnF.

 

Now with the SCOTUS loss, do you really think the trend is shifting?

I don't see any reason for that.

[Gregmal]

Sometimes you just need to move on. Or just leave the position alone. Taking losses is part of the game. Nothing to be phased by. If there are lessons to learn, learn from them. Otherwise, its not much to cry over. No different really then a card counter crying because they lose a hand. Just part of the game. 

[colinwalt]

https://howardonmortgagefinance.com/2021/06/28/an-unexpected-ruling/

[muscleman]

1 hour ago, Gregmal said:

Sometimes you just need to move on. Or just leave the position alone. Taking losses is part of the game. Nothing to be phased by. If there are lessons to learn, learn from them. Otherwise, its not much to cry over. No different really then a card counter crying because they lose a hand. Just part of the game. 

 

Yeah. Just like how I dealt with my tremendous losses in 2011 with the US listed Chinese reverse merger frauds. I took the losses and moved on. Glen Bradford was the cheerleader for those craps back then. Can't believe our fate crossed over again this time.

 

Overall, using a trading approach for FNMAS worked well. The last loss was properly positioned as a binary outcome for a very small position sized, which unfortunately did not work out. But people who buy every dip of FNMAS like what they do with the long term compounders like AMZN have to take a big hit and big lesson.

 

 

[investorG]

2 hours ago, muscleman said:

 

Over the years, I've learned that being a trend follower is much easier than being a contrarian. Right now I could see that since the NWS started in 2012, the trend is to kill it. Trump gave us high hope to reverse that course but somehow neither him nor Calabria did anything. That just tells us how strong the trend is to kill FnF.

 

Now with the SCOTUS loss, do you really think the trend is shifting?

I don't see any reason for that.

 

Yes, I do.  As explained in prior posts.  It's a 3 year process but at such a depressed level the shares can possibly re-rate first to a more reasonable level and then flat-line for a good bit of time while we wait for concrete actions to develop over those 3 years.

Edited June 28, 2021 by investorG

[james22]

6 hours ago, colinwalt said:

https://howardonmortgagefinance.com/2021/06/28/an-unexpected-ruling/

 

Nice summary: 

 

I had been highly confident that plaintiffs would prevail on the APA claim. I did not, though, count on all of the justices agreeing on a strained reading of the statute, nor on their giving no weight to the background facts on the case presented by plaintiffs (and me, in my amicus curiae brief). Yet that is what occurred.

 

Thanks.

[Parsad]

On 6/28/2021 at 3:25 AM, james22 said:

 

Really? Didn't think rationality was to much to ask.

 

Hi James,

 

Not what I meant.  The point was that the success/failure of the investment was based partially on a rational outcome from the courts...not something solely based on underlying fundamentals. 

 

Once the outcome is based on something intangible, the fate of the investment lies in something completely out of the investor's control.  And in this case, the intangible act was not what the majority of investors expected. 

 

Cheers!

[james22]

12 hours ago, Parsad said:

 

Hi James,

 

Not what I meant.  The point was that the success/failure of the investment was based partially on a rational outcome from the courts...not something solely based on underlying fundamentals. 

 

Once the outcome is based on something intangible, the fate of the investment lies in something completely out of the investor's control.  And in this case, the intangible act was not what the majority of investors expected. 

 

Cheers!

 

Got it.

 

Just believed a rational outcome was more reliable than fundamentals.

 

But that was obviously naive. 

 

Skol!

[orthopa]

20 hours ago, Parsad said:

 

Hi James,

 

Not what I meant.  The point was that the success/failure of the investment was based partially on a rational outcome from the courts...not something solely based on underlying fundamentals. 

 

Once the outcome is based on something intangible, the fate of the investment lies in something completely out of the investor's control.  And in this case, the intangible act was not what the majority of investors expected. 

 

Cheers!

Did FnF get nationalized and their assets liquidated and no one told me? The success and failure of this investment never depended on the SCOTUS and was in all intents and purposes the weakest case of them all. For those who have followed more then casually for 4 weeks should know similar judgemental disappointment occured after the en banc. 

 

The lamberth case and takings case are of the most beneficial to preferred holders. The NWS could/can as it is and the preferred could still end up with more then par. All the cases could go against shareholders and the preferred could get par or a modest haircut in a restructuring. 

 

Anyone here cook up a GSE alternative that finally puts the GSEs out of business and into receivership?

[orthopa]

There are multiple bites at the apple for GSE investors, more so for preferred then common. 

 

What is the worst case scenario for investors? All court cases go against you and GSEs go into receivership, 3-6 years from now. That of course assumes Congress passes legislation to replace the GSEs. Therefore the inertia is on both sides. The climate is also significantly different towards the GSEs then after the bailouts. The GSEs were wound down to 3B each of capital with 4-5T of assets, with the NWS in place and they were not replaced. Why? the 30 year mortgage and MBS. Until somebody out of 350 million people can come up with a better alternative and liquidate the GSEs in 3-6 years who at that point may have combined 100-150B of capital (that makes a lot of sense) then we are stuck with them. How an Obama/parrot/zandi/demarco/lew combo doesn't get rid of the GSEs while people are protesting on wall street but do now is beyond me. I'm open to ideas guys. Hit me with them. 

 

Without even knowing who the next FHFA head is how can anyone make a reasonable assessment of where things are going? There is no rational reason why a SCOTUS loss means a lamberth or takings loss.  There is also no reason to assume that since Bush, Obama, etc didnt do anything so Biden wont either. As much as anyone investing in this maybe subject to confirmation bias what do you call watching the price of an investment get cheaper and say its no good and it wont work out? Those suffering from recency bias calling out confirmation bias. How rich. 

 

What I find most troubling is the investment on this forum has over time weeded out a lot of posters who had a lot to contribute and knew enough about the investment or brought an angle or background that was useful to bounce off or argue against. The investment has chewed them up. 

[orthopa]

On 6/26/2021 at 5:56 AM, DRValue said:

The pspa benefited the fhfa as regulator because it was the only deal available, and without it receivership was the only option. It had to take it to avoid receivership. Prove me wrong.

 

On the flip side a truly independent regulator should of used that as leverage to negotiate a workable deal. And also not entered into the 3rd amendment. 

Couple things on this. 

 

1. How can that be the only deal available? I thought there were 2 independent agencies who were conducting an arm length transaction? Maybe your referring to the emails where they say they will salt the earth with the GSEs and make sure they never go "pretend private again". That sounds like no option to me. Maybe that will come up in court huh? Or maybe FHFA never even fought back.  Look at lockharts statement:" The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 as amended by the Housing and Economic Recovery Act of 2008, authorizes FHFA as conservator to "take such action as may be: (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity."

 

2. How has FHFA benefited from the NWS? The cash flows to treasury. Treasury does not equal FHFA. There are separate government agencies. In a receivership, recap/release, utility model FHFA benefits the same in all 3 which is "nothing". It still regulates and carries out its duties. 

 

3. Lamberth already threw out the APA claim but upheld fair dealing and contract claims. After reading the preferred FNF offering was an investor to expect the NWS occuring while being "conserved" by the FHFA?

 

 

[TwoCitiesCapital]

1 hour ago, orthopa said:

What is the worst case scenario for investors? All court cases go against you and GSEs go into receivership, 3-6 years from now. 

 

I disagree. The worst case is they continue as is.  100% of the benefits flow to the Treasury, 100% of the risk is borne by tax payers, and current shareholders continue on in limbo with no claims on anything and securities of uncertain value. 

 

1 hour ago, orthopa said:

Did FnF get nationalized and their assets liquidated and no one told me? The success and failure of this investment never depended on the SCOTUS and was in all intents and purposes the weakest case of them all. For those who have followed more then casually for 4 weeks should know similar judgemental disappointment occured after the en banc. 

 

I'm no legal expert, but the environment of Treasury continuing to take all economic value is an effective nationalization and was just upheld by the SCOTUS which matters. 

 

Maybe other court cases say differently? Who cares? They'll get appealed to the same neutered SCOTUS as handed down this bullshit ruling. 

Edited July 1, 2021 by TwoCitiesCapital

[investorG]

The current market cap of Fannie Mae's total jr preferred debt is around $1.5bn or about 5 weeks of after tax company profits.  Lots of ways to win from here.

[typicalvalue]

3 hours ago, investorG said:

The current market cap of Fannie Mae's total jr preferred debt is around $1.5bn or about 5 weeks of after tax company profits.  Lots of ways to win from here.

 

Agree. These are pricing as post NWS announcement yet:

 

-GSEs still retaining capital and no profit sweep to TSY.

-Financial advisors hired (who knows if they influence on pushing utility model recap)

-Despite SCOTUS loss, Lamberth case and COFC look pretty good and the SCOTUS sentence made pretty clear that this is a takings case. Many shots on goal are left.

-For me, Calabria being fired is a positive, it's nonsensical to have someone in front of the FHFA that does not fit with new admin objectives. I know that the next one could be Zandi (which is worse), but what if Wachter or Calhoun are hired? Market pessimism would shift fast.

-Warrants due to expire in 2028, I don't think that this money will be left on the table.

-TINA. GSEs are not going anywhere.

 

I know that there is a lot of pessimism post-SCOTUS, and it was a disgrace, but this is not over.  Trading at 6 cnts on the dollar any positive news should take us close to 15-20 cents at least. 

[COBFInfinity]

On 6/30/2021 at 5:51 PM, orthopa said:

Did FnF get nationalized and their assets liquidated and no one told me? The success and failure of this investment never depended on the SCOTUS and was in all intents and purposes the weakest case of them all. For those who have followed more then casually for 4 weeks should know similar judgemental disappointment occured after the en banc. 

 

The lamberth case and takings case are of the most beneficial to preferred holders. The NWS could/can as it is and the preferred could still end up with more then par. All the cases could go against shareholders and the preferred could get par or a modest haircut in a restructuring. 

 

Anyone here cook up a GSE alternative that finally puts the GSEs out of business and into receivership?

 

The investment has and still does depend severely on SCOTUS. Plaintiffs could win takings case in front of Lamberth, which gets appealed to SCOTUS, then SCOTUS says no taking has occurred since the shares still have value. Go directly to jail; do not pass Go; do not collect $200.

[typicalvalue]

CapWealth Tim Pagliara update post-SCOTUS

 

 

[allnatural]

https://www.politico.com/news/2021/07/05/biden-housing-dilemma-low-income-497921

 

“Top Democrats are calling on Biden to quickly name a permanent leader — a position that Senate Banking Chair Sherrod Brown's spokesperson said is “vital to the administration’s goals of building an equitable economy and must be filled quickly.”

 

“Our housing finance system remains in urgent need of reform,” said Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee. “I look forward to working with the next FHFA director to enact legislation that finally addresses the flaws in the structure of the housing finance system, ends the conservatorships, and protects taxpayers against future bailouts.”

 

“Van Tol is already trying to warn the administration against nominating two prominent housing experts — Mark Zandi, chief economist of Moody’s Analytics, and Jim Parrott, a former Obama White House economic adviser. He objects to their support for earlier housing finance reform proposals that envisioned revoking Fannie and Freddie’s government charters, voiding their affordable-housing obligations as a result. ... “I’d be very disappointed if the administration tapped someone who was wedded to the failed ideas of the past,” Van Tol said.”

[james22]

On 7/3/2021 at 6:05 AM, typicalvalue said:

CapWealth Tim Pagliara update post-SCOTUS

 

 

 

Thanks.

[orthopa]

On 6/30/2021 at 8:26 PM, TwoCitiesCapital said:

 

I disagree. The worst case is they continue as is.  100% of the benefits flow to the Treasury, 100% of the risk is borne by tax payers, and current shareholders continue on in limbo with no claims on anything and securities of uncertain value. 

 

 

I'm no legal expert, but the environment of Treasury continuing to take all economic value is an effective nationalization and was just upheld by the SCOTUS which matters. 

 

Maybe other court cases say differently? Who cares? They'll get appealed to the same neutered SCOTUS as handed down this bullshit ruling. 

I agree that is a similar worst case scenario. The money is not going directly to treasury via cash but do they or anyone else care? They will have to ultimately to get over the inertia.  Although not 0 certainly why market pricing in close to it at $.06 on the dollar as well as uncertainty regarding new director. 

 

FWIW when pessimism on this investment has been highest the returns have been the highest too. Every time things became very promising was the wrong time to buy. 

[orthopa]

On 7/2/2021 at 3:23 PM, COBFInfinity said:

 

The investment has and still does depend severely on SCOTUS. Plaintiffs could win takings case in front of Lamberth, which gets appealed to SCOTUS, then SCOTUS says no taking has occurred since the shares still have value. Go directly to jail; do not pass Go; do not collect $200.

Im no lawyer so Im happy to have other opinions but the most recent SCOTUS was a statutory ruling. They plainly interpreted HERA. Lamberth agreed already that the APA avenue was a no go but other claims are proceeding. Can SCOTUS rule HERA says FHFA can do what is best for itself but not honor a contract? Can FHFA do what it wants but still have to pay for property taken?  I guess we will see if we get that far. 

 

 

 

 

[allnatural]

20 hours ago, orthopa said:

Im no lawyer so Im happy to have other opinions but the most recent SCOTUS was a statutory ruling. They plainly interpreted HERA. Lamberth agreed already that the APA avenue was a no go but other claims are proceeding. Can SCOTUS rule HERA says FHFA can do what is best for itself but not honor a contract? Can FHFA do what it wants but still have to pay for property taken?  I guess we will see if we get that far. 

 

 

 

 

FWIW both Lambert and Sweeney ruled in favor of shareholders while explicitly saying that the government didn't violate the APA (agreeing w/ SCOTUS) re: the NWS but that doesn't help them in the contractual or takings context.