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

[orthopa]

https://www.multihousingnews.com/whats-ahead-for-the-gses-under-the-new-administration/

Edited November 19 by orthopa

[sleepydragon]

https://open.substack.com/pub/ruleoflawguy?r=ag2rx&utm_medium=ios
 

 

[sleepydragon]

On 11/18/2024 at 6:42 AM, DRValue said:

 

Craig Phillips was aware of it and agreed with it under Mnuchin in Treasury.

 

IIRC Ackman's thesis is that the commons increase when conservatorship ending is announced, which means less dilution, which means a higher share price, which means less dilution, which means a higher share price...

 

i have more preferred than commons, and added to the preferred recently. This was a lottery ticket before election but now the preferred is really a 50 cents on a dollar.

 

I find it’s hard to believe that commons will be zero. If the govt want to re-ipos the shares, it will be hard to raise capital if they zeroed the commons? Also, all the common shareholders like Ackman can also buy preferred, thus will be able to vote on restructuring. But on the other hand, i am also not sure that the potential payoffs for commons will be a lot higher than preferred, cuz this is completely decided by the kindness of the secretary at time of restructuring.

 

by the way, Buffett has 300bn cash. Can he buy the whole thing? That will be so cool !

 

 

[TwoCitiesCapital]

21 minutes ago, sleepydragon said:

 

i have more preferred than commons, and added to the preferred recently. This was a lottery ticket before election but now the preferred is really a 50 cents on a dollar.

 

I find it’s hard to believe that commons will be zero. If the govt want to re-ipos the shares, it will be hard to raise capital if they zeroed the commons? Also, all the common shareholders like Ackman can also buy preferred, thus will be able to vote on restructuring. But on the other hand, i am also not sure that the potential payoffs for commons will be a lot higher than preferred, cuz this is completely decided by the kindness of the secretary at time of restructuring.

 

by the way, Buffett has 300bn cash. Can he buy the whole thing? That will be so cool !

 

 

 

If you think they're worth $0.50, I'll sell you some for $0.25? 

Edited November 21 by TwoCitiesCapital

[This2ShallPass]

I have the common, bought more as a lottery ticket. Now thinking of converting to preferred. Which preferred is better, I want to buy both Fannie and Freddie..

[sleepydragon]

5 hours ago, This2ShallPass said:

I have the common, bought more as a lottery ticket. Now thinking of converting to preferred. Which preferred is better, I want to buy both Fannie and Freddie..

i think FNMAS has the highest dividend rate, so potentially it could worth more under certain conditions of re-org. 

[This2ShallPass]

7 hours ago, sleepydragon said:

i think FNMAS has the highest dividend rate, so potentially it could worth more under certain conditions of re-org. 

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

[sleepydragon]

38 minutes ago, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

Yeah, i only have fnmas and fmckj.

i think the main difference is liquidity. Some people buy the less liquid ones which can be cheaper sometimes.

[DRValue]

15 hours ago, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

I have a bunch of different prefs but mainly fnmas, fnmaj, fmckj. The less liquid fnmaj always traded at a pretty steep discount to fnmas due to liquidity and offered a big coupon with more upside

[sleepydragon]

 

https://www.ft.com/content/1ef2a6ef-a623-484f-9879-8cb3c26f67fb
 

Accolades rolled in, including from Larry Kudlow, Trump’s former National Economic Council director, who told the FT that Bessent was “absolutely first rate” and an “excellent choice”. 

[sholland]

On 11/21/2024 at 3:54 PM, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

FMNAT dividend = 8.25%, but is less liquid

FMNAS dividend = 7.75%

FMCKJ dividend = 7.875%

 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_T_05152008.pdf
 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_s_12062007.pdf
 

https://www.freddiemac.com/investors/pdf/FtFPrefStock-oc.pdf

 

[DocSnowball]

8 hours ago, sholland said:

FMNAT dividend = 8.25%, but is less liquid

FMNAS dividend = 7.75%

FMCKJ dividend = 7.875%

 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_T_05152008.pdf
 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_s_12062007.pdf
 

https://www.freddiemac.com/investors/pdf/FtFPrefStock-oc.pdf

 

 

Still waiting for this to play out fully. This story has had so many twists and turns. I'm in the skeptical camp, yet hold 10% of portfolio at this point. Waiting a little more to decide, the tide has definitely turned on expected outcomes, and the market agrees. 

 

A while back, I had calculated the net present value of  FNMAT using the dividend rate promised in the prospectus (8.25% dividends unless called back at par, valuing it as a perpetuity). If dividends are turned on in future it will be a delayed perpetuity and discounted further based on when dividends are turned on.

 

Revisiting this today to compare this option to alternative investment decisions and whether to hold or sell. 

 

NPV = Dividend/(r-g) where r is the discount rate and g is the growth rate (assuming zero growth rate of dividend, and beta =1 for a low risk utility when released)

Discount rate = Risk free rate + Implied Equity risk premium at current level of index*Beta = 4.43%+ (5*1) = 9.43% (approximating 5% as current ERP)

 

NPV whenever dividends turned on (example one year from now)

       = 2.06/0.0943%

       = 21.85 FOR FNMAT

 

NPV if dividends turned on after capital raise completed 12/31/2026 - more realistic

21.85 discounted back another year at 9.43%

      = 19.97 for FNMAT

 

Multiply this by your OWN JUDGMENT of probability of success for various outcomes and you get your expected value

Let’s say:

1) 25% chance of this outcome of dividends turned back on 12/31/26 = 25% of 19.98 = 5

2) 25% chance of getting par value on 12/31/25 = 0.25*25=6.25 current value, discounted back one year at 9.43% = 5.71

3) 25% chance of getting 50% of par on 12/31/25 = 0.25*12.5 = 3.125 current value, discounted back one year at 9.43% = 2.86

4) 25% chance of zero = 0 

 

Net present value (sum of all the possibilities) = 13.57

Current market price = 9.48

 

Please point out the blind spots

Edited November 24 by DocSnowball

[Mephistopheles]

I haven't been following too closely here, any reason why the commons are tanking again? The prefs appear to be stable. Is the market expecting a massive dilution?

[sleepydragon]

1 hour ago, Mephistopheles said:

I haven't been following too closely here, any reason why the commons are tanking again? The prefs appear to be stable. Is the market expecting a massive dilution?

It started recently after this guy’s post:

 

i read it I don’t think what he wrote make sense. Maybe this scared FNMA holders 

[COBFInfinity]

4 hours ago, sleepydragon said:

It started recently after this guy’s post:

 

i read it I don’t think what he wrote make sense. Maybe this scared FNMA holders 

 

Whalen has entrenched views, as do many others. It just shows how critical it is that Treasury Secretary and FHFA Director are either a) entrenched in favor of ending the conservatorship or b) at least pragmatic enough to review all options. For example, Calabria supported ended the conservatorships, but his entrenched belief that the GSEs massive writedowns post-conservatorship were legitimate only served to help keep them in conservatorship due to excessive capital requirements.

 

Having said that, I think wild price swings are to be expected regardless of whatever early posturing the new Admin takes. That, of course, is nothing new for these securities.

[DocSnowball]

16 hours ago, COBFInfinity said:

 

Whalen has entrenched views, as do many others. It just shows how critical it is that Treasury Secretary and FHFA Director are either a) entrenched in favor of ending the conservatorship or b) at least pragmatic enough to review all options. For example, Calabria supported ended the conservatorships, but his entrenched belief that the GSEs massive writedowns post-conservatorship were legitimate only served to help keep them in conservatorship due to excessive capital requirements.

 

Having said that, I think wild price swings are to be expected regardless of whatever early posturing the new Admin takes. That, of course, is nothing new for these securities.

 

FHFA director would be the next catalyst now. Would shed more light on the desired direction of GSEs. 

[COBFInfinity]

1 hour ago, DocSnowball said:

 

FHFA director would be the next catalyst now. Would shed more light on the desired direction of GSEs. 

Well, we don't actually know Bessent's views and I think he's more important.

[vincy4fish98]

https://howardonmortgagefinance.com/2024/12/09/release-2-0/

 

I'm sure many on here are familiar with Tim Howard's writing on this over the years.

[18436572]

An Update to CBO’s Analysis of the Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions

 

https://www.cbo.gov/publication/60810

 

 

60810-GSEs.pdf

[This2ShallPass]

10 hours ago, 18436572 said:

An Update to CBO’s Analysis of the Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions

 

https://www.cbo.gov/publication/60810

 

 

60810-GSEs.pdf 319.78 kB · 0 downloads

Good report, CBO seems to be positive on the GSEs becoming private.

 

They say new equity needs to be issued. Scenario being analyzed (seems like base case) is 4.5% total value of assets (FHFAs risk based capital requirements), 10% return on capital (expected investor return), 4% growth (GSEs annual earnings)

 

Start of 2027 capital needed = $370B

Cash by start of 2027 = $208B

 

Shortfall = $162B

 

They say this shortfall needs to be covered by sale of equity.

 

I assume this is new equity being issued? Current common is valued at $6B. So, when new equity is issued current common will be significantly diluted . What does Ackman see in owning common?

 

In the above scenario, preferred (valued at $35B) will be fully paid. So a 2.5x return from here in another 2 years.

 

 

 

[TwoCitiesCapital]

14 hours ago, This2ShallPass said:

Good report, CBO seems to be positive on the GSEs becoming private.

 

They say new equity needs to be issued. Scenario being analyzed (seems like base case) is 4.5% total value of assets (FHFAs risk based capital requirements), 10% return on capital (expected investor return), 4% growth (GSEs annual earnings)

 

Start of 2027 capital needed = $370B

Cash by start of 2027 = $208B

 

Shortfall = $162B

 

They say this shortfall needs to be covered by sale of equity.

 

I assume this is new equity being issued? Current common is valued at $6B. So, when new equity is issued current common will be significantly diluted . What does Ackman see in owning common?

 

In the above scenario, preferred (valued at $35B) will be fully paid. So a 2.5x return from here in another 2 years.

 

Ackman is hoping CBO is wrong. 

[This2ShallPass]

9 hours ago, TwoCitiesCapital said:

Ackman is hoping CBO is wrong. 

Treasury preferred $190B

Other preferred $35B

+ capital requirements

 

Cash on hand $125B (will be $200B start of '27 as per cbo)

 

How do you cover the shortfall if you are Ackman, issue debt? He's a pretty smart guy who is not going to miss on something as simple as this. Is there any proposal out there from him?

 

[TwoCitiesCapital]

10 hours ago, This2ShallPass said:

Treasury preferred $190B

Other preferred $35B

+ capital requirements

 

Cash on hand $125B (will be $200B start of '27 as per cbo)

 

How do you cover the shortfall if you are Ackman, issue debt? He's a pretty smart guy who is not going to miss on something as simple as this. Is there any proposal out there from him?

 

 

Last I heard from him was years ago before the Trump administration screwed us over again. Not sure what his hopes are for a recapitalization, how he is handicapping it, or what his proposed path forward would be to continue justifying the common. 

 

I have always viewed the play on common as incredibly speculative and entirely reliant on the kindness of strangers and the courts. It always seemed obvious to me the path of least resistance would be for the common to be diluted into oblivion once the courts made it clear that they weren't going to evaluate the legitimacy of the "bail outs" or the motivations behind them. The commons were the junior claim at that point and the only way they were going to make money was if some other group voluntarily parted with it. 

 

Even the preferred are a suspect trade at this point - but the hopium runs strong.

[sleepydragon]

https://seekingalpha.com/news/4386431-bill-ackman-says-hes-short-iep-long-fnma-for-stock-picking-contest
 

[orthopa]

15 hours ago, This2ShallPass said:

Treasury preferred $190B

Other preferred $35B

+ capital requirements

 

Cash on hand $125B (will be $200B start of '27 as per cbo)

 

How do you cover the shortfall if you are Ackman, issue debt? He's a pretty smart guy who is not going to miss on something as simple as this. Is there any proposal out there from him?

 

 

Ackman holds preferred too. I dont have the reference or quote handy but he has said he holds preferred to hedge his common position. 

 

Not sure when its reportable but he may have bought some preferred since the election?  Holding common assumes some forgiveness in so much as the govt giving up a portion of their share. Worth a flier for a very small speculative position but if Jrs are money good at these prices common have to be 6-7 a share for equal return. Is it worth the risk to lose a ton to make a little more? At this point many of the tired preferred holders would say no way and Im one of them.