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

[18436572]

Freddie Mac hires Craig Phillips to handle regulatory and conservatorship affairs

 

https://www.housingwire.com/articles/freddie-mac-hires-craig-phillips-to-handle-regulatory-and-conservatorship-affairs/

 

 

Edited January 9 by 18436572

[james22]

The GSE Vibe Shift Continues

 

The Senate Committee on Banking, Housing and Urban Affairs is Already Looking Forward to the GSEs Post-Conservatorship

 

https://archive.ph/wip/yGwnG

[james22]

The GSE Vibe Shift Continues: Part III

 

Sheila Bair now says "It's Time"

 

https://archive.ph/wip/hnV28

 

[james22]

The GSE Vibe Shift Meets John Carney

 

A Long-Time GSE Antagonist Throws a Breitbart Bomb

 

https://ruleoflawguy.substack.com/p/the-gse-vibe-shift-meets-john-carney

[This2ShallPass]

 

On 1/23/2025 at 12:25 PM, james22 said:

The GSE Vibe Shift Continues: Part III

 

Sheila Bair now says "It's Time"

 

https://archive.ph/wip/hnV28

 

Given that there's widespread agreement that the GSEs need to be released from conservatorship, what are some (reasonable) scenarios where the preferred don't get par value? 

 

It seems to me like an almost gtd 2x from these levels.

 

[sleepydragon]

8 hours ago, This2ShallPass said:

 

Given that there's widespread agreement that the GSEs need to be released from conservatorship, what are some (reasonable) scenarios where the preferred don't get par value? 

 

It seems to me like an almost gtd 2x from these levels.

 

there might be a scenario the preferred holders can convert to commons, and the commons’s price could be too high making that less attractive. The conversion will be optional though.

 

another scenario is trump is too busy doing other stuffs first and later some sort of crisis hit and he will again never have time to get this done.

 

[sleepydragon]

Also, even though commons were purely speculation, the involvement of Bill Ackman has changed that. Being an activist, he’s pushing this issue to be highly unpopular for the US treasury to wipe out common shareholders, most of them trump supporters— TikTok is an example .

[orthopa]

4 hours ago, sleepydragon said:

there might be a scenario the preferred holders can convert to commons, and the commons’s price could be too high making that less attractive. The conversion will be optional though.

 

another scenario is trump is too busy doing other stuffs first and later some sort of crisis hit and he will again never have time to get this done.

 

 

At times I wonder the same....will they run out of time. But realistically how much time is needed? Surely the lawyers at FHFA and Treasury have done the work to make sure leavinging conservatorship is legal and in a way to avoid legal challenges. Calabria did a ton of work on the subject with plans he said he left on the shelf. 

 

Congress is needed for an explicit guarantee. Put them on a shot clock and let it be known if they want an explicit guarantee to act. If not its implicit. 

 

Kudlow et al has been working since summer according to wall street journal. 

 

Jesus, how hard is this? An executive order with a consent decree outlining exit conditions can be done in one day. 

 

This investment needs deadlines, otherwise those that benefit from the status quo will keep it the way it is. 

 

Either way I doubt we see anything until both Pulte and Bessent are confirmed. 

[sleepydragon]

46 minutes ago, orthopa said:

 

At times I wonder the same....will they run out of time. But realistically how much time is needed? Surely the lawyers at FHFA and Treasury have done the work to make sure leavinging conservatorship is legal and in a way to avoid legal challenges. Calabria did a ton of work on the subject with plans he said he left on the shelf. 

 

Congress is needed for an explicit guarantee. Put them on a shot clock and let it be known if they want an explicit guarantee to act. If not its implicit. 

 

Kudlow et al has been working since summer according to wall street journal. 

 

Jesus, how hard is this? An executive order with a consent decree outlining exit conditions can be done in one day. 

 

This investment needs deadlines, otherwise those that benefit from the status quo will keep it the way it is. 

 

Either way I doubt we see anything until both Pulte and Bessent are confirmed. 

It seems everyone will benefit from this. 300 billions to fund the US gov and tax cut. There’s really not much incentive of not doing it. It a matter of how to cut the pie so everyone is happy with the piece they get— that’s the harder part and that’s why Bessent is keeping his mouth shut on this.

[sholland]

On 1/25/2025 at 2:52 PM, orthopa said:

Jesus, how hard is this? An executive order with a consent decree outlining exit conditions can be done in one day.  

The Trump letter indicates that he will order FHFA to release the GSEs from Conservatorship. However, the actual process is quite technical with many potential bureaucratic stumbling blocks. 

 

Is an explicit guarantee necessary?  If not, is a periodic commitment fee necessary?  A periodic commitment fee would increase the g-fees ~10 bps.  An explicit guarantee would add several trillion dollars to the national deficit and would require congress.

 

Is the ECRF ok as is?  If yes, then FNMA and FMCC both estimate that g-fees will need to be increased 15-35 bps (not including the PCF).  FNMA and FMCC both believe they need a 5 year transition period to allow for an adequate mix of higher g-fees in their portfolio to provide adequate returns for investors. Bill Ackman, Tim Howard, and others believe the ratio needs to be reduced to ~2.5%.  I estimate that the process of changing the ratio would take almost a year. I believe that the new FHFA director will rewrite the capital rule as it is my experience that when a new sheriff arrives in town anything done by the old sheriff needs to be reworked (as my old boss used to day - not invented here, no f**king good).

 

How will Treasury be compensated?  Craig Phillips, Bill Ackman, and the Moelis plan all assume the senior preferred shares will be cancelled. Canceling the senior preferred shares was a nonstarter for Mnuchin. I suspect it will be a nonstarter for Bessent too because he will want the avoid generating newspaper headlines stating that he gave away taxpayer money (the value of the senior preferred shares) to enrich hedge funds. 

 

How will the outstanding court cases be settled?

[This2ShallPass]

On 1/25/2025 at 7:26 AM, sleepydragon said:

another scenario is trump is too busy doing other stuffs first and later some sort of crisis hit and he will again never have time to get this done.

This is a plausible scenario, you never know what new crisis he's going to rake up with all the million things he's trying to do at once. But something worth taking a chance on.

 

So I'm not hearing any realistic ways where the junior preferreds doesn't get paid par. Any scenario where common gets paid a dollar without junior pfds at par will be challenged and lose in court (this part I'm pretty sure). Senior pfds, govt is a non economic player, so you don't know what they'll decide.

 

I don't think anybody is objected to releasing from conservatorship, basically just need time to go through the mechanics. It needs push to not fall into the back burner which I assume will come from Ackman, Paulson et al.

 

 

[DRValue]

Thoughts on whether this would still be valid?

 

Treasury-Housing-Finance-Reform-Plan.pdf

 

Key points:

 

1. Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred shares or exchanging all or a portion of that interest for common stock or other interests in the GSE;
2. Issuing shares of common or preferred stock, and perhaps also convertible debt or other loss-absorbing instruments, through private or public offerings, perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;
3. Congress should authorize an explicit, paid-for guarantee by Ginnie Mae of qualifying MBS that are collateralized by eligible conventional mortgage loans.

I don't agree a Govt guarantee is necessary but Treasury wanted it and maybe those media articles and institutions advocating for it not only want it for the benefit of their members but are doing so to add weight to the Treasury recommendation. I do not know if the guarantee by Ginnie Mae adds the liability to the Govt balance sheet which is one of the main criticisms of providing a guarantee.

 

Interesting to read elimination of the LP is being contemplated.

 

[COBFInfinity]

On 1/25/2025 at 2:42 PM, sleepydragon said:

It seems everyone will benefit from this. 300 billions to fund the US gov and tax cut. There’s really not much incentive of not doing it. It a matter of how to cut the pie so everyone is happy with the piece they get— that’s the harder part and that’s why Bessent is keeping his mouth shut on this.

"Making everyone happy" is not required. For example, common shareholders have no legitimate argument that the SPS be written off in any way - they just want that to happen so that they get more of the company. My base case assumption is that common ends up with very little unless Bessent implies otherwise at some point, so satisfying the desires of common shareholders doesn't play into my expectations at all. They could easily lose 80-90% of current stock value and the end of the conservatorship can still occur.

[gfp]

From someone who doesn't follow this situation particularly closely - my question is:  Does the envisioned "private" version of Fannie and Freddie still issue de-facto government guaranteed MBS?  Or is this envisioned as fully private companies with some vague "too big to fail / systemic" sort of "guarantee"?

[sholland]

1 hour ago, gfp said:

From someone who doesn't follow this situation particularly closely - my question is:  Does the envisioned "private" version of Fannie and Freddie still issue de-facto government guaranteed MBS?  Or is this envisioned as fully private companies with some vague "too big to fail / systemic" sort of "guarantee"?

Some vested interests are calling for Congress to legislate an explicit MBS guarantee, but that will not happen as Congress has shown it has no desire to get involved and would likely require the U.S. government to consolidate the $7.6T MBS of Fannie and Freddie, which would increase the national debt by 20%.

 

In return for Treasury’s 2008 funding commitment, Treasury received from each GSE non voting senior preferred shares, warrants to purchase 79.9% of the GSE’s common stock, and a right to a periodic commitment fee to be determined at a later date (which was never determined). Bill Ackman says the senior preferred shares should be modified to act as a government backstop, providing the same benefits as an explicit guarantee without the negative consequences. Mr. Ackman further states Treasury would be paid a commitment fee in exchange for this support (Pershing Square estimates a 25 bps fee).

 

[sleepydragon]

2 hours ago, COBFInfinity said:

"Making everyone happy" is not required. For example, common shareholders have no legitimate argument that the SPS be written off in any way - they just want that to happen so that they get more of the company. My base case assumption is that common ends up with very little unless Bessent implies otherwise at some point, so satisfying the desires of common shareholders doesn't play into my expectations at all. They could easily lose 80-90% of current stock value and the end of the conservatorship can still occur.

Yes, you are right commons have little protection, but Bill Ackman’s thesis is that Treasury can get more money from the market if commons are not wiped out. It’s kinda of like in 2008, how the govt bailed out banks.  The govt has huge incentives to maximize profits .

[sleepydragon]

2 hours ago, gfp said:

From someone who doesn't follow this situation particularly closely - my question is:  Does the envisioned "private" version of Fannie and Freddie still issue de-facto government guaranteed MBS?  Or is this envisioned as fully private companies with some vague "too big to fail / systemic" sort of "guarantee"?

De-facto is what MBS investors/blackrock want, but basically will never happen. Congress is not really motivated to pass a law for that. However, a motivated administration can charge ahead without new laws and providing a vague guarantee. 

[sleepydragon]

watching a few video clips on YouTube about Bill Pluto. This guy is 30 years old and is fairly active in politics. This is not a guy who's going to sit around and do nothing. He's going to do something big to make a name for himself.

[COBFInfinity]

3 hours ago, sleepydragon said:

Yes, you are right commons have little protection, but Bill Ackman’s thesis is that Treasury can get more money from the market if commons are not wiped out. It’s kinda of like in 2008, how the govt bailed out banks.  The govt has huge incentives to maximize profits .

But Ackman's logic rests on the assumption that the market prices the stocks at a 15 P/E with SPS deemed repaid, and as low as a 5 P/E with SPS conversion. Is Treasury going to buy into that argument? Seems like a stretch to me.

[sleepydragon]

1 hour ago, COBFInfinity said:

But Ackman's logic rests on the assumption that the market prices the stocks at a 15 P/E with SPS deemed repaid, and as low as a 5 P/E with SPS conversion. Is Treasury going to buy into that argument? Seems like a stretch to me.

Maybe not as high as ackman wished, but  if treasury decide to wipe out commons, he’s argument is it will make the company’s valuation lower, and treasury will get a bigger portion of a smaller pie. Bessett has said in one of his interviews, that his dad wiped out his family’s fortune, so he wants to be good to middle class . I dont think he and trump will wipe out commons — many are trump supporters — look at TikTok. I also think Pulte has bones with mortgage people— he once said on cnbc higher mortgage costs is bad for existing house sales but good for new house builders like Pulte. For budget perspective, this is a lot of money to balance the budget. It’s a big cake that trump wont want to pass down to the next administration.

 

 

[This2ShallPass]

On 1/31/2025 at 9:02 AM, sleepydragon said:

Yes, you are right commons have little protection, but Bill Ackman’s thesis is that Treasury can get more money from the market if commons are not wiped out.

But can't treasury get much more if current common is wiped out and they become majority owners in new common (similar to BK process)?

 

I don't mind current common getting paid as I bought those at 70 cents a few years back and still have half of my position.

[TwoCitiesCapital]

3 hours ago, This2ShallPass said:

But can't treasury get much more if current common is wiped out and they become majority owners in new common (similar to BK process)?

 

 

Yes. 

 

EVERYONE gets more if the common are wiped out...except the common holders. I don't think wiping out the common by diluting them to oblivion is going to scare off investors any more than the government stealing the companies in the first place is scaring them off. 

 

I am still skeptical anything gets worked out though - because the gov't getting 100% of profits/retained earnings/capital into perpetuity while putting nothing up, doing no work, and further entrenching their position every year that goes by is best for the government...unless if the courts actually do something.

Edited 6 hours ago by TwoCitiesCapital

[Mephistopheles]

But what the govt wants in perpetuity is irrelevant to what Trump wants over the next 4 years.

 

Calabria said it wasn’t done in the first term because of COVID. What exactly does he mean by that?

 

Is it that they couldn’t do a big capital raise when markets froze up in 2020?

 

By now the companies have retained enough earnings (built enough capital) that it should be easier.

 

 I’m cautiously long a small amount of the commons. I’ll buy some prefs too, as a hedge.

 

But the first time, all the incentives were there: John Paulson, Steve Mnuchin, Calabria…and somehow it wasn’t done.

 

Is it the bank lobby that stopped it?

 

Paulson was at the inauguration and now Ackman seems to have Trump’s ear. So maybe odds are higher?

 

If not, I’m sure Trump will get it done in his next term. Third time is a charm!

Edited 5 hours ago by Mephistopheles

[sleepydragon]

4 hours ago, This2ShallPass said:

But can't treasury get much more if current common is wiped out and they become majority owners in new common (similar to BK process)?

 

I don't mind current common getting paid as I bought those at 70 cents a few years back and still have half of my position.

Ackman thinks if treasury dont wipe out commons, the pie is bigger and treasury can make more money owning 80% of a bigger pie than 100% of a smaller pie. He

thinks if commons is wiped out, treasury will have a harder time to moneylize any of its 100% because there’s no natural shareholder base (wiped out) and they have to find new shareholders (who will be reluctant)