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

[muscleman]

Good summary of where we stand.

http://www.washingtonexaminer.com/rising-drumbeat-for-trump-to-deal-with-fannie-and-freddie-himself/article/2649809

 

Yes. What was originally a legal bet now becomes an administrative bet. We'll see what happens.

I didn't expect the judicial system to be so bad that all these liberal judges bend the laws to fit their political views.

[TwoCitiesCapital]

Good summary of where we stand.

http://www.washingtonexaminer.com/rising-drumbeat-for-trump-to-deal-with-fannie-and-freddie-himself/article/2649809

 

Yes. What was originally a legal bet now becomes an administrative bet. We'll see what happens.

I didn't expect the judicial system to be so bad that all these liberal judges bend the laws to fit their political views.

 

Agreed on the surprise out of the courts. I don't know if its political will that's getting in the way - just really surprised that the courts are willing to stand for a law that supersedes their ability to review/question the law. What is the point of checks & balances at this point...

[rros]

Nobody wants to fix 'congress mess' so they all wash their hands while proclaiming 'I am innocent of this NWS blood'. Specially, when fixing it may lead to a windfall to shareholders. Who wants that?

[orthopa]

I know the IMF rag should be taken with a grain of salt but seems the MBA people maybe getting nervous based on the latest edition.

 

The Federal Housing Finance Agency and Treasury Department have stepped up talks on how they can find an “administrative” solution to the conservatorships of Fannie Mae and Freddie Mac, industry sources told Inside Mortgage Finance late this week. As for what direction these talks are headed in, that’s a different matter…

 

One lobbyist said the industry is concerned that Treasury might do something to reduce secondary market liquidity, but also fears that if the GSEs are eventually “let go” they might once again turn into the industry’s “Pac-men,” a reference to their pre-conservatorship days when they were known to throw their weight around by encroaching on the business turf of both lenders and third-party service providers, while using politicians for protection…

 

Meanwhile, someone suggested the White House might consider Treasury counselor Craig Phillips to succeed Mel Watt as FHFA director. Watt’s term ends next January…

 

 

[Luke 532]

I know the IMF rag should be taken with a grain of salt but seems the MBA people maybe getting nervous based on the latest edition.

 

That was my take-away as well.

[DocSnowball]

However, with the NWS being upheld by the courts so far, shareholders are dependent on the kindness of Mnuchin now and legally the companies have not even paid back a cent of bailout money. Are these not the fundamentals?

 

I cut my position down to 2% of portfolio given the increased risk of zero, or a long delay in getting paid back, or not getting close to par if you’re an optimist.

[rros]

However, with the NWS being upheld by the courts so far, shareholders are dependent on the kindness of Mnuchin now and legally the companies have not even paid back a cent of bailout money. Are these not the fundamentals?

 

I cut my position down to 2% of portfolio given the increased risk of zero, or a long delay in getting paid back, or not getting close to par if you’re an optimist.

The nws has not been upheld in any court, as far as my limited legal understanding goes. Instead, courts have upheld Lamberth who said there is no possible judicial review of what has been done stopping right before looking into the nws. So not the same. Lamberth ruled "go talk to congress". In a way, the Supreme Court has done the same. And in an strange way, so has Mnuchin. Although he appears to be changing if Paolo -who has never been right- is right.

[DocSnowball]

However, with the NWS being upheld by the courts so far, shareholders are dependent on the kindness of Mnuchin now and legally the companies have not even paid back a cent of bailout money. Are these not the fundamentals?

 

I cut my position down to 2% of portfolio given the increased risk of zero, or a long delay in getting paid back, or not getting close to par if you’re an optimist.

The nws has not been upheld in any court, as far as my limited legal understanding goes. Instead, courts have upheld Lamberth who said there is no possible judicial review of what has been done stopping right before looking into the nws. So not the same. Lamberth ruled "go talk to congress". In a way, the Supreme Court has done the same. And in an strange way, so has Mnuchin. Although he appears to be changing if Paolo -who has never been right- is right.

 

Thanks, appreciate your thoughts, as always - it may just be my problem then, that understanding the situation is outside my circle of competence!

[Guest cherzeca]

However, with the NWS being upheld by the courts so far, shareholders are dependent on the kindness of Mnuchin now and legally the companies have not even paid back a cent of bailout money. Are these not the fundamentals?

 

I cut my position down to 2% of portfolio given the increased risk of zero, or a long delay in getting paid back, or not getting close to par if you’re an optimist.

The nws has not been upheld in any court, as far as my limited legal understanding goes. Instead, courts have upheld Lamberth who said there is no possible judicial review of what has been done stopping right before looking into the nws. So not the same. Lamberth ruled "go talk to congress". In a way, the Supreme Court has done the same. And in an strange way, so has Mnuchin. Although he appears to be changing if Paolo -who has never been right- is right.

 

two things.

 

first, bhatti and rop each present args that fhfa is unconstitutionally structured (dc circuit in PHH disagrees re cfpb, but scotus may have last word; fhfa has even more insulated control/discretion), and that demarco was unconstitutionally appointed when he signed nws.  so the judicial process isnt over.

 

second, at some point trump administration may decide, you know what, the nws was great at accelerating repayment to treasury (though obama spent all of that money...maybe even gave the iranian some), but now it is time to resuscitate GSEs, and to do that they need capital, and so time to switch out of nws mode.

 

you have to think that as money men, trump and mnuchin would be able to see that once one is repaid as per original deal, it may be smart to move forward with a program that is easy to execute when compared to all of the BS corker/mba might imagine

[Midas79]

second, at some point trump administration may decide, you know what, the nws was great at accelerating repayment to treasury (though obama spent all of that money...maybe even gave the iranian some), but now it is time to resuscitate GSEs, and to do that they need capital, and so time to switch out of nws mode.

 

you have to think that as money men, trump and mnuchin would be able to see that once one is repaid as per original deal, it may be smart to move forward with a program that is easy to execute when compared to all of the BS corker/mba might imagine

 

The NWS didn't just accelerate payments to Treasury, it allowed them to keep the entire liquidation preference when it otherwise would have been paid down and eliminated by now. Treasury has come out around $200B ahead so far of where it would have been without the NWS, assuming a dollar-for-dollar cash value for their liquidation preference (perhaps a bad assumption).

 

You're right that if the administration wants the GSEs revived they can pretty easily do it. Doing that without pissing off a large number of Rs is the issue. Hensarling and Corker, while on the way out, still wield a lot of power. A court decision would have been really helpful in allowing the administration to say "look, we have no choice."

 

It's all about political capital: releasing the GSEs will cost a lot of it given the R control of Congress. If the Ds gain control of both houses in November the equation changes significantly: Trump can use the release of the GSEs to get the Ds to pass legislation he wants.

 

I still think the RNC resolution has to mean at least a little bit of "something." Why else would it exist? I would really like to know who wrote it and who approved it. One possible upcoming tell is the RNC Spring meeting and subsequent release of resolutions.

[investorG]

second, at some point trump administration may decide, you know what, the nws was great at accelerating repayment to treasury (though obama spent all of that money...maybe even gave the iranian some), but now it is time to resuscitate GSEs, and to do that they need capital, and so time to switch out of nws mode.

 

you have to think that as money men, trump and mnuchin would be able to see that once one is repaid as per original deal, it may be smart to move forward with a program that is easy to execute when compared to all of the BS corker/mba might imagine

 

The NWS didn't just accelerate payments to Treasury, it allowed them to keep the entire liquidation preference when it otherwise would have been paid down and eliminated by now. Treasury has come out around $200B ahead so far of where it would have been without the NWS, assuming a dollar-for-dollar cash value for their liquidation preference (perhaps a bad assumption).

 

You're right that if the administration wants the GSEs revived they can pretty easily do it. Doing that without pissing off a large number of Rs is the issue. Hensarling and Corker, while on the way out, still wield a lot of power. A court decision would have been really helpful in allowing the administration to say "look, we have no choice."

 

It's all about political capital: releasing the GSEs will cost a lot of it given the R control of Congress. If the Ds gain control of both houses in November the equation changes significantly: Trump can use the release of the GSEs to get the Ds to pass legislation he wants.

 

I still think the RNC resolution has to mean at least a little bit of "something." Why else would it exist? I would really like to know who wrote it and who approved it. One possible upcoming tell is the RNC Spring meeting and subsequent release of resolutions.

 

nice post, well said.

 

I personally wouldnt over-emphasize the RNC resolution's importance since no one has picked up on it, despite many opportunties.  it appears as if someone from moelis called a buddy at the RNC to put it in a document.

 

[rros]

* Sales of new U.S. single-family homes fell for a second straight month in January, weighed down by steep declines in the Northeast and South, which could raise concerns the housing market is losing momentum.

 

* Orders for business equipment at U.S. factories unexpectedly fell for a second month. Non-military capital goods orders excluding aircraft declined 0.2% (est. up 0.5%) after falling 0.6% the prior month.

 

Not as robust an economy as JP is painting it. Making matters worse, labor shortage and wage increase happening.

 

Softening news is right on schedule. Capex/investment cycle may have peaked. No tailwind there. Raising interest rates could be suicidal. Will see what happens in March/April. I still feel we will be seeing "exigent circumstances" in a not so distant future.

[Guest cherzeca]

fwiw, the hindes/jacobs appeals brief is a very good job:  http://www.gselinks.com/Court_Filings/Jacobs_Hindes/17-3794-0016.pdf

[muscleman]

fwiw, the hindes/jacobs appeals brief is a very good job:  http://www.gselinks.com/Court_Filings/Jacobs_Hindes/17-3794-0016.pdf

 

I think what matters more is how many conservative judges are in the appeals court. No matter how great it is, liberal judges have flexibility to interpret the law.

[Spekulatius]

* Sales of new U.S. single-family homes fell for a second straight month in January, weighed down by steep declines in the Northeast and South, which could raise concerns the housing market is losing momentum.

 

* Orders for business equipment at U.S. factories unexpectedly fell for a second month. Non-military capital goods orders excluding aircraft declined 0.2% (est. up 0.5%) after falling 0.6% the prior month.

 

Not as robust an economy as JP is painting it. Making matters worse, labor shortage and wage increase happening.

 

Softening news is right on schedule. Capex/investment cycle may have peaked. No tailwind there. Raising interest rates could be suicidal. Will see what happens in March/April. I still feel we will be seeing "exigent circumstances" in a not so distant future.

 

Do you really think that  the government will let Fannie/Freddie go when the housing market indeed turns south?

 

FWIW, I don’t think it will and I am about to find out first hand because I will need to sell a home and buy another one due to relocation.

 

The fast rise in interest rates certainly will give some first time home buyers reasons to hesitate and some might be priced out the market.

[rros]

* Sales of new U.S. single-family homes fell for a second straight month in January, weighed down by steep declines in the Northeast and South, which could raise concerns the housing market is losing momentum.

 

* Orders for business equipment at U.S. factories unexpectedly fell for a second month. Non-military capital goods orders excluding aircraft declined 0.2% (est. up 0.5%) after falling 0.6% the prior month.

 

Not as robust an economy as JP is painting it. Making matters worse, labor shortage and wage increase happening.

 

Softening news is right on schedule. Capex/investment cycle may have peaked. No tailwind there. Raising interest rates could be suicidal. Will see what happens in March/April. I still feel we will be seeing "exigent circumstances" in a not so distant future.

 

Do you really think that  the government will let Fannie/Freddie go when the housing market indeed turns south?

 

FWIW, I don’t think it will and I am about to find out first hand because I will need to sell a home and buy another one due to relocation.

 

The fast rise in interest rates certainly will give some first time home buyers reasons to hesitate and some might be priced out the market.

 

Nobody can predict what may happen if there is marked downturn. Personally, I suspect it will force some hands. Can't say in which direction.

 

Real Estate: in Miami Beach prices are going south quickly and selling isn't a smooth ride. Where I live there is an abundance of inventory. More than I have ever seen. On the macro view, China manufacturing data has slumped in another indication of a noticeable slowdown. That, among tremendous optimism among analysts about global strength. Narrow money indicates it will get worse and last for all 2018. As said, let's wait for March/April.

 

A personal view. The peaks on 2000 and 2007 and the following crashes have left deep wounds and are still fresh in investors' memories. I would think almost everyone involved will have their fingers on the trigger and avoid the charm, the third time.

 

Update: pending home sales disappoint, today. New home sales dissapoint, yesterday.

[Midas79]

I have read through the Owl Creek complaint. They bought junior preferred shares after conservatorship but before the NWS.

 

http://www.glenbradford.com/wp-content/uploads/2018/02/18-00281-0001.pdf

 

The plaintiffs go to great lengths to claim that their claims are direct and not derivative, and presumably thus not subject to 4617(f). They also take pains to shoot down the argument that the NWS was a potential risk they should have anticipated, showing multiple public statements by DeMarco that non-government shareholders still had their economic rights to company profits once the conservatorship ended and that preservation and conservation of assets was their duty.

 

The claim that there is an implied-by-fact contract between FHFA and the companies appears to be new. The complaint says (several times) that conservatorship was only lawfully imposed due to 4617(a)(3)(I) (the boards consented) and that no other reason in 4617(a)(3) applied. They then say that the boards' acceptance of conservatorship was partially predicated on the promise that FHFA would actually act as a conservator in the traditional sense of the word, conserving and preserving the companies' assets with the view of a future release. That this understanding created an implied-in-fact contract that was later breached by the NWS is beyond my (not very substantial) legal ken, but I don't remember seeing this argument before.

 

I do wonder why they waited so long to file this lawsuit given that it has been 5.5 years since the NWS. I suppose their case would have been consolidated with others had it been filed earlier, and waiting gave them the chance to get around all of the reasons for dismissal that have been used so far, as well as making extensive use of released documents from the Fairholme case that undermine many of the government's previous arguments.

 

Next week I think it will be instructive to compare the Owl Creek complaint to the amended Perry complaint.

 

The Owl Creek complaint brings up something that I don't remember seeing before, though it is likely the fault of my memory rather than an oversight by all other plaintiff lawyers so far. It says that the NWS must be unwound because it basically was at the direction of Treasury, and HERA 4617(a)(7) says that FHFA is not subject to the direction or supervision of any other agency of the United States when acting as conservator. The SPSPA includes language not allowing FHFA to distribute dividends or any other assets to junior preferred or common stockholders, as well as not allowing FHFA to release the companies from conservatorship without Treasury's permission.

 

 

[rros]

The SPSPA includes language not allowing FHFA to distribute dividends or any other assets to junior preferred or common stockholders, as well as not allowing FHFA to release the companies from conservatorship without Treasury's permission.

I do not think this will fly unless it can be proven Treasury twisted FHFA's arm. FHFA agreed to the terms and that would put an end to this argument. They did not have to, but they did. DeMarco, later on, showed independence from Treasury when FHFA refused to lower guarantee fees (he actually raised them) in disagreement with Geithner. This action alone will not help to convince a judge that Treasury forced FHFA. What other lawsuits tried, circumventing this argument, is to say that FHFA Director acted against his mandate by agreeing to terms that were not in line with "preserve and conserve". No lawsuit has been able to get to that beacon. All have been "lamberthed" right before that point. Cleverly. So although anyone can see our argument might be valid, it has been made "unreachable".

 

Many of us bought like owl creek, after c-ship and way, way before the nws. And although there was no indication whatsoever that something like the nws was in the cards -something never heard of before-, it happened. And courts have understood anything goes when it comes to regulated entities.

 

In my view, good or even the best arguments will not fly. Only thing that may help is finding judges that are willing to rule against the most powerful agency in the planet, the Treasury of the United States. After 6 years of a very hard learning process, I am not sure this will ever happen.

[Luke 532]

Interesting comment from Mnuchin...

[rros]

Interesting comment from Mnuchin...

Thanks. Bodes well for the utility model.

 

I have found the interview. Thank you, Luke.

http://wunc.org/post/treasury-secretary-mnuchin-says-he-feels-obligated-help-middle-class#stream/0

[investorG]

Interesting comment from Mnuchin...

 

thanks, this is nice to hear.  no bounce though.  I'm guessing there's a real chance ackman has been selling his common position.  he's cut staff and also some legacy headache positions.  his remaining investors might want him narrowly focused on traditional areas.  the price is low, at some point a big fund complex might step in with a big block to clear him out.

 

[Midas79]

Speaking of big blocks, over 16M shares of FNMAT have traded today at $5.90 or $5.95, other trades around that time were around $6.40. Total issuance is 89M so that's almost 20% of the float that has been dumped at prices well below market. That's some serious sell volume. This isn't Fairholme, they didn't own any FNMAT as of the 2017 annual report. Around 1/6 of my total pref position is in FNMAT due to relative weakness in January.

 

For whatever it's worth anymore, the correlation value of the junior pref series prices versus dividend yields has been climbing steadily and is up to 0.87 now. For much of 2017 it was around 0.90 but dropped significantly in the fall, going as low as 0.55. I have taken that value as a proxy for the probability the market places on dividends being resumed as opposed to the juniors being redeemed or cancelled in a large-scale settlement.

 

Freddie 25-par prefs are about as strong against the commons as they have been since December 7 (when the last big divergence between commons and prefs happened), around 99th percentile, Fannie 50s are 85th percentile, Fannie 25s (higher yields) are 96th percentile.

 

I keep feeling tempted to switch some of my position into common (currently 100% pref) but I keep hesitating and then being glad that I did so. 10% of the total position seems like a reasonable upper bound, and I suppose if I ever were to do that small reallocation I should do it now (non-taxable account). But it just doesn't feel right and I don't really know why.

[rros]

Speaking of big blocks, over 16M shares of FNMAT have traded today at $5.90 or $5.95, other trades around that time were around $6.40. Total issuance is 89M so that's almost 20% of the float that has been dumped at prices well below market. That's some serious sell volume. This isn't Fairholme, they didn't own any FNMAT as of the 2017 annual report. Around 1/6 of my total pref position is in FNMAT due to relative weakness in January.

 

For whatever it's worth anymore, the correlation value of the junior pref series prices versus dividend yields has been climbing steadily and is up to 0.87 now. For much of 2017 it was around 0.90 but dropped significantly in the fall, going as low as 0.55. I have taken that value as a proxy for the probability the market places on dividends being resumed as opposed to the juniors being redeemed or cancelled in a large-scale settlement.

 

Freddie 25-par prefs are about as strong against the commons as they have been since December 7 (when the last big divergence between commons and prefs happened), around 99th percentile, Fannie 50s are 85th percentile, Fannie 25s (higher yields) are 96th percentile.

 

I keep feeling tempted to switch some of my position into common (currently 100% pref) but I keep hesitating and then being glad that I did so. 10% of the total position seems like a reasonable upper bound, and I suppose if I ever were to do that small reallocation I should do it now (non-taxable account). But it just doesn't feel right and I don't really know why.

Those trades are disconcerting. But given they are concentrated in only one issue, fnmat, it is possible someone wanted the cash. Specially, considering what is happening today. Raising a ton is not a bad idea if there is a market swoon coming. Getting closer to /exigent circumstances/ by the day.

[Midas79]

Those trades are disconcerting. But given they are concentrated in only one issue, fnmat, it is possible someone wanted the cash. Specially, considering what is happening today. Raising a ton is not a bad idea if there is a market swoon coming. Getting closer to /exigent circumstances/ by the day.

 

Just to be clear, are you using the same context as Watt did when you mention "exigent circumstances?" Watt's quote about the letter agreements was

 

We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.

 

So you think that an economic downturn, or some other large-scale event, will get Treasury to allow FnF to keep their profits rather than paying to Treasury? Or be prompted to finally deal with the conservatorships rather than kicking the can further down the road?

[rros]

Those trades are disconcerting. But given they are concentrated in only one issue, fnmat, it is possible someone wanted the cash. Specially, considering what is happening today. Raising a ton is not a bad idea if there is a market swoon coming. Getting closer to /exigent circumstances/ by the day.

 

Just to be clear, are you using the same context as Watt did when you mention "exigent circumstances?" Watt's quote about the letter agreements was

 

We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.

 

So you think that an economic downturn, or some other large-scale event, will get Treasury to allow FnF to keep their profits rather than paying to Treasury? Or be prompted to finally deal with the conservatorships rather than kicking the can further down the road?

Basically, yes. Thank you for finding the written text. I am adding my own interpretation of what Watt may be saying in regards to EC. 

 

Watt statement points to a possible scenario where in spite of companies delivering earnings FHFA may not declare/pay dividends. This automatically discounts losses. In such times there would be a draw instead. For him, a broader set of issues may impede the transfer of earnings. What is in that umbrella we do not know. Market turmoil that may affect the real estate market is my interpretation of what can one of those issues be.

 

Not sure if EC would include Treasury allowing for a full recap. It would depend on what type of circumstances develop.

 

Edit: but I should also consider that these may just be standard phrases commonly used in regards to dividend payments. Therefore, meaning nothing.