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

[Midas79]

I'm half-listening to the hearing.  Did I hear correctly that Watt just said a moment ago in his exchange with Heitkamp that "we'd like the utility model"?

 

I heard it too. It shouldn't be too surprising, right?

[DocSnowball]

I have been invested on this for close to 8 years, probably done more research than you and may even have more shares than you. Where is your sense of humor? After so much time and struggle a bit of humor can offer relief and a laugh is what I aimed for. But if you insist on being manly we can discuss our differences in person. I live in Miami Beach, FL.

 

Unrelated to this -

rros: Your comments are always so insightful and educational to me. Thank you!

[DocSnowball]

And thank you Senator Toomey for summarizing the true status of the loans repayed by Fannie and Freddie in a minute. If R hold the Senate, a big if, he may end up being the chair of the Banking committee.

 

https://www.americanbanker.com/news/hatch-retirement-paves-way-for-makeover-atop-banking-panel

"If Crapo gives up the Banking Committee gavel next year and the GOP holds the Senate in midterm elections, Sen. Pat Toomey, R-Pa., would stand in line potentially to become chairman of the banking panel."

 

"...the biggest impact of a possible GOP changing of the guard on the Banking Committee would perhaps be on housing finance reform."

[Luke 532]

I'm half-listening to the hearing.  Did I hear correctly that Watt just said a moment ago in his exchange with Heitkamp that "we'd like the utility model"?

 

I heard it too. It shouldn't be too surprising, right?

 

It's just nice to hear "utility model" - as long as that keeps coming up that means Moelis is in play.

[rros]

I have been invested on this for close to 8 years, probably done more research than you and may even have more shares than you. Where is your sense of humor? After so much time and struggle a bit of humor can offer relief and a laugh is what I aimed for. But if you insist on being manly we can discuss our differences in person. I live in Miami Beach, FL.

 

Unrelated to this -

rros: Your comments are always so insightful and educational to me. Thank you!

Thank you! I've learned from many myself, here. This is a good place to share ideas with little noise. From some, I gained technical knowledge (lawyers, mortgage professionals). From others, how to improve my investing. I feel gratitude for members who generously share their views. Unfortunately, today I also learned sarcasm is not everyone's cup of tea :(

 

And no more OT writing from me :)

[DocSnowball]

Page 262 from Fannie Mae's annual report talks about capital requirement framework. This possibly indicates how much capital will eventually be needed?

 

Core capital ($121,389M) ¹

Statutory minimum capital requirement $23,007M ²

Deficiency of core capital over statutory minimum capital requirement ($144,396M)

 

and...core capital is ..."¹ The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; © our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income or (b) senior preferred stock."

 

² Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and © up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances.

 

Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (2) 0.25% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances.

 

ADDENDUM:

Page 11 of Moelis blueprint

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-1.pdf

 

"Pre-crisis, the GSEs were subject to minimum (core) capital requirements of 0.45% on their mortgage guarantee portfolio, plus 2.5% on their on-balance sheet loans and securities. While these requirements have been suspended in conservatorship, they continue to be calculated by FHFA and currently equal approximately $43 billion of core capital under the pre-crisis

regime. This amount of capital is woefully inadequate, representing less than 1.0% of the total asset values and guarantee notional amounts at the Enterprises.ii At present, under the constraints of the Net Worth Sweep, the GSEs’ capital falls far short of even this low minimum.

Setting new standards

Our Safety and Soundness Blueprint targets $155

to $180 billion in permanent capital at the GSEs, equivalent to over 8.5% of risk-weighted assets or

3.0% to 3.5% of total balance sheet assets (including unfunded guarantees). This equates to approximately four times the pre-crisis GSE capital requirements and is equivalent to approximately 150% of the existing capital requirements the Federal Housing Administration (“FHA”) is subject to, despite the substantially higher quality portfolios guaranteed by Fannie Mae and Freddie Mac. Furthermore, this permanent GSE capital would be augmented by a reduction in risk-weighted assets provided through the issuance of CRT securities (projected to reach nearly $100 billion, or approximately 2.0% of total assets, at 2020 year-end). Including the use of CRT and loan loss reserves, the Enterprises would achieve total private claims paying resources in the range of $280 to $305 billion (or 5.5% to 6.0% of total assets).iii"

FNMA_Capital_Requirements_Page_262_Annual_report_2017.pdf

[Luke 532]

Page 262 from Fannie Mae's annual report talks about capital requirement framework. This possibly indicates how much capital will eventually be needed?

 

Core capital ($121,389M)

Statutory minimum capital requirement $23,007M

Deficiency of core capital over statutory minimum capital requirement ($144,396M)

 

Indeed very interesting.

[Midas79]

Page 262 from Fannie Mae's annual report talks about capital requirement framework. This possibly indicates how much capital will eventually be needed?

 

Core capital ($121,389M)

Statutory minimum capital requirement $23,007M

Deficiency of core capital over statutory minimum capital requirement ($144,396M)

 

Indeed very interesting.

 

Agreed. A specifically risk-based capital standard both refutes the idea that FnF should hold "bank-like" levels of capital like Corker was asking about. It also would only matter after release from conservatorship, so Watt is at least partially paving the road for that. In addition it shows that Watt doesn't consider Treasury's backstop to be capital, not that he hasn't implied that before.

[DocSnowball]

Page 262 from Fannie Mae's annual report talks about capital requirement framework. This possibly indicates how much capital will eventually be needed?

 

Core capital ($121,389M)

Statutory minimum capital requirement $23,007M

Deficiency of core capital over statutory minimum capital requirement ($144,396M)

 

Indeed very interesting.

 

Agreed. A specifically risk-based capital standard both refutes the idea that FnF should hold "bank-like" levels of capital like Corker was asking about. It also would only matter after release from conservatorship, so Watt is at least partially paving the road for that. In addition it shows that Watt doesn't consider Treasury's backstop to be capital, not that he hasn't implied that before.

 

Page 13 Moelis explains why they are different from banks in capital requirements

"Dedicated mortgage insurers

 

In assessing capital requirements, we should recognize the unique nature of Fannie and Freddie as single-purpose mortgage guarantors. Nearly 90% of Fannie’s and Freddie’s assets are effectively match-funded through issuance of MBS by consolidated trusts. As such, the GSEs are not dependent on deposit funding that can be withdrawn and are far less dependent on short-term funding (such as commercial paper) when compared to other financial institutions. In other words, unlike banks, the GSEs have limited liquidity and interest rate risk, instead operating under a proven insurance company model which precludes the possibility of financial “runs.”

 

Given the unique nature of Fannie Mae and Freddie Mac’s businesses, and particularly the scale of their mortgage guarantee businesses, FHFA may elect to implement a more nuanced risk-weighting system for mortgages, as compared to the fairly simplistic (e.g., 50% RWA) approach applied to multi-product banks. Such an approach would be consistent with FHFA’s more granular Private Mortgage Insurer Eligibility Requirements (PMIERs).17 Doing so could also enable FHFA to encourage product innovation by recognizing the true economic impact of offsetting factors in determining the quality of a mortgage, as well as the risks associated with risk-layering (e.g. combinations of lower FICOs with higher LTVs or DTIs). A more nuanced approach to determining RWAs could also help to broaden the “credit box” that has historically excluded large groups of deserving Americans from obtaining a mortgage. Multi-product banks may themselves migrate towards such an approach, as proposed Basel IV rules now contemplate more granular mortgage risk-weights (including differentiation based on LTVs)."

 

And page 14...once FHFA sets capital standards, Moelis can do the rest...

 

"Role of FHFA in setting minimum capital standards

 

The FHFA, which HERA endowed with broad discretion and authority to implement capital standards for the GSEs, will have the ultimate responsibility for designing and implementing final capital requirements.18 This authority, which has not been used or tested since the crisis, allows FHFA to impose a safe and sound regulatory regime tailored to the unique nature of the GSEs’ businesses and, designed to prevent the undercapitalization which led to their initial conservatorship. FHFA should be strongly encouraged to exercise this authority.

 

While we have sought to provide credible assumptions in designing and testing this Blueprint, the architecture of the Safety and Soundness Blueprint can be applied to lower or higher minimum capital requirements.^iv

 

^iv. There is an implicit trade-off between safety and soundness, on one hand, and the cost of guarantee fees and timeline to building capital, on the other. Imposition of more conservative capital requirements (e.g., 4% to 5% capital minimums) would require higher guarantee fees, in order to provide a sufficient market return to the larger amount of private capital that needs to be raised from third parties, and/or would necessitate a slower capital build. FHFA as safety and soundness regulator has the ultimate responsibility for assessing and evaluating this trade-off."

[Luke 532]

And page 14...once FHFA sets capital standards, Moelis can do the rest...

 

I think many are going to be blindsided once Moelis gets implemented.

[rros]

 

Mel Watt tells Congress "told you so" on #Fannie/#Freddie Q1 draw, hints that working with *Mnuchin* is the way to avoid future draws. Adds: "this could well be the last time I appear before this Committee as Director of FHFA"

 

"Too many guarantors will create a race to the bottom"- Mel Watt

 

also talks about releasing some papers in the near future related to capital requirements

 

Mel Watt Full written statement

https://www.banking.senate.gov/imo/media/doc/Director%20Watt%20Written%20Statement%2005222018.pdf

Thank you for this link.

 

Watt's last Congress written testimony from 5/11/17 had 2 references to the word "capital". Today's written testimony has 19. It devotes page 1, page 3 (anticipatory to capital framework) and page 4 (Capital framework) out of 6 pages to delineate how the companies had to learn to operate using a virtual framework that mimics business behavior of well capitalized companies operating in the real market. And it adds the fix: instituting -although suspension will continue- new capital frameworks to replace the old ones. These, risk-based and leverage ratio standard, had been anticipated by him on January this year.

 

Important. In spite of Watt trying to remove any ulterior reading, this baby step -soon to be implemented, it appears- will help smooth out a transition to some form of recapitalization, someday. Which doesn't necessarily mean we will be made whole.

 

But knowing precisely how much money the companies will require to operate safely removes a huge obstacle and puts this matter to sleep. Or we can hope.

 

so Watt is at least partially paving the road for that.

Totally agree.

 

First, the permanent buffers. Soon, specific and precise capital levels needed. We are moving at turtle speed. But in the right direction.

[DocSnowball]

versus going in the wrong direction - the argument against receivership - pages 24 and 25 of the Moelis blueprint

 

"More importantly, our Blueprint does not require a winding down of the existing GSEs, or use of market- destabilizing legal constructs like receivership, as envisioned by the MBA. The MBA proposal contemplates leaving behind substantial portions of the GSEs’ portfolios and winding these portfolios down over time (for example, in MBA’s operating subsidiary model). This approach fails to protect taxpayers as private capital is only raised at the “new guarantors,” leaving the “old GSEs” effectively nationalized, with any and all risk associated with the existing books of business fully borne by taxpayers for decades to come.

 

Any steps towards receivership would present massive complications to a proper resolution, including raising market concerns about the future performance of GSE MBS and agency debt obligations.^xii Receivership would also eliminate the value associated with Treasury’s warrants, thereby costing taxpayers substantial realizable value. The use of receivership

also compromises existing GSE assets, at best creating the need for new legislation to allow these assets to be transferred or reinstated, and at worst permanently destroying substantial value for both the government and private shareholders. The creation of new enterprises in receivership to operate the GSEs’ businesses will substantially slow the process of building capital, leaving taxpayers exclusively on the hook in the near-to-medium term. Further, a wind down of the existing GSEs, coupled with substantial value transfer to newly chartered guarantors, fails to resolve existing shareholder litigation and would likely lead to new legal claims (e.g. preference issues, fraudulent conveyance, takings claims) that increase the prospect of a court- imposed solution rather than a policy-led solution.

 

^xii. While this risk might theoretically be managed through careful transaction structuring and robust disclosure, receivership introduces unnecessary risk of confusion and disruption into the mortgage capital markets. Undoubtedly, holders of GSE MBS and debt would immediately file notices of claim (in fear of having their legal claims waived if they do not), initiating a costly and administratively complex decade-long process of claims adjudication in front of FHFA."

[rros]

Just a note.. His statement is pre-Lamberth. A lot has changed since.

[rros]

Corsi tweets “Now DJT AIMS TO STOP NWS - in 3rd Quarter please.”

How does he know what Potus aims ? Corsi does have ears of the president as I read. Why in 3Q especially when he acknowledges it is “stealing”, why say I would keep stealing for another 6 months? Is that not strange?

 

 

The problem with Jerome Corsi is his association with Alex Jones (infowars) who runs an online store selling whey protein products and other supplements. Looks to me infowars is after eyeballs anyway they can get them as that traffic can be turned into leads: protein shakes or other products. Stirring the pot does lead to more eyeballs ($$).

[Midas79]

Corsi tweets “Now DJT AIMS TO STOP NWS - in 3rd Quarter please.”

How does he know what Potus aims ? Corsi does have ears of the president as I read. Why in 3Q especially when he acknowledges it is “stealing”, why say I would keep stealing for another 6 months? Is that not strange?

 

 

The problem with Jerome Corsi is his association with Alex Jones (infowars) who runs an online store selling whey protein products and other supplements. Looks to me infowars is after eyeballs anyway they can get them as that traffic can be turned into leads: protein shakes or other products. Stirring the pot does lead to more eyeballs ($$).

 

I thought the problem with Corsi is that his FnF predictions have all been proven false so far. I don't even know how much access he has. Does anyone who matters actually pay attention to him?

 

This telling word in that last tweet is "please". He's not claiming to have inside information, instead he's asking the administration to stop the sweep.

[rros]

Corsi tweets “Now DJT AIMS TO STOP NWS - in 3rd Quarter please.”

How does he know what Potus aims ? Corsi does have ears of the president as I read. Why in 3Q especially when he acknowledges it is “stealing”, why say I would keep stealing for another 6 months? Is that not strange?

 

 

The problem with Jerome Corsi is his association with Alex Jones (infowars) who runs an online store selling whey protein products and other supplements. Looks to me infowars is after eyeballs anyway they can get them as that traffic can be turned into leads: protein shakes or other products. Stirring the pot does lead to more eyeballs ($$).

 

I thought the problem with Corsi is that his FnF predictions have all been proven false so far. I don't even know how much access he has. Does anyone who matters actually pay attention to him?

 

This telling word in that last tweet is "please". He's not claiming to have inside information, instead he's asking the administration to stop the sweep.

Midas, the only intention here is to move traffic from here to there ("Head of Washington D.C. News Bureau for Alex Jones and infowars", on Corsi's twitter page) hoping for a click on infowars own website or tube channel. And the up-sell! I know all about internet traffic and how to monetize it. I made my bankroll from 1999-2005 monetizing traffic! For our purposes, I would totally and completely ignore Corsi. He is only stirring the pot.

[orthopa]

Does OTC short volume mean anything? It is at its lowest ever.

 

It means there are less people short then before.

[rros]

We are again at the make-it-or-break-it point with the Jrs. Any bets on who will come out this time to derail us?

[allnatural]

http://www.freddiemac.com/investors/pdf/investor-presentation.pdf

 

Freddie Mac investor presentation from today. See page 6 where Freddie admits that ADMIN might determine future and that its "PERHAPS LIKELY" that we will see significant changes in the near term.

 

"Our future structure and role will be determined by the Administration and Congress, and it

is possible, and perhaps likely, that there will be significant changes beyond the near term."

 

Was this language included in prior presentations?

[Midas79]

http://www.freddiemac.com/investors/pdf/investor-presentation.pdf

 

Freddie Mac investor presentation from today. See page 6 where Freddie admits that ADMIN might determine future and that its "PERHAPS LIKELY" that we will see significant changes in the near term.

 

"Our future structure and role will be determined by the Administration and Congress, and it

is possible, and perhaps likely, that there will be significant changes beyond the near term."

 

Was this language included in prior presentations?

 

What you said (in bold) and what the presentation said (in bold) are actually opposites. The presentation's words make it seem that there will be no major changes in the near term, which fits with Mnuchin's statements that he doesn't expect anything to happen in 2018. IMO only a court ruling in favor of shareholders will prod Treasury into action earlier, and Freddie Mac can't anticipate that.

[allnatural]

I'm in your camp. Only hope for 2018 is a positive court ruling to prompt admin action or a direct Trump push by deciding he wants $100b for his wall asap and Mnuchin gets to work. 2019 is put up or shut up year for GSE reform. I won't be suckered into another year of this past that! :)

[Luke 532]

The narrative, slowly but surely, is shifting towards them being released from conservatorship. If it doesn't seem like they're in conservatorship (according to David Stevens' mouth piece IMF), then why keep them in that state?  I know this isn't news to anyone that the conservatorship will end (Mnuchin has blatantly stated that), but those wanting to kill the GSE's are waking up to the fact that their desire won't happen, and it seems to me they are preparing themselves for that.  No, I didn't derive all of that from one headline... but from what has transpired the past year or so.

The GSEs in Conservatorship: Sure Doesn’t Seem Like It

https://www.insidemortgagefinance.com/imfnews/1_1369/daily/gses-in-Conservatorship-Sure-Does-not-seem-Like-It-1000046264-1.html#Login

[rros]

More on that...

 

By John Bancroft

 

jbancroft@imfpubs.com

 

Fannie Mae and Freddie Mac don’t act like two companies in their 10th year of government conservatorship, waiting for federal policymakers to figure out what to do with them.

 

Officials from the two government-sponsored enterprises reported on a broad range of initiatives aimed at improving mortgage-market efficiency and steering toward changing demographics during the recent secondary market conference sponsored by the Mortgage Bankers Association.

 

Kevin Palmer, senior VP of single-family credit-risk transfer at Freddie, said the GSE is working to “reimagine the mortgage experience” by leveraging the huge repository of data it has to make things easier through the entire process.

 

Freddie has also launched a “Borrower of the Future” initiative to study the changing demographics and economics of the market. “Affordability is getting worse,” Palmer said, noting that over 40 million households are struggling with housing affordability. For full details, see the new edition of Inside MBS & ABS, now available online.

[Luke 532]

David Stevens feels left out in the cold...

 

https://www.insidemortgagefinance.com/imfnews/1_1371/daily/MBA-Wants-more-transparency-on-gse-activities-1000046308-1.html?ET=imfpubs:e10982:73599a:&st=email&s=imfnews

[Luke 532]

New from the Milken Institute Housing Finance Program: Senior Fellows Michael Stegman and Phill Swagel begin a series of papers that focuses on the effectiveness of the affordable housing measures we have in place today.

 

https://assets1c.milkeninstitute.org/assets/Publication/Viewpoint/PDF/WP-An-Affordable-Housing-Fee.pdf