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

[Luke 532]

:-)

[Guest cherzeca]

@midas

 

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

 

while I don't doubt you, I didn't see this explained on my quick first read

[Midas79]

@midas

 

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

 

while I don't doubt you, I didn't see this explained on my quick first read

 

I will take a closer look. I could very well be wrong.

[Guest cherzeca]

@midas

 

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

 

while I don't doubt you, I didn't see this explained on my quick first read

 

I will take a closer look. I could very well be wrong.

 

the two smaller amounts are proposed rule alternatives.  i just don't understand where the first amount comes from.

[Luke 532]

the real Tim Howard...

I’ve just now downloaded FHFA’s notice of proposed rule making (NPR) on Fannie and Freddie capital. I’m very glad they’ve done this. I’ll read it as soon as I can (it’s 368 pages), and definitely will submit a comment on it.

https://howardonmortgagefinance.com/2018/05/03/a-view-on-affordable-housing/#comments

[rros]

@midas

 

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

 

while I don't doubt you, I didn't see this explained on my quick first read

 

I will take a closer look. I could very well be wrong.

I don't doubt you either but if I remember correctly, Moelis stated there is the companies capital (between 150B and 200B) + Treasury's backstop for which the companies will pay a commitment fee for a total +/- of 400B of capital cushion. If Watt is implying more than 300B of capital is needed perhaps a chunk of that could be that taxpayer's backstop.

[Guest cherzeca]

fnma:

 

risk based capital 9/2017:  $115B  table 5 p.72

minimum leverage 2.5% assets:  $83B table 7 p. 73

minimum leverage bifurcated:  $60B table 7 p. 73

 

so i see the most stringent capital requirement under proposed rule as $115B (pro forma 9/2017)

[SnarkyPuppy]

Imagine the reaction two years ago if the following happened simultaneously:

- FHFA put out a proposed capital framework (seemingly aligned to a shareholder proposal)

- Treasury Secretary went on TV and agreed that Obama used fannie/freddie profits for Obamacare

- Treasury Secretary confirmed in an interview that he won't consider getting rid of fannie/freddie

- Treasury Secretary stating that any resolution will be contingent on the companies being "adequately capitalized"

- FHFA putting out a proposal for a shareholder owned utility model

- RNC resolution basically written by a shareholder

- HUD Secretary stating that he wouldnt be opposed to shareholders "getting their money back"

- Modification to SPSA to suspend 1 dividend payment

- Consistent friction between Corker/MBA and the administration

 

Of course the legal case has weakened since so that should be accounted for as well.

[Midas79]

fnma:

 

risk based capital 9/2017:  $115B  table 5 p.72

minimum leverage 2.5% assets:  $83B table 7 p. 73

minimum leverage bifurcated:  $60B table 7 p. 73

 

so i see the most stringent capital requirement under proposed rule as $115B (pro forma 9/2017)

 

Yes, this is what I meant earlier: the companies will be held to the highest capital standard to be considered adequately capitalized. The numbers I used were for both companies combined, while yours are Fannie only.

 

 

 

And because I can't write a post without writing a short essay...

 

 

This passage at the bottom of page 21 explains some of it.

 

Under the statute, both in 1992 and today, an Enterprise is considered adequately capitalized when core capital meets, or exceeds, the minimum capital requirement and total capital meets, or exceeds, the risk-based capital requirement. An Enterprise is considered undercapitalized if it fails the risk-based requirement, but meets the minimum capital requirement.  It is significantly undercapitalized when it fails both the minimum and risk-based capital requirements, but still has enough critical capital.  It becomes critically undercapitalized when it fails both the minimum and risk-based capital requirements, as well as the critical capital requirement.

 

I believe I was wrong in my initial impression: the undercapitalization levels imply that risk-based capital is never less than minimum capital; there is no provision for meeting the risk-based standard but not the minimum.  Though I suppose it's possible (though quite unlikely) they could be the same if the risk profile of the companies changes enough (all assets are cash?).

 

It's also important to note the difference between core capital, which is defined on page 255-256 as

 

Using the statutory definitions, core capital means the sum of the following (as determined in accordance with GAAP): (i) the

par or stated value of outstanding common stock; (ii) the par or stated value of outstanding perpetual, noncumulative preferred stock;

(iii) paid-in capital; and (iv) retained earnings.

 

and total capital as defined earlier on page 21

 

The statute, both in 1992 and today, requires the risk-based capital requirement to be met with total capital, which is the sum of core capital and a general allowance for foreclosure losses, plus “[a]ny other amounts from sources of funds available to absorb losses incurred by the enterprise, that the Director by regulation determines are appropriate to include in determining total capital” (a determination that OFHEO never made). 

 

The minimum capital requirement of $139.5B or $103.5B (still using numbers for the combined companies) can only be met with core capital, while the higher risk-based capital requirement of $180.9B can include many other things as defined above.

 

 

 

This still means that the companies are at least $97.5B short of the minimum in terms of core capital. That enormous accumulated deficit really hurts. Though as I said in a previous post, I think Treasury really will just cancel the seniors or deem them repaid because what they get in return is freedom from the backstop, which in turn would remove $187.5B of the deficit, nearly eliminating it. I think the SPSPAs themselves will have to go. Attracting new capital would be nearly impossible with a $193B liquidation preference overhang, even if the dividends are halted permanently.

[rros]

Midas,

Treasury can deem the Srs. paid and remove the overhang but can still provide a backstop in exchange for a commitment fee. Can't they? Isn't this part of the plan?

[allnatural]

That is exactly what Moelis suggests. Keep the current Treasury credit line for a fee (only to be tapped in catastrophic circumstances), and redeem the senior prefs as fully paid back.

 

Midas,

Treasury can deem the Srs. paid and remove the overhang but can still provide a backstop in exchange for a commitment fee. Can't they? Isn't this part of the plan?

[Luke 532]

love these guys... https://thenationalrealestatepost.com/11000-secret-fannie-mae-papers/

[Midas79]

Midas,

Treasury can deem the Srs. paid and remove the overhang but can still provide a backstop in exchange for a commitment fee. Can't they? Isn't this part of the plan?

 

The Moelis plan does involve Treasury's backstop declining over time as the companies' capital reserves increase.

 

The problem here is that if getting out of the backstop is Treasury's incentive for deeming the seniors repaid, continuing to provide a backstop undermines the argument. Every year that Treasury's backstop exists - while the companies are undercapitalized - increases the risk of another bailout.

 

It all depends on whether Mnuchin is willing to have Treasury still on the hook past Trump's term (albeit with an end in sight), or if he instead wants the backstop completely gone by the end of 2020. The former allows for retained earnings to increase core capital for longer, reducing dilution to commons.

 

The original Moelis plan was scheduled to basically have the companies out of conservatorship by the end of 2020, coinciding with Mnuchin's timeline. Mnuchin's delays, though, have sown the seeds of a conflict between staying on the timeline and not having to move too fast.

[rros]

... and not having to move too fast.

"Fast" is in the eye of the beholder lol. At the speed this Administration moves we could still be right on schedule.

[allnatural]

Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

[Luke 532]

Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

 

Excellent point.

[Midas79]

Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

 

Good point, but every NWS dividend sent out makes things worse. Unless one expects Treasury to send back overpayments past the 10% moment (I don't), time is still working against Mnuchin.

 

Our best hope now, perhaps, is another letter agreement upping the capital reserve to $12B or so per company to account for the rest of 2018's earnings, assuming Mnuchin really does want to wait out the current Congress. Mnuchin has said he wants to work with Watt's successor, but Josh Rosner makes a good point that given how slow the Senate has been to confirm appointments, Watt won't necessarily be stepping down immediately in January 2019.

[Luke 532]

Rosner's paper on FHFA Capital Requirements... https://www.scribd.com/document/381737512/GF-Co-FHFA-s-Proposed-Capital-Rule

 

PDF attached...

381737512-GF-Co-FHFA-s-Proposed-Capital-Rule.pdf

[Midas79]

Rosner's paper on FHFA Capital Requirements... https://www.scribd.com/document/381737512/GF-Co-FHFA-s-Proposed-Capital-Rule

 

Wow, shots fired. I wonder why nobody has tried a lawsuit challenging these aspects of Watt and FHFA's behavior without going after the NWS itself, so as to not get the case consolidated with others. Since this is a duty of the Director, and not the Conservator, the 4617(f) bar cannot apply.

 

Even then I would love to hear a Congressional committee ask Watt directly why he has chosen to suspend capital standards when he has no statutory authority to do so. The idea that Treasury's backstop can substitute for capital is indefensible, and points to some level of hypocrisy given FHFA's use of the statutes to defend their choices in the capital requirements paper.

 

Heck, the capital standards paper from yesterday should have been done long ago. And not just that, the standards need to be enforced. It's in HERA section 1361(a)(1): (emphasis added)

 

‘(a) In General-

 

    ‘(1) ENTERPRISES- The Director shall, by regulation, establish risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.

 

These requirements trigger specific other duties by FHFA and the companies as the levels are breached. Since maintaining sufficient capital is a "shall", then doesn't every NWS payment violate this section, especially since not having capital requirements isn't a statutorially (sp?) authorized option? Especially because the SPSPAs cannot override HERA.

 

 

Let's go further. Section 1313(a)(1)(B)(i): (emphasis added)

 

(1) PRINCIPAL DUTIES- The principal duties of the Director shall be--

 

    ‘(A) to oversee the prudential operations of each regulated entity; and

 

    ‘(B) to ensure that--

‘(i) each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls;

 

Hard to square NWS payments with the maintenance of adequate capital. Unless you decide that zero capital is adequate? Or that if no capital standards exist, neither does the notion of "adequate capital"?

[rros]

Rosner's paper on FHFA Capital Requirements... https://www.scribd.com/document/381737512/GF-Co-FHFA-s-Proposed-Capital-Rule

 

Wow, shots fired. I wonder why nobody has tried a lawsuit challenging these aspects of Watt and FHFA's behavior without going after the NWS itself, so as to not get the case consolidated with others. Since this is a duty of the Director, and not the Conservator, the 4617(f) bar cannot apply.

 

Even then I would love to hear a Congressional committee ask Watt directly why he has chosen to suspend capital standards when he has no statutory authority to do so. The idea that Treasury's backstop can substitute for capital is indefensible, and points to some level of hypocrisy given FHFA's use of the statutes to defend their choices in the capital requirements paper.

 

Heck, the capital standards paper from yesterday should have been done long ago. And not just that, the standards need to be enforced. It's in HERA section 1361(a)(1): (emphasis added)

 

‘(a) In General-

 

    ‘(1) ENTERPRISES- The Director shall, by regulation, establish risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.

 

These requirements trigger specific other duties by FHFA and the companies as the levels are breached. Since maintaining sufficient capital is a "shall", then doesn't every NWS payment violate this section, especially since not having capital requirements isn't a statutorially (sp?) authorized option? Especially because the SPSPAs cannot override HERA.

 

 

Let's go further. Section 1313(a)(1)(B)(i): (emphasis added)

 

(1) PRINCIPAL DUTIES- The principal duties of the Director shall be--

 

    ‘(A) to oversee the prudential operations of each regulated entity; and

 

    ‘(B) to ensure that--

‘(i) each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls;

 

Hard to square NWS payments with the maintenance of adequate capital. Unless you decide that zero capital is adequate? Or that if no capital standards exist, neither does the notion of "adequate capital"?

Between HERA and the NWS, James Lockhart (OFHEO) suspended the capital framework making that section of HERA irrelevant (to this day). He did it within weeks of HERA being signed into law. This made possible for the companies to bear losses and operate under-capitalized without risking receivership. Watt (and Geithner) have been asked about this repeatedly in many congressional hearings. Originally, Watt would say he "inherited" the problem. Later, he understood and "owned" it. But I agree with you, it's all a farce.

 

They have all used the suspension of the capital framework to suspend things in time. Literally. An indefinite time out.

[Guest cherzeca]

12  U.S.C.  §  4623(d) limits court review of "director" actions.  this was taken up at judge Ginsburg's insistence in the perry appeal.

[rros]

12  U.S.C.  §  4623(d) limits court review of "director" actions.  this was taken up at judge Ginsburg's insistence in the perry appeal.

Thanks!

[Midas79]

12  U.S.C.  §  4623(d) limits court review of "director" actions.  this was taken up at judge Ginsburg's insistence in the perry appeal.

 

Thanks, I didn't know about that.

 

The text reads:

 

(d) Limitation on jurisdiction

 

Except as provided in this section, no court shall have jurisdiction to affect, by injunction or otherwise, the issuance or effectiveness of any classification or action of the Director under this subchapter (other than appointment of a conservator under section 4616 or 4617 of this title or action under section 4619  of this title) or to review, modify, suspend, terminate, or set aside such classification or action.

 

Technically, Watt not issuing the capital standards that he is by statute required to do is neither a "classification" nor an "action", is it? Or does an inaction legally count as an action? Would a court order forcing Watt to come up with enforceable capital standards, and following the statute when they are not met, be considered as the court "affect[ing], review[ing], modify[ing], suspend[ing], terminat[ing], or set[ting] aside" some classification or action?

 

I know it sounds like I'm being pedantic. I'm just trying to understand the laws better and how violations and challenges tend to work in practice.

 

It kind of rankles that one section of a law could be used to prevent review of a violation of another part of the law. While claims against the NWS haven't had any clear statute of HERA that is violated, Watt's refusal to do what he is obligated to does directly violate 1361(a)(1). I'm not sure how much that matters.

 

 

Edit: Earlier in section 4623 is this:

 

(b) Scope of review

 

The Court may modify, terminate, or set aside an action taken by the Director and reviewed by the Court pursuant to this section only if the court finds, on the record on which the Director acted, that the action of the Director was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with applicable laws.

 

4623(d) only applies to things not covered in (b). Refusing to fulfill a statuory obligation - in this case setting capital requirements in 1361(a)(1) - seems like it is "not in accordance with applicable laws."

[rros]

There is a "suspension" of this requirement set by prior Director. And it looks like courts can't get close to this. According to ch.

 

There is the law. And there is governing by regulation which aims at circumventing the law. Judge Brown specifically referred to this on her dissent. Lockhart did just that in 2008 when he suspended assessing capital levels. And it looks like he has been able to get away with murder.

[John Hjorth]

Pretty amazing to now read 10,000+ posts in this topic.