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

[Eye4Valu]

there is a lot that could go wrong.

 

you would think that, with MI now adopting a stop to NWS divs (albeit only as a step to motivate congress to act) and bright seeing the light and leaving gnma, those who have a good opportunity to know a lot more about admin plans than we do are  not pleased with what they are seeing.  that's good, but this admin (and truly any admin) is not likely to move quickly.  for example, we don't know whether admin thinks that doing things under otting and before Calabria is confirmed is a good idea

 

even if things go "right" and admin reform is really rolled out that seeks to release GSEs from conservatorship, it may take a whole lot longer than one would hope.

 

my next signpost is the collins en banc oral arg 1/23.

 

Agree. Favorable decision there provides the adequate protection I'm looking for.

[Cox022]

Sorry for the long post, but I thinking through his has been helpful to me. 

 

Someone smartly asked about downside.  The following line of thought, which has bugged me for years, concerns what happens to legacy common and preferred shareholders.

 

Negative:

 

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

 

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

 

Therefore, as an issuer, if you felt like your legacy shareholders would limit the attractiveness or potential of your capital raise, it might seem like it would be in your interest to dispose of them.

 

 

Positive:

 

-As an owner of the business, like Treasury is with their warrants, it seems like if you were issuing equity to raise capital, it would be in your interest to have a pre-existing market for your shares, and you would additionally prefer that those shares have a healthy valuation to help you raise capital.  On the flip side, as the issuer, you may be at risk if the market for your securities was really depressed or too volatile-which could raise the preference for a clean slate.  [We havent discussed re-listing the securities on the NYSE but I’m curious if the timing of any re-listing implies what may come next.]

 

-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

 

[i sense these last two points which are pro shareholder are stronger than the points I made which are negative to legacy shareholders.  The reason is that Treasury has skin in the game with the warrants and I have a hard time thinking that the capitalists and bankers-turned-politicians just throw that away.  I think it’s fair to expect them to protect their position in the warrants just as it was in their interest to vigorously defend all the litigation.]

 

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.

 

 

 

A side note as food for thought…One has to wonder: is treasury worried about raising capital in institutions where the general perception is that these institutions ‘failed’ and how does that shape Treasury’s decision making?  It is also worth keeping in mind that to raise capital is essentially to ‘sell’ the companies to investors.

 

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

 

 

 

[blackcoffee]

Negative:

 

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

 

good post - this missed the point though - the point is - if legacy shareholders can be wiped out based on lies - whats to stop them from doing the same thing to new buyer? The gov't holds all the cards and could 0 you out the day after your check clears based on the history here - that's the point.

[orthopa]

Sorry for the long post, but I thinking through his has been helpful to me. 

 

Someone smartly asked about downside.  The following line of thought, which has bugged me for years, concerns what happens to legacy common and preferred shareholders.

 

Negative:

 

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

 

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

 

Therefore, as an issuer, if you felt like your legacy shareholders would limit the attractiveness or potential of your capital raise, it might seem like it would be in your interest to dispose of them.

 

 

Positive:

 

-As an owner of the business, like Treasury is with their warrants, it seems like if you were issuing equity to raise capital, it would be in your interest to have a pre-existing market for your shares, and you would additionally prefer that those shares have a healthy valuation to help you raise capital.  On the flip side, as the issuer, you may be at risk if the market for your securities was really depressed or too volatile-which could raise the preference for a clean slate.  [We havent discussed re-listing the securities on the NYSE but I’m curious if the timing of any re-listing implies what may come next.]

 

-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

 

[i sense these last two points which are pro shareholder are stronger than the points I made which are negative to legacy shareholders.  The reason is that Treasury has skin in the game with the warrants and I have a hard time thinking that the capitalists and bankers-turned-politicians just throw that away.  I think it’s fair to expect them to protect their position in the warrants just as it was in their interest to vigorously defend all the litigation.]

 

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.

 

 

 

A side note as food for thought…One has to wonder: is treasury worried about raising capital in institutions where the general perception is that these institutions ‘failed’ and how does that shape Treasury’s decision making?  It is also worth keeping in mind that to raise capital is essentially to ‘sell’ the companies to investors.

 

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

 

Idk if the treasury has presented the GSEs in that fashion or anyone in the Trump administration has discussed the GSE's as failures etc. That was the Obama, Demarco, Stevens etc narrative. I don't think they have to distance themselves much from that as they never presented the GSE's that way. Mnuchin from day one has wanted out of conservatorship and no risk to tax payers.

 

Regarding capital raises I would look at the govt sales of AIG, Ally etc. The capital was there and those were assets that were heavily diluted by a govt stake and big stakes. The gov TARP warrants were easily sold too. I believe if the price is right and terms attractive the money will show up for secondary offerings.

 

In regards to new shareholders not caring about old this could certainly be the case in the common and with dilution. Different story with preferred and their treatment once out of conservatorship and retaining capital. How can legacy shareholders disappear? Maybe in receivership but its clear this is not going that way at this point. How can legacy common and preferred shareholders not be considered in capital rebuild? They will be the ground floor to build upon!

 

I think in regards to the preferred the treatment of dividends/back pay on dividends I think is highly up for debate and speculative but I think eventual par out of the conservatorship and retaining capital is not a stretch. Big unknown will be time.

[Midas79]

Good post.

 

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

 

None at all, and that's where a lot of the risk comes from. Much of the "value" in the legacy shares comes in the form of the lawsuits, giving FHFA and Treasury an incentive to at least carve out something for them. However, that power lies almost entirely with the preferred shareholders.

 

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

 

Buying shares in the market won't be an alternative for the new buyers because buying the existing shares doesn't add to the companies' capital, while buying newly created shares does.

 

What the new buyers would push for, though, is the lowest possible secondary offering price because it gives them a larger proportion of the companies' shares for the same amount of capital raised. The new buyers' incentives are directly opposed to those who hold common shares now. The junior preferreds are mostly agnostic to this unless a conversion is offered.

 

A full wipeout of old shareholders is neither probable nor necessary. Dilution can accomplish nearly the same thing. Also, not only will the new buyers not care about the fate of the old shareholders, they will have an incentive to dilute them as much as possible. Any money that accrues to those holding commons now is less money that will be available to the new buyers.

 

-As an owner of the

-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

 

I don't think this will apply to the FnF recap. Instead of raising as much money as possible, I think FHFA and Treasury will raise a set amount and let the market decide what total percentage of the common shares they would demand in return. Overcapitalizing the companies is actually a problem because it makes it harder for them to produce a decent return on equity.

 

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.

 

What do you believe is "fair"? Or "unfair", for that matter?

 

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

 

Yes, Otting's words yesterday show that FHFA and the adminstration don't consider FnF to be failed business models. But the big money knows that FnF are extremely valuable outside of consevatorship. I don't think Treasury or FHFA needs to convince them of that.

[Midas79]

good post - this missed the point though - the point is - if legacy shareholders can be wiped out based on lies - whats to stop them from doing the same thing to new buyer? The gov't holds all the cards and could 0 you out the day after your check clears based on the history here - that's the point.

 

Not quite. If people had any idea that an NWS-like event was eventually going to happen, they would have challenged the conservatorship within the 30-day window provided for by HERA back in 2008. I'd bet anything that if FHFA tried that again they would be flooded with lawsuits, discovery requests, etc.

 

Now, the risk of another huge downturn and shares going to zero is still clear and present, but all that's going to do is lower the share price of the secondary offering, not keep everyone away entirely.

[rros]

He should spend time taking care of his health and praying to god to forgive his sins. But he keeps committing more sins.. some never learn.

https://www.mortgagemedia.com/opinion/former-fha-commissioner-reform-before-recapitalization

So it's not really about reform anymore. Nor the housing market. Neither about the 30 Y mortgage, affordable housing or the Trust Funds. What it is really desperately about -as it is finally coming out for the world to see- is reviving Obama's old war against vulture capitalists.

[Luke 532]

The attached could prove interesting.  Can't wait to read their filing on Monday.  FHFA requested and was granted an extension to this upcoming Monday to file a supplemental en banc brief in the Fifth Circuit because "[t]his case raises significant issues of interest to FHFA's new leadership [and] FHFA’s new leadership requires additional time to review the issues presented in the case and to evaluate FHFA's positions."

 

17-20364-00514792607.pdf

[ValueMaven]

how so Luke?

[Luke 532]

how so Luke?

 

Otting evaluating FHFA's position makes it possible (I'd say highly probable) that FHFA's position will change in a meaningful way.

[Guest cherzeca]

how so Luke?

 

Otting evaluating FHFA's position makes it possible (I'd say highly probable) that FHFA's position will change in a meaningful way.

 

maybe yes, maybe no.  remember, this is Otting's filing on behalf of FHFA, not the lawyers representing fhfa.  Otting may simply have asked fhfa lawyers for a look at the brief being submitted in his name as acting director, and the lawyers may have said, ahem, it is due today, and Otting simply said get an extension so I can at least read it over the weekend.

 

I expect there will not be any changes.  while I think Otting will have an effect on fhfa, I doubt it will be by red pencilling this brief.

 

edit: another reason I don't expect any change is that argument is in only 2 weeks, and the court en banc was insistent that filing deadlines be met...so that the extension could be only for the weekend and another will likely not be granted.  I don't know that Otting can read this brief, talk to his lawyers and get lawyers to change brief in 48 hours...happens all the time on Wall Street but much less in DC

[Luke 532]

how so Luke?

 

Otting evaluating FHFA's position makes it possible (I'd say highly probable) that FHFA's position will change in a meaningful way.

 

maybe yes, maybe no.  remember, this is Otting's filing on behalf of FHFA, not the lawyers representing fhfa.  Otting may simply have asked fhfa lawyers for a look at the brief being submitted in his name as acting director, and the lawyers may have said, ahem, it is due today, and Otting simply said get an extension so I can at least read it over the weekend.

 

I expect there will not be any changes.  while I think Otting will have an effect on fhfa, I doubt it will be by red pencilling this brief.

 

ValueMaven, I recommend placing infinitely more weight on cherzeca's (Christian) comments than mine when it comes to legal matters.  That is definitely not an area of expertise for me, and it certainly is for Christian. 

[Guest cherzeca]

as I posted a bit earlier, I doubt this will result in a meeker fhfa brief.  but I am sure this has fhfa counsel (Arnold & porter) shitting in their pants.  all prior briefs were likely delivered on a courtesy copy basis to watt who never read them.  they sent over a courtesy copy this time to Otting and Otting asked how long do I have to read this.  and counsel said, excuse me, you want to read it? and Otting said, of course, it is being filed under my name as acting director. then counsel said, gee, well, um, it is due today.  and then Otting likely ripped counsel a new one.

 

maybe this happened, maybe it didn't. but if I were a betting man....

[SnarkyPuppy]

Going through older articles to try to piece together likely outcomes.  Writing on the wall. 

 

Calabria/Pollock 2015:

https://thehill.com/blogs/congress-blog/economy-budget/240014-making-a-fannie-and-freddie-we-could-live-with

 

What is required are practical steps forward, rather than designing the ideal but politically unachievable solution.  We offer Congress the following suggestion as something that can be done now: simply take away all Fannie and Freddie’s special privileges.  They could be allowed out of conservatorship when all of the following actions have been taken:

 

1. Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size.  Equity of at least 5 percent of total assets should be their required leverage capital ratio.

2. End all their securities law exemptions.

3. End all their preferences in banking law and regulation.  Banks aren’t allowed to hold corporate equity, but as a mistaken exception were allowed to make large equity investments in Fannie and Freddie, on a highly leveraged basis.

4. End their exemption from state and local income taxes. 

5. Open up their charters to competition just like banking charters.  End their exclusive duopoly privileges.

6. End all their exemptions from consumer protection rules.

7. Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are.

 

Implementing these steps would go a long way towards making Fannie and Freddie less distortive and far less dangerous, rendering them a Fannie and Freddie we could live with as two competitors among others.  Such a de-fanged, de-privileged Fannie and Freddie could safely be brought out of eternal conservatorship.  If they again get themselves into insolvency, they could be placed into receivership.  In the meantime, debates about the ideal housing finance system can continue.

 

Mulvaney 2016:

https://www.valuewalk.com/2016/02/fannie-mae-fincher-mulvaney-press-fhfa-treasury-on-risks-of-sweep/

 

It is extremely troubling that these massive agencies – deeply imbedded in our financial system with over $5 trillion in securities outstanding – are being specifically directed to deplete their capital reserves.  According to the 2013 FHFA report, four out of five mortgages are now backed by Fannie Mae and Freddie Mac, which is a level higher than before the crisis. Should a sudden shock to the system or even a normal downturn occur, it is American taxpayers that will have to fit the bill.

 

The letter also echoed an idea that housing policy experts from across the political spectrum have backed: Treat Fannie Mae and Freddie Mac like systemically-important financial institutions, or SIFIs.

 

Mulvaney 2016

The Housing Finance Restructuring Act of 2016

https://www.congress.gov/bill/114th-congress/house-bill/4913/text

 

Key sections:

"(1) DEEMED REPAYMENT IN FULL.—Effective on the date of the date of the enactment of this Act, the liquidation preference on the Variable Liquidation Preference Senior Preferred Stocks of each enterprise is reduced to zero."

 

© Exercise Of Warrants For Common Stock.—Notwithstanding subsection (a)(2)© of this section, upon the enactment of this Act, the Department of the Treasury shall exercise the warrants for the purchase of common stock of the enterprises provided to the Department under the Senior Preferred Stock Purchase Agreements.

 

(d) Capital Restoration Plan.—(1) REQUIREMENT.—Not later than the expiration of the 45-day period beginning on the date of the enactment of this Act, the Director shall prepare and submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate a capital restoration plan for each enterprise that complies with section 1369C(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4622(a)).

 

(e) Termination Of Conservatorships.—The Director shall terminate the conservatorship of an enterprise under section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) at such time that the enterprise attains, as determined by the Director, an amount of capital that is equal to or exceeds 5 percent of the risk-weighted assets of the enterprise.

 

Pollock 2017:

https://www.americanbanker.com/opinion/time-to-reform-fannie-and-freddie-is-now

"The answer is easily determined. Take all the cash flows between Fannie and Freddie and the Treasury, and calculate the Treasury’s internal rate of return on its investment. When the IRR reaches 10%, Fannie and Freddie have sent in cash economically equivalent to paying the 10% dividend plus retiring 100% of the principal. This I call the “10% Moment.

 

Freddie reached its 10% Moment in the second quarter of 2017. With the $3 billion dividend Fannie was previously planning to pay on December 31, the Treasury’s IRR on Fannie would have reached 10.06%.

 

The new Treasury-FHFA deal will postpone Fannie’s 10% Moment a bit, but it will come. As it approaches, Treasury should exercise its warrants and become the actual owner of the shares to which it and the taxpayers are entitled. When added to that, Fannie reaches its 10% Moment, then payment in full of the original bailout deal will have been achieved, economically speaking.

 

Any real reform must address two essential factors. First, Fannie and Freddie are and will continue to be absolutely dependent on the de facto guarantee of their obligations by the U.S. Treasury, thus the taxpayers. They could not function even for a minute without that. The guarantee needs to be fairly paid for, as nothing is more distortive than a free government guarantee. A good way to set the necessary fee would be to mirror what the Federal Deposit Insurance Corp. would charge for deposit insurance of a huge bank with 0.1% capital and a 100% concentration in real estate risk. Treasury and Congress should ask the FDIC what this price would be.

 

Second, Fannie and Freddie have demonstrated their ability to put the entire financial system at risk. They are with no doubt whatsoever systemically important financial institutions. Indeed, if anyone at all is a SIFI, then it is the GSEs. If Fannie and Freddie are not SIFIs, then no one is a SIFI. They should be formally designated as such in the first quarter of 2018, by the Financial Stability Oversight Council —and that FSOC has not already so designated them is an egregious and arguably reckless failure.

 

When Fannie and Freddie are making a fair payment for their de facto government guarantee, have become formally designated and regulated as SIFIs, and have reached the 10% Moment,  Treasury should agree that its senior preferred stock has been fully retired.

 

Then Fannie and Freddie would begin to accumulate additional retained earnings in a sound framework. Of course, 79.9% of those would belong to the Treasury as 79.9% owner of their common stock. Fannie and Freddie would still be woefully undercapitalized, but progress toward building the capital appropriate for a SIFI would begin"

 

Mnuchin 2017

https://www.bloomberg.com/news/articles/2017-01-28/mnuchin-dims-banks-hopes-he-will-allow-a-prop-trading-revival

 

Additionally, Mnuchin offered further details on his thoughts regarding housing finance reform, including the role of GSEs. Mnuchin wrote in response to questions from Senator Sherrod Brown that "any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers."

 

Mnuchin 2017

https://www.wsj.com/articles/trump-administration-could-support-government-backstop-for-fannie-and-freddie-mnuchin-says-1495137047

"If we end up with a scenario where we need some type of explicit guarantee, I would expect that it would be paid for and I would expect that it would hopefully never be hit,” he said. The Treasury secretary said such a system would be no different than insurance programs operated by the Federal Deposit Insurance Corp. and the Federal Housing Administration.

 

 

OMB Budget 2018 - Mulvaney

https://www.whitehouse.gov/wp-content/uploads/2018/06/Government-Reform-and-Reorg-Plan.pdf

 

"This proposal would reorganize the way the Federal Government delivers mortgage assistance and go beyond restructuring Federal agencies and programs by transitioning Fannie Mae and Freddie Mac to fully private entities.  Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities (MBS) that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for

 

The proposal would remove the Federal charter from statute and fully privatize the GSEs. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs, ensuring they would all be adequately capitalized and competing on a level playing field.

 

Under this proposal, which would also involve entities outside the Executive Branch of the Federal  Government, guarantors would have access to an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances. Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors ... The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure.

 

Phillips 2018

https://www.housingwire.com/articles/47122-mnuchins-top-housing-advisor-says-gse-charters-should-be-removed

 

“The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said Monday. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market 

 

“Guarantors should have access to an explicit federal guarantee for MBS (mortgage-backed securities) that they issue which is on budget and fully paid for, designed for use only in exigent circumstances and designed and overseen in a manner that protects the interests of taxpayers by their primary regulator,” Phillips continued..”

 

Mnuchin 2018

"Watt's term ends in early 2019. That will be an opportunity to “make sure we have someone in that job that supports the agenda,” Mnuchin said."

 

Otting 2019

Otting: ‘A lot’ can get done during acting FHFA tenure

 

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

[DRValue]

@puppy

 

Valuable work thanks for sharing.

[Luke 532]

@puppy

 

Valuable work thanks for sharing.

 

+1.  Very nice work!

[rros]

Going through older articles to try to piece together likely outcomes.  Writing on the wall. 

 

Calabria/Pollock 2015:

https://thehill.com/blogs/congress-blog/economy-budget/240014-making-a-fannie-and-freddie-we-could-live-with

 

What is required are practical steps forward, rather than designing the ideal but politically unachievable solution.  We offer Congress the following suggestion as something that can be done now: simply take away all Fannie and Freddie’s special privileges.  They could be allowed out of conservatorship when all of the following actions have been taken:

 

1. Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size.  Equity of at least 5 percent of total assets should be their required leverage capital ratio.

2. End all their securities law exemptions.

3. End all their preferences in banking law and regulation.  Banks aren’t allowed to hold corporate equity, but as a mistaken exception were allowed to make large equity investments in Fannie and Freddie, on a highly leveraged basis.

4. End their exemption from state and local income taxes. 

5. Open up their charters to competition just like banking charters.  End their exclusive duopoly privileges.

6. End all their exemptions from consumer protection rules.

7. Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are.

 

Implementing these steps would go a long way towards making Fannie and Freddie less distortive and far less dangerous, rendering them a Fannie and Freddie we could live with as two competitors among others.  Such a de-fanged, de-privileged Fannie and Freddie could safely be brought out of eternal conservatorship.  If they again get themselves into insolvency, they could be placed into receivership.  In the meantime, debates about the ideal housing finance system can continue.

 

Mulvaney 2016:

https://www.valuewalk.com/2016/02/fannie-mae-fincher-mulvaney-press-fhfa-treasury-on-risks-of-sweep/

 

It is extremely troubling that these massive agencies – deeply imbedded in our financial system with over $5 trillion in securities outstanding – are being specifically directed to deplete their capital reserves.  According to the 2013 FHFA report, four out of five mortgages are now backed by Fannie Mae and Freddie Mac, which is a level higher than before the crisis. Should a sudden shock to the system or even a normal downturn occur, it is American taxpayers that will have to fit the bill.

 

The letter also echoed an idea that housing policy experts from across the political spectrum have backed: Treat Fannie Mae and Freddie Mac like systemically-important financial institutions, or SIFIs.

 

Mulvaney 2016

The Housing Finance Restructuring Act of 2016

https://www.congress.gov/bill/114th-congress/house-bill/4913/text

 

Key sections:

"(1) DEEMED REPAYMENT IN FULL.—Effective on the date of the date of the enactment of this Act, the liquidation preference on the Variable Liquidation Preference Senior Preferred Stocks of each enterprise is reduced to zero."

 

© Exercise Of Warrants For Common Stock.—Notwithstanding subsection (a)(2)© of this section, upon the enactment of this Act, the Department of the Treasury shall exercise the warrants for the purchase of common stock of the enterprises provided to the Department under the Senior Preferred Stock Purchase Agreements.

 

(d) Capital Restoration Plan.—(1) REQUIREMENT.—Not later than the expiration of the 45-day period beginning on the date of the enactment of this Act, the Director shall prepare and submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate a capital restoration plan for each enterprise that complies with section 1369C(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4622(a)).

 

(e) Termination Of Conservatorships.—The Director shall terminate the conservatorship of an enterprise under section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) at such time that the enterprise attains, as determined by the Director, an amount of capital that is equal to or exceeds 5 percent of the risk-weighted assets of the enterprise.

 

Pollock 2017:

https://www.americanbanker.com/opinion/time-to-reform-fannie-and-freddie-is-now

"The answer is easily determined. Take all the cash flows between Fannie and Freddie and the Treasury, and calculate the Treasury’s internal rate of return on its investment. When the IRR reaches 10%, Fannie and Freddie have sent in cash economically equivalent to paying the 10% dividend plus retiring 100% of the principal. This I call the “10% Moment.

 

Freddie reached its 10% Moment in the second quarter of 2017. With the $3 billion dividend Fannie was previously planning to pay on December 31, the Treasury’s IRR on Fannie would have reached 10.06%.

 

The new Treasury-FHFA deal will postpone Fannie’s 10% Moment a bit, but it will come. As it approaches, Treasury should exercise its warrants and become the actual owner of the shares to which it and the taxpayers are entitled. When added to that, Fannie reaches its 10% Moment, then payment in full of the original bailout deal will have been achieved, economically speaking.

 

Any real reform must address two essential factors. First, Fannie and Freddie are and will continue to be absolutely dependent on the de facto guarantee of their obligations by the U.S. Treasury, thus the taxpayers. They could not function even for a minute without that. The guarantee needs to be fairly paid for, as nothing is more distortive than a free government guarantee. A good way to set the necessary fee would be to mirror what the Federal Deposit Insurance Corp. would charge for deposit insurance of a huge bank with 0.1% capital and a 100% concentration in real estate risk. Treasury and Congress should ask the FDIC what this price would be.

 

Second, Fannie and Freddie have demonstrated their ability to put the entire financial system at risk. They are with no doubt whatsoever systemically important financial institutions. Indeed, if anyone at all is a SIFI, then it is the GSEs. If Fannie and Freddie are not SIFIs, then no one is a SIFI. They should be formally designated as such in the first quarter of 2018, by the Financial Stability Oversight Council —and that FSOC has not already so designated them is an egregious and arguably reckless failure.

 

When Fannie and Freddie are making a fair payment for their de facto government guarantee, have become formally designated and regulated as SIFIs, and have reached the 10% Moment,  Treasury should agree that its senior preferred stock has been fully retired.

 

Then Fannie and Freddie would begin to accumulate additional retained earnings in a sound framework. Of course, 79.9% of those would belong to the Treasury as 79.9% owner of their common stock. Fannie and Freddie would still be woefully undercapitalized, but progress toward building the capital appropriate for a SIFI would begin"

 

Mnuchin 2017

https://www.bloomberg.com/news/articles/2017-01-28/mnuchin-dims-banks-hopes-he-will-allow-a-prop-trading-revival

 

Additionally, Mnuchin offered further details on his thoughts regarding housing finance reform, including the role of GSEs. Mnuchin wrote in response to questions from Senator Sherrod Brown that "any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers."

 

Mnuchin 2017

https://www.wsj.com/articles/trump-administration-could-support-government-backstop-for-fannie-and-freddie-mnuchin-says-1495137047

"If we end up with a scenario where we need some type of explicit guarantee, I would expect that it would be paid for and I would expect that it would hopefully never be hit,” he said. The Treasury secretary said such a system would be no different than insurance programs operated by the Federal Deposit Insurance Corp. and the Federal Housing Administration.

 

 

OMB Budget 2018 - Mulvaney

https://www.whitehouse.gov/wp-content/uploads/2018/06/Government-Reform-and-Reorg-Plan.pdf

 

"This proposal would reorganize the way the Federal Government delivers mortgage assistance and go beyond restructuring Federal agencies and programs by transitioning Fannie Mae and Freddie Mac to fully private entities.  Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities (MBS) that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for

 

The proposal would remove the Federal charter from statute and fully privatize the GSEs. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs, ensuring they would all be adequately capitalized and competing on a level playing field.

 

Under this proposal, which would also involve entities outside the Executive Branch of the Federal  Government, guarantors would have access to an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances. Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors ... The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure.

 

Phillips 2018

https://www.housingwire.com/articles/47122-mnuchins-top-housing-advisor-says-gse-charters-should-be-removed

 

“The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said Monday. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market 

 

“Guarantors should have access to an explicit federal guarantee for MBS (mortgage-backed securities) that they issue which is on budget and fully paid for, designed for use only in exigent circumstances and designed and overseen in a manner that protects the interests of taxpayers by their primary regulator,” Phillips continued..”

 

Mnuchin 2018

"Watt's term ends in early 2019. That will be an opportunity to “make sure we have someone in that job that supports the agenda,” Mnuchin said."

 

Otting 2019

Otting: ‘A lot’ can get done during acting FHFA tenure

 

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

Excellent! Thank you so much for this detailed report.

 

If I may, I would like to add this speech to your list. This guy may have a say too...

 

Jerome Powell - July 2017

The Case for Housing Finance Reform

https://www.federalreserve.gov/newsevents/speech/powell20170706a.htm

 

* Make housing bailouts a remote possibility by attracting large amounts of private capital to be wiped out on first loss, before catastrophic.

* Any guarantee should be transparent, explicit and applied to securities only.

* Allow for greater competition: open up charters.

* Follow simple approach: restructure and repurpose w/o dismantling current system.

* Unacceptable status quo: find best feasible plan, not perfect answer.

 

 

[DRValue]

Not to get ahead of the en banc hearing, but what is the expected timing on the opinion?

[Guest cherzeca]

Not to get ahead of the en banc hearing, but what is the expected timing on the opinion?

 

who knows.  on one hand, 16 judges should take longer to coalesce than 3. on other hand, they all want to get back to their normal caseload. 

[Midas79]

as I posted a bit earlier, I doubt this will result in a meeker fhfa brief.  but I am sure this has fhfa counsel (Arnold & porter) shitting in their pants.  all prior briefs were likely delivered on a courtesy copy basis to watt who never read them.  they sent over a courtesy copy this time to Otting and Otting asked how long do I have to read this.  and counsel said, excuse me, you want to read it? and Otting said, of course, it is being filed under my name as acting director. then counsel said, gee, well, um, it is due today.  and then Otting likely ripped counsel a new one.

 

maybe this happened, maybe it didn't. but if I were a betting man....

 

I'll admit, this made me chuckle some. But should we really believe that Otting didn't know anything about the cases or briefing deadlines before he took office? Was he really caught by surprise when Arnold and Porter showed him a copy of their brief yesterday? That seems a stretch to me.

 

If we see a different tone in FHFA's briefing on Monday, it might be because Otting asked to see the brief last Monday or Tuesday, then spent part of the week with Arnold and Porter trying to change it to fit his (Otting's) views; when they couldn't finish the changes by Friday they asked for an extension to work over this weekend.

[Guest cherzeca]

as I posted a bit earlier, I doubt this will result in a meeker fhfa brief.  but I am sure this has fhfa counsel (Arnold & porter) shitting in their pants.  all prior briefs were likely delivered on a courtesy copy basis to watt who never read them.  they sent over a courtesy copy this time to Otting and Otting asked how long do I have to read this.  and counsel said, excuse me, you want to read it? and Otting said, of course, it is being filed under my name as acting director. then counsel said, gee, well, um, it is due today.  and then Otting likely ripped counsel a new one.

 

maybe this happened, maybe it didn't. but if I were a betting man....

 

I'll admit, this made me chuckle some. But should we really believe that Otting didn't know anything about the cases or briefing deadlines before he took office? Was he really caught by surprise when Arnold and Porter showed him a copy of their brief yesterday? That seems a stretch to me.

 

If we see a different tone in FHFA's briefing on Monday, it might be because Otting asked to see the brief last Monday or Tuesday, then spent part of the week with Arnold and Porter trying to change it to fit his (Otting's) views; when they couldn't finish the changes by Friday they asked for an extension to work over this weekend.

 

could be.

 

remember treasury argues in its brief that the single director removable for cause provision is unconstitutional, it only argued against retroactive relief (void NWS).  we shall see what the fhfa brief says about this

[muscleman]

as I posted a bit earlier, I doubt this will result in a meeker fhfa brief.  but I am sure this has fhfa counsel (Arnold & porter) shitting in their pants.  all prior briefs were likely delivered on a courtesy copy basis to watt who never read them.  they sent over a courtesy copy this time to Otting and Otting asked how long do I have to read this.  and counsel said, excuse me, you want to read it? and Otting said, of course, it is being filed under my name as acting director. then counsel said, gee, well, um, it is due today.  and then Otting likely ripped counsel a new one.

 

maybe this happened, maybe it didn't. but if I were a betting man....

 

I'll admit, this made me chuckle some. But should we really believe that Otting didn't know anything about the cases or briefing deadlines before he took office? Was he really caught by surprise when Arnold and Porter showed him a copy of their brief yesterday? That seems a stretch to me.

 

If we see a different tone in FHFA's briefing on Monday, it might be because Otting asked to see the brief last Monday or Tuesday, then spent part of the week with Arnold and Porter trying to change it to fit his (Otting's) views; when they couldn't finish the changes by Friday they asked for an extension to work over this weekend.

 

 

Don’t forget similar things happened to the CFPB en banc, and DOJ sent in lawyers to say they actually agree with plaintiff.

 

https://www.insidearm.com/news/00042722-doj-brief-opposing-cfpb-brings-more-uncer/

 

Tim Howard also said in his blog that Otting knows many plantiffs and knows this NWS nonsense well.

[Guest cherzeca]

as I posted a bit earlier, I doubt this will result in a meeker fhfa brief.  but I am sure this has fhfa counsel (Arnold & porter) shitting in their pants.  all prior briefs were likely delivered on a courtesy copy basis to watt who never read them.  they sent over a courtesy copy this time to Otting and Otting asked how long do I have to read this.  and counsel said, excuse me, you want to read it? and Otting said, of course, it is being filed under my name as acting director. then counsel said, gee, well, um, it is due today.  and then Otting likely ripped counsel a new one.

 

maybe this happened, maybe it didn't. but if I were a betting man....

 

I'll admit, this made me chuckle some. But should we really believe that Otting didn't know anything about the cases or briefing deadlines before he took office? Was he really caught by surprise when Arnold and Porter showed him a copy of their brief yesterday? That seems a stretch to me.

 

If we see a different tone in FHFA's briefing on Monday, it might be because Otting asked to see the brief last Monday or Tuesday, then spent part of the week with Arnold and Porter trying to change it to fit his (Otting's) views; when they couldn't finish the changes by Friday they asked for an extension to work over this weekend.

 

 

Don’t forget similar things happened to the CFPB en banc, and DOJ sent in lawyers to say they actually agree with plaintiff.

 

https://www.insidearm.com/news/00042722-doj-brief-opposing-cfpb-brings-more-uncer/

 

Tim Howard also said in his blog that Otting knows many plantiffs and knows this NWS nonsense well.

 

DOJ has already filed a brief in collins en banc agreeing there is a separation of powers violation but denying that relief should be given Ps.  the violation is meaningless unless relief is granted vacating NWS

[ValueMaven]

u can read previous board posts on this matter - there is everything from $25 par to $100,000 par securities should do well.  You can also play the common too which have now blown out wider to the prefs (ie: cheaper) right now...

[rros]

Can someone recommend a preferred stock?  I would like to invest some money so that dividends can cover tuition every semester. if you don’t have any specific recommendations, how can I go about looking for one (where to look and what to look for).  Thank you.

Just take into account that one of the scenarios could be 50% of the amount of any preferred you may own could be converted to common. Which may not be a bad thing. Also, if you believe you may hold unto the preferreds for 5 to 10 years perhaps the ones with variable rates are better. We may be in the last 10 years of the 45 year inflation super-cycle, equivalent to 1965-1975.