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

[SnarkyPuppy]

Seems the risk of "nothing happening for 10 years" is all but gone (ex tail risks which we cant predict). 

 

If the memo basically is a high level 3 sentences saying nothing and effectively defers to summer OMB- the obvious question is why this summer?  Are they waiting for Collins?

[Guest cherzeca]

potus memo:  https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reforming-housing-system-help-americans-want-buy-home/

 

looks like treasury is called upon to get F/F out of conservatorship without any GNMA etc involvement.  also calls for competition though the words "additional guarantors" are not used.  HUD is called upon to enter the 21st century

[Midas79]

potus memo:  https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reforming-housing-system-help-americans-want-buy-home/

 

looks like treasury is called upon to get F/F out of conservatorship without any GNMA etc involvement.  also calls for competition though the words "additional guarantors" are not used.  HUD is called upon to enter the 21st century

 

I wonder how fast "as soon as practicable" is? Treasury should have been working on this for months by now, if not years.

 

The Presidential memorandum calls for reform plans to be submitted to the President for approval as soon as practicable.

 

Promoting competition could be as easy as just trying to shrink FnF's business line by refusing to securitize mortgages above a certain median home price-to-income ratio, perhaps. Those mortgages would have to go somewhere.

 

I think this part finally takes receivership 100% off the table, at least from an administrative perspective. Why improve oversight over something that doesn't exist?

 

End the conservatorship of Fannie Mae and Freddie Mac and improve regulatory oversight over them.

 

The emphasis on "protect[ing] taxpayer dollars", to me, means getting FnF recapped ASAP. Every day that passes is a new risk of a housing decline that would deplete FnF's miniscule capital buffers. This goes well beyond not taking this week's NWS payment (which they might be hinting at given the timing of this memo), it means raising a ton of private capital (probably by selling new common and preferred shares) very quickly.

[Guest cherzeca]

there is a nascent PLS market starting up.  competition may simply mean offering PLS a fed catastrophic mbs guaranty, as opposed to additional guarantors as per crapo.  who knows. 

[Midas79]

there is a nascent PLS market starting up.  competition may simply mean offering PLS a fed catastrophic mbs guaranty, as opposed to additional guarantors as per crapo.  who knows.

 

Certainly possible. I just wonder what type of competition-promoting things the administration (including FHFA) can do without legislation. Might be a good question for Tim, though he won't read the memo until late today at the earliest.

[orthopa]

This is a well timed memo....

 

1. The white house throws in their 2 cents the day the congress wraps up their reform hearings.

2. As Midas mentions the desk of the president now acknowledges not putting the tax payer at risk for future bailouts, ie sweep.

 

 

This gives more then enough cover to stop the sweep IMO. If Treasury does it can point a finger at the President as he is involved now.

 

This certainly looks like the back and forth that was suspected by the former treasury official quoted in the Marketwatch article.

 

I think as alluded to the plan is already known. Otting said so right? He signed off, Mnuchin signed off, WH signed off, Calabria signed off.  The plan is known. Is this the cover to get it started?

 

The tone of the letter to me seems more like this is the plan and you can help then we need your help.

 

 

 

 

[rros]

This is a well timed memo....

 

1. The white house throws in their 2 cents the day the congress wraps up their reform hearings.

2. As Midas mentions the desk of the president now acknowledges not putting the tax payer at risk for future bailouts, ie sweep.

 

 

This gives more then enough cover to stop the sweep IMO. If Treasury does it can point a finger at the President as he is involved now.

 

This certainly looks like the back and forth that was suspected by the former treasury official quoted in the Marketwatch article.

 

I think as alluded to the plan is already known. Otting said so right? He signed off, Mnuchin signed off, WH signed off, Calabria signed off.  The plan is known. Is this the cover to get it started?

 

The tone of the letter to me seems more like this is the plan and you can help then we need your help.

I do not think the sweep will go. Fast, at least. If investorG is correct that Mnuchin wants 1 last shot at Congress, the sweep gives him a powerful leverage to force reform, even dictate the terms. If so, we could see a partial removal next quarter as a last message to Congress.

 

It makes too much sense for Mnuchin to want legislation. And the sweep -as a lever to force it-,  is an integral part.

[orthopa]

Reading through it again it appears as if the WH and Treasury/HUD will reform Fannie administratively , and then turn to congress for comprehensive reform.

 

1. "The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform."

 

2. "Treasury will prepare a reform plan for Fannie Mae and Freddie Mac."

 

3. "HUD will prepare a reform plan for the housing finance agencies it oversees."

 

4. "The Presidential memorandum calls for reform plans to be submitted to the President for approval as soon as practicable."

 

5."Critically, the Administration wants to work with Congress to achieve comprehensive reform that improves our housing finance system.

 

Looks like the reform plans from Treasury and HUD are could get approved before comprehensive reform gets going.

 

And FWIW we have gotten this far in the process this year with no mention of the evil hedge funds reaping a large windfall. Instead its "

We’re lifting up forgotten communities, creating exciting new opportunities, and helping every American find their path to the American Dream — the dream of a great job, a safe home, and a better life for their children"

[Midas79]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

[DRValue]

Finally some concrete signs of intention! Although they still haven't said exactly what they will do this is better than nothing.

 

I don't like the talk of competition and I don't read it as applying broadly to the private sector, more so to the gse's. Then again you can't raise capital without a clear picture of competition so it may not be too bad.

 

I wouldn't be surprised if the nws doesn't happen now. I don't see how it could affect calabria as it can be seen as coming from treasury and also he's got the party line vote.

The timing of this memo is also curious in respect of the nws date.

[investorG]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

wow this is thorough and professional.  and fairly direct.  one question - does the use of the words 'successor entities' on page 4 bother any of you?  does this mean receivership is actually still an option?

 

[DRValue]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

wow this is thorough and professional.  and fairly direct.  one question - does the use of the words 'successor entities' on page 4 bother any of you?  does this mean receivership is actually still an option?

 

As it mentions gse's in the same sentence I convinced myself it was referring to additional guarantors.

 

But I'm still nervous!

[investorG]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

wow this is thorough and professional.  and fairly direct.  one question - does the use of the words 'successor entities' on page 4 bother any of you?  does this mean receivership is actually still an option?

 

As it mentions gse's in the same sentence I convinced myself it was referring to additional guarantors.

 

But I'm still nervous!

 

I don't think it's referring to other guarantors.  hopefully by using those words it means if their charters are changed in the legislative route.  it's never easy...interested in others' views on this?

[DRValue]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

wow this is thorough and professional.  and fairly direct.  one question - does the use of the words 'successor entities' on page 4 bother any of you?  does this mean receivership is actually still an option?

 

As it mentions gse's in the same sentence I convinced myself it was referring to additional guarantors.

 

But I'm still nervous!

 

I don't think it's referring to other guarantors.  hopefully by using those words it means if their charters are changed in the legislative route.  it's never easy...interested in others' views on this?

 

I've re-read this and agree with you. A couple of observations;

 

It gives flexibility to leave the gse's as is or change them.

I didn't get the impression in all the other text that there was the potential for successors, in terms of receivership.

It could mean breaking them up, or combining them.

[Guest cherzeca]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

on balance, I find this to be a huge plus.

 

1. it comes from potus himself.  there can no longer any dispute that administrative reform of GSEs will occur, and will begin upon presentation of a plan as soon as practicable.

 

2. there is reference to authorizing FHFA director to approve guarantors of conventional mortgage loans in the secondary market (I am assuming this includes mbs)...but this will require legislation.  how likely will this congress pass legislation? how quickly once any such legislation is passed will fhfa director be ready to start approving guarantors...and how likely is it that any such competitors will line up to go head to head with the GSEs?  because the memo asks treasury to distinguish between things that can be accomplished administratively and only by legislation, it seems clear that the administration reform will not await congressional action.

 

3. while HUD is instructed to reform its programs to avoid duplication and it will remain the primary department focusing on low-income housing, by implication GSEs will continue their low housing mandates (which are currently mandated by statute).  so it would be likely that any additional guarantors approved by fhfa under any legislation passed by congress would likely also have such low income housing mandates. this is not what the banks want to have to undertake in forming competing guarantors.

 

4.  it is clear that the GSEs are to be released from conservatorship with their capital levels restored to a sound level.  this means that crapo's 2 pager is toast.

 

EDIT:  I saw successor entities...I just thought that was eye-wash.  the whole structure and other language of this memo is to get GSEs out of conservatorship.

[Midas79]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

wow this is thorough and professional.  and fairly direct.  one question - does the use of the words 'successor entities' on page 4 bother any of you?  does this mean receivership is actually still an option?

 

That's odd. I had glossed right over the "successor" part on my first read-through, but you are correct that it is a pretty important addition. Since that is the only place in the document that mentions successors, it might just be that someone forgot to delete that part. If that's really what Trump meant, shouldn't every mention of the GSEs include that language?

 

It could also mean that if the GSEs somehow burn through all their capital and go bankrupt after all, Treasury would provide support for whatever takes their place (probably through receivership) and that the support would be paid for.

 

Part (iv) doesn't mention successors directly, but I think it essentially does because the GSEs are the secondary housing finance market, or at least the part of it that would potentially need government support.

 

(iv) Providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market.

[orthopa]

Here is a more detailed version of the memo.

 

https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001

 

Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

 

on balance, I find this to be a huge plus.

 

1. it comes from potus himself.  there can no longer any dispute that administrative reform of GSEs will occur, and will begin upon presentation of a plan as soon as practicable.

 

2. there is reference to authorizing FHFA director to approve guarantors of conventional mortgage loans in the secondary market (I am assuming this includes mbs)...but this will require legislation.  how likely will this congress pass legislation? how quickly once any such legislation is passed will fhfa director be ready to start approving guarantors...and how likely is it that any such competitors will line up to go head to head with the GSEs?  because the memo asks treasury to distinguish between things that can be accomplished administratively and only by legislation, it seems clear that the administration reform will not await congressional action.

 

3. while HUD is instructed to reform its programs to avoid duplication and it will remain the primary department focusing on low-income housing, by implication GSEs will continue their low housing mandates (which are currently mandated by statute).  so it would be likely that any additional guarantors approved by fhfa under any legislation passed by congress would likely also have such low income housing mandates. this is not what the banks want to have to undertake in forming competing guarantors.

 

4.  it is clear that the GSEs are to be released from conservatorship with their capital levels restored to a sound level.  this means that crapo's 2 pager is toast.

 

EDIT:  I saw successor entities...I just thought that was eye-wash.  the whole structure and other language of this memo is to get GSEs out of conservatorship.

 

+1 There is an entire section (xi) that specifies requirements for the GSEs to have conservatorship terminated, (A), (B), ©. This is what I think your are referring to and IMO leaves the door open for others to have to compensate for guarantees.  This entire memorandum signals moving forward, a clear delineation of what needs to be done and a prudent separation of what is administrative or legislative. Recievership is out the window, as are undercapitalized GSEs.

 

The key now is A, B, C of (xi).

 

Safety and Soundness means one thing; capital. Getting out of the political and reform weeds it will be interesting to see if Sr. Pfd is declared paid down.

 

Maybe Im naive but I dont see a reason for the prfd to be trading at less then 35% of par. The GSEs are getting recapped, there is no receivership, and IMO behind the scenes Paulson/Otting/Mnuchin et al are firmly in the drivers seat. Where the rub? Time to wait still?

 

 

 

 

[Guest cherzeca]

@orthopa

 

I think this memo gives otting cover as an "independent" agency director to not make the dividend distribution 3/31.  we shall see

[Guest cherzeca]

clearly administration doesn't believe congress will do anything, as memo provides for payment of a fee for an explicit OR implicit guarantee.  not sure how you price an implicit guarantee but GSEs will be paying it once admin reform is done. payment of an implicit guarantee fee is actually a good signal to market that govt will bail again if necessary

[Guest cherzeca]

I thought this was interesting:  admin plans submitted to potus through kudlow.  https://www.marketwatch.com/story/kudlow-who-called-fannie-freddie-profit-sweep-a-scam-is-at-center-of-white-house-housing-reform-plans-2019-03-27

[orthopa]

I thought this was interesting:  admin plans submitted to potus through kudlow.  https://www.marketwatch.com/story/kudlow-who-called-fannie-freddie-profit-sweep-a-scam-is-at-center-of-white-house-housing-reform-plans-2019-03-27

 

Yep another sympathizer. Perfect storm it seems.  :)

[SnarkyPuppy]

I think everyone is over complicating what is obvious:

 

Announce plan for broader reform simultaneously with specific administrative steps to be taken to protect taxpayers and recommendations to congress for broader legislative steps: 

1. Legislative recommendations

a.  Ask federal charters to be modified to allow for private competition and explicit paid for catastrophic guarantee

b.  Other recommendations (such as changes to affordable housing specifics or ginnie item mentioned by cherz recently which are not relevant to our thesis)

 

2.  Administrative actions to reduce taxpayer risk

a.  Amend agreement to original contract terms and deem fully repaid (10% moment) consistent w/ mulvaney prior legislation and w/ Calabria's views on NWS

b.  Finalize capital requirements

c.  Implement capital requirements through some moelis type recap

d.  Unwind govt "line of credit" relative to recap progress (moelis)

e.  FHFA to deem conservatptship ended once these steps have been accomplished

 

When asked why administrative actions are being taken without approval by congress:

- lack of capital exposes taxpayers and does not adequately price current explicit limited backstop under all scenarios

- existence of SPSA and conservatorship does not allow capital to build (secondary offering)

- government makes $150bn and private capital bears risk of impairment of net income stream

- explain conservatoeship and SPSA are mutually exclusive from congress reforms and for reasons described above create hidden taxpayer risk

- won't be said but will be true:  congress can't do jack sh1t

 

Just going to leave this here

[Luke 532]

Just going to leave this here

 

:D

[rros]

@orthopa

 

I think this memo gives otting cover as an "independent" agency director to not make the dividend distribution 3/31.  we shall see

I do not believe anything in this memo supports the idea that the sweep stops 3/31. Instead, I think it supports the idea that Congress is in play. There is hope, though.

 

By far, the most favorable paragraph for us is Section 1, c).

 

It establishes the basis for the dual track investorG was hoping for. We will have to wait until Treasury outlines specifically what is they can do w/o Congress and this will likely include how a recapitalization may be done (steps, time frame), with details on how warrants and Jrs. will be treated and how a compensation for an implicit guarantee might replace the sweep. My view is that sweeping will stop only after this outline clears Treasury's desk and is approved by Trump. Somehow, I have the feeling that Trump himself wants the credit for stopping it.

 

The emphasis on the word 'competition' -it is both in the introduction as well as within sections of the memo-, tells us Trump supports Congressional involvement (change of charters). Within this context, the words "successors" and "explicit/implicit" may find a better interpretation. If the idea is to split reform Admin-Cong, both the implementation of the "explicit" part as well as the determination to change GSEs charters to allow for more guarantors fall on Congress' lap. The "implicit" part is then on the administrative side.

 

As was mentioned before: compensation/implicit are incompatible by their nature. The very action of compensating eliminates implicitness. Why was this added? Likely, it opens the doors for replacing the sweep with a different compensatory mechanism, administratively (commitment fee + guarantee fee). It's the only hint I could find indicating the end of the NWS.

 

What is troubling about this memo is that it directs Treasury to work on a multi-guarantor system directly colliding with much of what we heard today in the Senate hearing.. While we may not see it in our lifetime and while the companies may be fully recap before Congress initiates any dramatic change, questions is, will they be out of c-ship?

 

And if c-ship extends, will a full recap be enough for the Jrs. to achieve par? I personally see them trading between $10 and $14 next quarter.

[rros]

Just going to leave this here

 

:D

Smart!