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

[Jcmeg35]

I know this has been discussed quite extensively here and on Tim Howard's blog, but since we seem to be just a couple of weeks away at this stage, I wonder what others' current thinking is about the risk of Calabria repurposing a higher capital level vs. what Watt already put out.

 

I have become increasingly concerned given his constant drumbeat for "leveling the playing field" and "bank-like capital" etc., and potentially repurposing, combined with the fact that there is not an advisor fully on board yet to temper his misguided thinking - that we get something with a 4 handle on it. Curious what others think.

 

Thanks in advance.

[Luke 532]

I know this has been discussed quite extensively here and on Tim Howard's blog, but since we seem to be just a couple of weeks away at this stage, I wonder what others' current thinking is about the risk of Calabria repurposing a higher capital level vs. what Watt already put out.

 

I have become increasingly concerned given his constant drumbeat for "leveling the playing field" and "bank-like capital" etc., and potentially repurposing, combined with the fact that there is not an advisor fully on board yet to temper his misguided thinking - that we get something with a 4 handle on it. Curious what others think.

 

Thanks in advance.

 

I believe Calabria will go with a 4%+ level.  I hope he doesn't, but I think he will for the two reasons you mentioned above (level the playing field and bank-like capital levels).

[investorG]

I know this has been discussed quite extensively here and on Tim Howard's blog, but since we seem to be just a couple of weeks away at this stage, I wonder what others' current thinking is about the risk of Calabria repurposing a higher capital level vs. what Watt already put out.

 

I have become increasingly concerned given his constant drumbeat for "leveling the playing field" and "bank-like capital" etc., and potentially repurposing, combined with the fact that there is not an advisor fully on board yet to temper his misguided thinking - that we get something with a 4 handle on it. Curious what others think.

 

Thanks in advance.

 

4-handle = not good. ~5x stress credit losses, hard working Americans pay higher mortgage rates.  large blowback likely.  can't rule it out though.  imo we're rooting for near the same end levels as watt but using more refined inputs / rationale.

[SnarkyPuppy]

I haven't looked at the capital level question in much detail because I don't think it's material to the thesis - primarily because Calabria will be required to recognize reality if he expects to re-IPO $100-200bn. 

 

With that said - is everyone's analysis taking into consideration the fact that part of a 4% capital requirement may be met through credit risk transfers?  Reducing the effective hard capital requirements down to an amount < 4% and much more reasonable for recapping?

[Guest cherzeca]

If the rumor is correct that treasury and fhfa have sounded out investment banks about raising money then this issue would have been discussed as well. And the advice would have been don’t go too high. Whether fhfa follows this advice is unknown.

 

To start a betting pool I wager one cobf chip that it will come out as $100B on a combined basis.

[investorG]

I haven't looked at the capital level question in much detail because I don't think it's material to the thesis - primarily because Calabria will be required to recognize reality if he expects to re-IPO $100-200bn. 

 

With that said - is everyone's analysis taking into consideration the fact that part of a 4% capital requirement may be met through credit risk transfers?  Reducing the effective hard capital requirements down to an amount < 4% and much more reasonable for recapping?

 

yes on CRT as that probably impacted the stress test results which likely is a factor in the required capital levels. 

 

Another factor is the breakdown between common equity, preferred equity, and subordinated debt.  while Calabria perhaps prefers ~4pct total loss absorbing capacity it can be more manageable to mortgage rates if he throws some portion (1-2pp) into the latter 2 categories which carry lower required rates of return for investors.

[Guest cherzeca]

Sub debt =/=capital

[investorG]

Sub debt =/=capital

 

it's not equity capital. it is however often Tier 2 capital (total capital ratios) and included in TLAC, total loss absorbing capacity.  it can be used as an additional layer of protection on top of equity capital and before the untouchables (govt bailout, senior debt, mbs debt, deposits, etc).

[Guest cherzeca]

Not applicable given the rubric set forth in proposed rule.

[Midas79]

If the rumor is correct that treasury and fhfa have sounded out investment banks about raising money then this issue would have been discussed as well. And the advice would have been don’t go too high. Whether fhfa follows this advice is unknown.

 

To start a betting pool I wager one cobf chip that it will come out as $100B on a combined basis.

 

There are three different capital levels to consider, and perhaps four.

• Full, top-line risk-based
  
• Full, top-line minimum
  
• Capital needed for release with consent agreement
  
• (this last one might also be split into minimum and risk-based)
  

 

When we hear things like 4%, that's generally referring to the first of these. But it's really the third, and the core capital needed for it, that should be concerning us and new investors. Lots of things can mitigate risk-based capital, the same cannot be said for minimum capital.

 

There are four capital classification levels in HERA. https://www.law.cornell.edu/uscode/text/12/4614

• Adequately capitalized: Meets both risk-based and minimum capital standards
  
• Undercapitalized: Meets minimum capital standard but not risk-based
  
• Significantly undercapitalized: Meets neither standard, but has core capital above the critical capital level (half the statutory minimum)
  
• Critically undercapitalized: Meets neither standard and has core capital below the critical capital level
  

 

FnF's core capital is hugely negative right now, but getting rid of the seniors brings it back to positive. With the retained earnings FnF have now, they should have enough to get to "significantly undercapitalized" once the seniors are gone.

 

One bit of speculation I saw is that the trigger for release with consent agreement might be moving from "significantly undercapitalized" to just "undercapitalized". If this is true, note that "undercapitalized" requires meeting Calabria's minimum capital standard in full. If he sets it near Watt's, we are looking at a minimum capital requirement of $100-140B that must be met prior to release.

 

For a while it was looking like FnF might not need to raise that much capital in a stock offering, but Calabria asked a couple of times if anyone has $100B lying around to recap FnF. Release at "undercapitalized" supports a $100B equity raise.

[Midas79]

Going further along this line of thinking, Calabria and FnF has different authorities and obligations depending on whether the companies are classified "undercapitalized" or "significantly undercapitalized".

 

Undercapitalized: https://www.law.cornell.edu/uscode/text/12/4615

Significantly undercapitalized: https://www.law.cornell.edu/uscode/text/12/4616

 

A big one, in my opinion, is 4616(a)(2)(B), which would make it difficult (if not impossible) for junior pref dividends to be paid while FnF are still classified "significantly undercapitalized".

 

(B) Standard for approval

 

The Director may approve a capital distribution by a regulated entity classified as significantly undercapitalized only if the Director determines that the distribution (i) will enhance the ability of the regulated entity to meet the risk-based capital level and the minimum capital level for the regulated entity promptly, (ii) will contribute to the long-term financial safety and soundness of the regulated entity, or (iii) is otherwise in the public interest.

 

Perhaps Calabria could find a way to weasel out of this, but it would be much easier to pay dividends if FnF were just "undercapitalized" instead.

 

(3) Restriction on capital distributions

 

A regulated entity that is classified as undercapitalized may not make any capital distribution that would result in the regulated entity being reclassified as significantly undercapitalized or critically undercapitalized.

 

Furthermore, if Calabria does allow release at "significantly undercapitalized", he will still have pretty tight control over the rest of the capital raise process.

 

(3) Acquisition of new capital

 

Require the regulated entity to acquire new capital in a form and amount determined by the Director.

 

...

 

(A) New election of board

 

Order a new election for the board of directors of the regulated entity.

 

Anyone with the idea that FnF will be released at "significantly undercapitalized" and that the boards of directors will have control over how to build the rest of the capital is sorely mistaken. Calabria would remain in control.

[Guest cherzeca]

@midas

 

thanks for that.  Re "Undercapitalized: Meets minimum capital standard but not risk-based", that would be $140B or $100B on a combined basis as per the proposed rule, depending on whether 2.5% of assets or birfurcated rule (Table 7, fhfa proposed rule).  Right?

[Midas79]

@midas

 

thanks for that.  Re "Undercapitalized: Meets minimum capital standard but not risk-based", that would be $140B or $100B on a combined basis as per the proposed rule, depending on whether 2.5% of assets or birfurcated rule (Table 7, fhfa proposed rule).  Right?

 

Yes, those are the right numbers if Calabria adopts Watt's rule as-is.

[Luke 532]

Interesting article on how using the threat of receivership might be to get a settlement done.

 

https://www.housingwire.com/articles/did-mnuchin-and-calabria-cite-fannie-mae-freddie-mac-receivership-as-a-threat/

 

“Receivership would be the threat to get all of the parties to cut a deal.”

[orthopa]

Interesting article on how using the threat of receivership might be to get a settlement done.

 

https://www.housingwire.com/articles/did-mnuchin-and-calabria-cite-fannie-mae-freddie-mac-receivership-as-a-threat/

 

“Receivership would be the threat to get all of the parties to cut a deal.”

 

I kind of see the angle there are taking but this guy has been wrong all along from start to finish on Fannie. I think the receivership option discussion was a show for the idiots at the hearing. When listening to the context of the discussion it was in response to questions that question whether some people (hedge funds) were to stand to make a windfall in privatization. Mnuchin even walks back from receivership as an option towards the end.

[fanniequestions]

Interesting article on how using the threat of receivership might be to get a settlement done.

 

https://www.housingwire.com/articles/did-mnuchin-and-calabria-cite-fannie-mae-freddie-mac-receivership-as-a-threat/

 

Receivership would be the threat to get all of the parties to cut a deal.

 

I kind of see the angle there are taking but this guy has been wrong all along from start to finish on Fannie. I think the receivership option discussion was a show for the idiots at the hearing. When listening to the context of the discussion it was in response to questions that question whether some people (hedge funds) were to stand to make a windfall in privatization. Mnuchin even walks back from receivership as an option towards the end.

 

I'm curious why any attention is still on the 10/22 mandatory hearing when the 10/23 interview Calabria chose to be on resulted in:

1) 19:45 minutes: CALABRIA CLARIFIES THAT HIS COMMENT TO WIPING OUT SHAREHOLDERS IS ONLY WHEN A COMPANY BECOMES INSOLVENT.  THIS IS THE LAW.

2) 24:30 minutes: CALABRIA SAID FANNIE WAS INSOLVENT IN 2008-2012. FANNIE IS HUGELY PROFITABLE NOW.

3) 27 minutes: THE LAW SAYS THERE ARE ONLY TWO CHOICES...FIX AND REALEASE OR RECEIVERSHIP.  SINCE RECEIVERSHIP CANNOT HAPPEN DUE TO POINTS 1 & 2, THE ONLY OPTION IS FIX AND RELEASE.

 

refer to

[SnarkyPuppy]

Interesting article on how using the threat of receivership might be to get a settlement done.

 

https://www.housingwire.com/articles/did-mnuchin-and-calabria-cite-fannie-mae-freddie-mac-receivership-as-a-threat/

 

“Receivership would be the threat to get all of the parties to cut a deal.”

 

I kind of see the angle there are taking but this guy has been wrong all along from start to finish on Fannie. I think the receivership option discussion was a show for the idiots at the hearing. When listening to the context of the discussion it was in response to questions that question whether some people (hedge funds) were to stand to make a windfall in privatization. Mnuchin even walks back from receivership as an option towards the end.

 

I'm curious why any attention is still on the 10/22 mandatory hearing when the 10/23 interview Calabria chose to be on resulted in:

1) 19:45 minutes: CALABRIA CLARIFIES THAT HIS COMMENT TO WIPING OUT SHAREHOLDERS IS ONLY WHEN A COMPANY BECOMES INSOLVENT.  THIS IS THE LAW.

2) 24:30 minutes: CALABRIA SAID FANNIE WAS INSOLVENT IN 2008-2012. FANNIE IS HUGELY PROFITABLE NOW.

3) 27 minutes: THE LAW SAYS THERE ARE ONLY TWO CHOICES...FIX AND REALEASE OR RECEIVERSHIP.  SINCE RECEIVERSHIP CANNOT HAPPEN DUE TO POINTS 1 & 2, THE ONLY OPTION IS FIX AND RELEASE.

 

refer to

 

I just looked at each timestamp in your video you posted - and your notes don't really align to what he actually says.  Not sure what I'm missing here / the point of this?

[SnarkyPuppy]

Midas - thank you very much for posting your thoughts on the capital requirements. 

 

I think the housingwire article makes one decent point although I think it's moot given the obvious move towards a re-IPO and the requirement to eliminate the lawsuits to facilitate new capital.  "This is an issue to watch as the argument could be that Fannie and Freddie would have to be compliant with the new capital standard by a certain date. If they are not compliant by that date, then it could be possible to trigger receivership. We don’t see this as a desired result as it would likely result in a decade of litigation and it could disrupt housing finance."

 

With that said, what is stopping Calabria from stating that the GSEs are currently "Critically Undercapitalized" and therefore "insolvent".  Or are the two terms not synonymous under the statute?  I just did a quick search under HERA and it's not clear how "insolvency" is defined.    If "Critically Undercapitalized" ~= "insolvent" - then why is everyone adamant that receivership is technically not possible? 

 

Again from a practical perspective I don't see the value in moving them to receivership.  But I see some people stating that it's not technically possible and it's not clear where that's coming from.

[Mephistopheles]

Interesting article on how using the threat of receivership might be to get a settlement done.

 

https://www.housingwire.com/articles/did-mnuchin-and-calabria-cite-fannie-mae-freddie-mac-receivership-as-a-threat/

 

“Receivership would be the threat to get all of the parties to cut a deal.”

 

I kind of see the angle there are taking but this guy has been wrong all along from start to finish on Fannie. I think the receivership option discussion was a show for the idiots at the hearing. When listening to the context of the discussion it was in response to questions that question whether some people (hedge funds) were to stand to make a windfall in privatization. Mnuchin even walks back from receivership as an option towards the end.

 

I'm curious why any attention is still on the 10/22 mandatory hearing when the 10/23 interview Calabria chose to be on resulted in:

1) 19:45 minutes: CALABRIA CLARIFIES THAT HIS COMMENT TO WIPING OUT SHAREHOLDERS IS ONLY WHEN A COMPANY BECOMES INSOLVENT.  THIS IS THE LAW.

2) 24:30 minutes: CALABRIA SAID FANNIE WAS INSOLVENT IN 2008-2012. FANNIE IS HUGELY PROFITABLE NOW.

3) 27 minutes: THE LAW SAYS THERE ARE ONLY TWO CHOICES...FIX AND REALEASE OR RECEIVERSHIP.  SINCE RECEIVERSHIP CANNOT HAPPEN DUE TO POINTS 1 & 2, THE ONLY OPTION IS FIX AND RELEASE.

 

refer to

 

I just looked at each timestamp in your video you posted - and your notes don't really align to what he actually says.  Not sure what I'm missing here / the point of this?

 

But he does say that in the video. They asked him about wiping out shareholders, and he said that's what should have happened in 2008. He said the companies were insolvent back then thus the government was wrong to make a deal that preserved 20% stake for public holders. Had the shareholders been wiped out there wouldn't be extensive litigation is what he says.

 

Now they're not insolvent, they have capital and building more, and are profitable. No reason to wipe out shareholders

[orthopa]

Midas - thank you very much for posting your thoughts on the capital requirements. 

 

I think the housingwire article makes one decent point although I think it's moot given the obvious move towards a re-IPO and the requirement to eliminate the lawsuits to facilitate new capital.  "This is an issue to watch as the argument could be that Fannie and Freddie would have to be compliant with the new capital standard by a certain date. If they are not compliant by that date, then it could be possible to trigger receivership. We don’t see this as a desired result as it would likely result in a decade of litigation and it could disrupt housing finance."

 

With that said, what is stopping Calabria from stating that the GSEs are currently "Critically Undercapitalized" and therefore "insolvent".  Or are the two terms not synonymous under the statute?  I just did a quick search under HERA and it's not clear how "insolvency" is defined.    If "Critically Undercapitalized" ~= "insolvent" - then why is everyone adamant that receivership is technically not possible? 

 

Again from a practical perspective I don't see the value in moving them to receivership.  But I see some people stating that it's not technically possible and it's not clear where that's coming from.

 

Technically your right. He probably could move them to receivership, but as you also mention what is the value? Again these were obviously throw away statements for the hearing which no doubt did perk up peoples ears.

 

Moving to receivership would  go against nearly everything Calabria has said since being confirmed.

 

1. Lawsuits go away when NWS goes away

2. Increasing capital threshold to 45B and the document saying another amendment coming.

3. FHFA hiring a financial advisor.

4. Comment on CNBC on whether preferred gets par or conversion

5. Meeting regarding consent decree

6. Im going to follow the law of HERA, and not waiting for congress.

 

 

It an interesting point of discussion but zero chance of happening IMO. Calabria was conveniently hand picked to do this job and it wasn't for receivership.  Just the opposite, and as expected he is moving and talking his way to the end objective.

 

I also think its interesting that the day after the hearing and receivership talk the WSJ article comes out of no where talking about "sources" and Treasury talking to banks and early footsteps for raising capital. That was some very good timing to contradict what was said dont cha think? The media has been used a couple times to clear up misconceptions in this manner over the past couple of months.

[Luke 532]

FHFA Releases New Strategic Plan and Scorecard for Fannie Mae and Freddie Mac

 

Plan: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019-Strategic-Plan.pdf

 

Scorecard: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2020-Scorecard-10282019.pdf

[Luke 532]

Calabria today at MBA.  Doesn't sound like they might revise the PSPA, sounds like they definitely will.  Not that this is a surprise to anybody here, but nice to hear him say it to the MBA crowd.

"I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships."

[orthopa]

Calabria today at MBA.  Doesn't sound like they might revise the PSPA, sounds like they definitely will.  Not that this is a surprise to anybody here, but nice to hear him say it to the MBA crowd.

"I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships."

 

Hopefully by year end as he originally mentioned this past summer.

[Luke 532]

 

.@FHFA @MarkCalabria @ #MBAAnnual19: "FHFA is also working on a capital rule that balances the imperative of protecting taxpayers, the mission of supporting liquidity, and the economic incentives of raising private capital." $FNMA $FMCC

[Guest cherzeca]

Calabria's MBA prepared remarks:  https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-at-MBA-2019-Annual-Convention-and-Expo.aspx