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

[allnatural]

https://www.autonomous.com/

[Midas79]

I agree with cherzeca, there have been many other great quality posts recently. Thank you to everyone for those.

 

 

[allnatural]

Craig Phillips back in the spot light! He is a keynote speaker next week to talk housing reform...

 

https://nextdc19.splashthat.com/

 

"Keynote Speaker: Craig Philips

09:00 AM  09:45 AM

 

What to Expect from Treasury's Housing Plans and Nonbank Financials, Fintech and Innovation"

[asterisk]

Craig Phillips back in the spot light! maybe there is some truth to Todd's post. He is a keynote speaker next week to talk housing reform...

 

https://nextdc19.splashthat.com/

 

"Keynote Speaker: Craig Philips

09:00 AM  09:45 AM

 

What to Expect from Treasury's Housing Plans and Nonbank Financials, Fintech and Innovation"

 

Are officials like Philips subject to any NDA or are they barred from speaking about their work for a period of time? It is interesting that he is speaking out now. Maybe it is because he was relaxing or maybe not...

[Guest cherzeca]

the best info is the info that needs to be deleted

[allnatural]

Full video https://video.foxbusiness.com/v/6104597630001/#sp=show-clips

[SnarkyPuppy]

Just had some thoughts - curious to hear if there's something missing in the below logic-

 

Is it not beneficial to us for them to hold off on modifying the SPSA for as long as possible?  The future SPSA amendment (if done in one shot) will likely eliminate the outstanding liquidation preference ending the net worth sweep, but it will also introduce a periodic commitment fee for the existing explicit backstop. 

 

Said another way, $x of earnings today go to building capital. Once the commitment fee is introduced for some amount $y, incremental capital build will be = $x minus $y, effectively slowing down the speed of building capital.

 

Of course, the liquidation preference today is being increases 1 for 1 with $x, but if I understand correctly we've actually surpassed the "10% moment", so there is room for further increases in liquidation preference while remaining above the "10% moment".  In fact, if you have the exact math behind how the administration is calculating the 10% moment, you can probably back into the timing of the SPSA amendment we're all looking forward to. 

[allnatural]

A simple workaround is to simply announce what the commitment fee would be, but not activate it until all conditions of exiting conservatorship are met so no fee is required in interim. Also rosners point is you can't direct the GSEs to come up with a capital restoration plan without knowing the status of spspa so this needs to be addressed sooner rather than later.

[allnatural]

Looks like its just that time of the year -

[onyx1]

I recognize I’m leap frogging ahead, but assuming we face a future decision to convert Jrs to common, nothing will cut my interest in owning a converted-to-common position faster than a threat of the NWS monster returning during the next housing downturn. 

 

I expect investors in a future public offering will also demand protection from government overreach, and I don’t think verbal assurances like “sorry, won’t happen again” from the FHFA will cut it.

 

Calabria expects the lawsuits will “go away” with a new PSPA amendment/Sr. liquidation write down.  If Rosner is right on timing, the lawsuits will be “moot” sometime in Q1 2020.

 

Without a definitive legal decision declaring the illegality of the NWS, where and in what form will shareholders get comfort?  An act of Congress clarifying the HERA language?  If part of a settlement agreement with plaintiffs, will it be enforceable?

[Guest cherzeca]

I recognize I’m leap frogging ahead, but assuming we face a future decision to convert Jrs to common, nothing will cut my interest in owning a converted-to-common position faster than a threat of the NWS monster returning during the next housing downturn. 

 

I expect investors in a future public offering will also demand protection from government overreach, and I don’t think verbal assurances like “sorry, won’t happen again” from the FHFA will cut it.

 

Calabria expects the lawsuits will “go away” with a new PSPA amendment/Sr. liquidation write down.  If Rosner is right on timing, the lawsuits will be “moot” sometime in Q1 2020.

 

Without a definitive legal decision declaring the illegality of the NWS, where and in what form will shareholders get comfort?  An act of Congress clarifying the HERA language?  If part of a settlement agreement with plaintiffs, will it be enforceable?

 

one more consideration:  the NWS was a creature of the HERA conservatorship. once the GSEs go from "in conservatorship" to "consent decree" phase, the conservator no longer has the power to try another NWS (never had the power to do it in first place as collins points out).  that is why this "consent decree" phase that fhfha has recently confirmed is so important...to answer the very question of new investors that you just articulated

[onyx1]

I recognize I’m leap frogging ahead, but assuming we face a future decision to convert Jrs to common, nothing will cut my interest in owning a converted-to-common position faster than a threat of the NWS monster returning during the next housing downturn. 

 

I expect investors in a future public offering will also demand protection from government overreach, and I don’t think verbal assurances like “sorry, won’t happen again” from the FHFA will cut it.

 

Calabria expects the lawsuits will “go away” with a new PSPA amendment/Sr. liquidation write down.  If Rosner is right on timing, the lawsuits will be “moot” sometime in Q1 2020.

 

Without a definitive legal decision declaring the illegality of the NWS, where and in what form will shareholders get comfort?  An act of Congress clarifying the HERA language?  If part of a settlement agreement with plaintiffs, will it be enforceable?

 

one more consideration:  the NWS was a creature of the HERA conservatorship. once the GSEs go from "in conservatorship" to "consent decree" phase, the conservator no longer has the power to try another NWS (never had the power to do it in first place as collins points out).  that is why this "consent decree" phase that fhfha has recently confirmed is so important...to answer the very question of new investors that you just articulated

 

 

That's a reasonable argument, and I believe it will satisfy investors for the near future and hopefully through the public offering.

 

But once free of the consent decree shareholders don't have any protection against a scenario down the road where:  (1) housing downturn, leads to (2) fear of losses, triggers (3) over reserving "to be safe", and panicked regulators (4) impose another conservatorship & money grab to "protect the taxpayers" and the new government backstop.

 

Yes, this is a hypothetical scenario.

 

But the government operators have a terrible track record in their treatment of shareholders.  The NWS was bad enough, but add the egregious sale of Jr. preferred in the summer of 2009.  Regulators gave investors assurances that the GSEs were "adequately capitalized" only to throw them in conservatorship a few weeks later. 

 

With the risk of government abuse, it's hard for me to put the common into the category of a long-term holding.

 

I am hoping for comfort, and recognize maybe it's a pipe dream.

[Guest cherzeca]

@onyx

 

I just dont think that is a material risk once GSEs come out of conservatorship. recall that the GSEs had only about .5% capital as SOP before GFC.  and they handled that thin capitalization quiet well for a long time.  now they will have substantially more capital.  I see the business model as becoming much more stable, for a business that was already very stable.  the mortgages that propelled the GFC are no longer being made, and while high DTA loans are being made, that would appear to be easily handled with higher capital level and capable underwriting (which the GSEs are very good at).  assuming that there is an exchange of junior preferred for common, then everybody will need to have a fresh look at the landscape, and make their decisions at that time imo. 

[SnarkyPuppy]

Onyx- interesting points but I think cherz is on the money.  They will have significantly more capital and will also potentially have an explicit line of credit standing behind it.

 

In my informal notes I have the following:

- combined f&f cash losses during financial crisis = $64bn.  Could add $18bn on top for DTAs currently on the books as of 9/30/2019

- 2019 2-year stress testing results = $43bn

 

Minimum Capital will almost definitely be $104-$140bn, and minimum+risk based will likely be $160-$220bn. 

[onyx1]

@cherz

@snark

 

Thanks for the thoughtful replies.

 

It appears this is playing out to be an investment in a higher quality guarantor with substantially more capital than history has shown was ever needed, but with some legally unresolved government overreach risk that may affect share valuation.  Especially in times of housing stress.

 

Best,

 

Onyx

[Luke 532]

 

Judge Sweeney questions government on @USTreasury loan that could never be paid back. Uses phrase "death grip." #GSEs #housingfinance #Fairholme

[Luke 532]

FHFA will re-propose capital rule for Fannie, Freddie

https://www.americanbanker.com/news/fhfa-will-re-propose-capital-rule-for-fannie-mae-freddie-mac

[Guest cherzeca]

fnma prefs just took a dive.  anyone know why? seems to me unlikely Sweeney would rule from bench and I don't see that Calabria is reproposing is such a bad idea given that the last watt rule was problematic

[Jcmeg35]

fnma prefs just took a dive.  anyone know why? seems to me unlikely Sweeney would rule from bench and I don't see that Calabria is reproposing is such a bad idea given that the last watt rule was problematic

 

My guess is that the market is taking the capital rule reproposal as a negative, assuming it will be a higher amount, and or will delay the process for release.

 

Edit: it also creates more general uncertainty, which the market obviously hates.

[Midas79]

fnma prefs just took a dive.  anyone know why? seems to me unlikely Sweeney would rule from bench and I don't see that Calabria is reproposing is such a bad idea given that the last watt rule was problematic

 

More delays. Anything that pushes the timeline beyond the election introduces a ton of risk.

 

Josh Rosner thinks that the rule is actually ready to go, which would be fine with me.

[Luke 532]

Josh Rosner thinks that the rule is actually ready to go, which would be fine with me.

 

Then why re-propose it as they just announced they are doing?

[Guest cherzeca]

at least fhfa's financial advisor will have some input, and I cant see them trying to make it harder to raise capital for the GSEs.

[investorG]

Muscleman -- I'm guessing you're out there -- well done.  you kept your composure and call in the face of unnecessary hostility and were proven correct. 

 

The team appears to have lazily punted.  The summer articles about this issue being too-hot-to-handle politically pre-election were likely correct.

 

I believe the shares represent great value. but it's not our time for a positive resolution.  good luck!

 

[DRValue]

Capital plan "sometime next year".

 

Flip.

 

Still, Calabria's recent comments around making any capital rule economically viable might work in our favour in the long run.

 

Sigh. Welp.

[orthopa]

I think its pretty clear delay, delay is the name of the game. Why of course Im not privy to. Maybe dont want to deal with election risk? Want courts to decide? I have also thought that maybe FHFA wants another PSPA agreement before doing the capital rule and capital raise plan which makes sense.

 

Its clear there has been a material change even since this summer on urgency starting with the delay of the plan. I think many are sick of waiting. Sometime in 2020? Shit could be a year from now although unlikely. I don't think anyone honestly has an idea now of a general timeline based on what Calabria has said. Everything is convoluted. Market will default to worst case which is what? 22-23 till this is all said and done?

 

Im not changing my investment thesis for the endgame but surely disappointed on what we were spoon fed since January.