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

[Guest Covid-19_Survivor]

Since people are beginning to worry about a recession, I figured FHFA's / Calabrias stress test from late last year will come in helpful to illustrate the impact to the GSEs, which highlights the GSEs are much more resilient businesses today than they were pre-2008.

 

Link: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf

 

The stress test assumes a "severe global recession" that lasts for 2 years in which GDP declines by 8%, unemployment spikes to 10%, and housing prices declines by 30%. In this scenario, the GSEs have a combined loss of $18b, which increases to $43b when including the "impact of establishing valuation allowance on deferred tax assets". Keep in mind the GSEs DTA balance has since to decreased to $18b, so looking at a total loss of $36b over 2 years.

 

For reference, the GSEs currently have ~$24b of combined capital, projected to increase to ~$28b after Q1, with expectations for a weak Q2 as of now. The big unknown is what does 2H 2020 look like? Is corona dealt with by then or are we still feeling the effects?

 

I'd like to add that they were both resilient in '08 too, but some hanky-panky got them conservorship'd anyway. For those of us looking to add, decrease or maintain, though, it's not about that. It's about how low can they go before the pain becomes intolerant. Personally, I fear my portfolios becoming FnF JP's, period, and as smart as that could be I don't think doing so is ever smart.

[investorG]

Questions for everyone. Let's assume the data will prove that there is/will be a recession this year:

 

(1) In your opinion, how many months will that delay the capital rule being reproposed?

 

(2) In your opinion, how many months will that delay the capital rule being finalized?

 

(3) In your opinion, how many months will that delay the consent decree from being executed?

 

(4) In your opinion, how many months will that delay the amendment to the PSPA?

 

Note: I am not asking about raising capital via a "re-IPO"/SPO.  I'm specifically asking about delays to the steps before they raise external capital.

 

Thanks.

 

This could go a few ways. 

 

Most likely they stall and worry about it later.

 

Another option is move towards nationalization / receivership, he's repeatedly and recently said he would do this if conditions warranted.  Courts could decide sr pref fate.

 

A good option would be a) 4th amendment which eliminates the warrants + sr pref (the govt has made plenty) and institutes a fair commitment fee  b) settle collins + lamberth  c) convert jr pref to common @ some meaningful discount to par and d) inject ~50bn of private equity money at a low common equity price in conjunction with re-listing/consent/exit/etc...

[Guest cherzeca]

you are not going to see either nationalization or warrants cancelled.  this thread is going south

[Luke 532]

 

PHH attorney gives Seila Law predictions - https://t.co/1bNNB6Sbeq - As the lead attorney for PHH Corp., Mitch Kider led the team of lawyers who first argued that the bureau’s single-director, for-cause only removal structure was unconstitutional.

 

PHH appealed a $109 million jud

[Guest Covid-19_Survivor]

So, last week was mostly a liquidity event, and our juniors were trounced mostly? because of that.

 

But I'm concerned about how they didn't start to recover as other good bets did latter day Friday, and I've had this thought: Italy suspended mortgage paying, would or could US do the same? If so how would that work?

 

Thanks,

In since '12 having done nothing but add. To the point where JP's are now 30% of my wealth.

 

Not sure why that was an apparently dumb question. Either this entire scare is mostly bull or a freeze on mortgage payments is coming. How would it work? Being conservators, could FHFA just demand FnF cover losses?

[Guest cherzeca]

So, last week was mostly a liquidity event, and our juniors were trounced mostly? because of that.

 

But I'm concerned about how they didn't start to recover as other good bets did latter day Friday, and I've had this thought: Italy suspended mortgage paying, would or could US do the same? If so how would that work?

 

Thanks,

In since '12 having done nothing but add. To the point where JP's are now 30% of my wealth.

 

Not sure why that was an apparently dumb question. Either this entire scare is mostly bull or a freeze on mortgage payments is coming. How would it work? Being conservators, could FHFA just demand FnF cover losses?

 

it was a dumb question because we are not Italy....yet

[Wiggins]

Respectfully, I don't think this is a dumb question at all. To date, the US is on same trajectory as Italy. US cases are rising just as fast and testing has lagged similarly to Italy, unlike South Korea. In fact it's possible the US situation ends up being worse. It's hard to know for sure, but we'll know either way within a short 2 weeks.

That having been said, I don't think it will be as bad in the US as it was in Italy. The US population is not as old as Italy's and the US has greater healthcare resources and greater industrial capacity to ramp up production of ventilators for the very ill. There are also a more flexible currency and other economic tools that Italy doesn't have.

 

I think news will come out today or tomorrow that Italy is turning the corner; cases are trending down there. This will create optimism for the entire Western world. But the US needs to shift into high gear now.

 

So, last week was mostly a liquidity event, and our juniors were trounced mostly? because of that.

 

But I'm concerned about how they didn't start to recover as other good bets did latter day Friday, and I've had this thought: Italy suspended mortgage paying, would or could US do the same? If so how would that work?

 

Thanks,

In since '12 having done nothing but add. To the point where JP's are now 30% of my wealth.

 

Not sure why that was an apparently dumb question. Either this entire scare is mostly bull or a freeze on mortgage payments is coming. How would it work? Being conservators, could FHFA just demand FnF cover losses?

 

it was a dumb question because we are not Italy....yet

[Guest cherzeca]

you are not going to see a mortgage moratorium in the US (unless Bernie gets elected). what you will see is a massive aid program, funded by Fed keystroke money and potus/congress trying to outdo each other to bail out any and everything needing money. dollars for votes.  I am not sure a mortgage moratorium would even be constitutional  (impair contracts clause)

[Guest cherzeca]

mea culpa:  https://twitter.com/GinSecurities/status/1239970548412645379?s=20

 

[TwoCitiesCapital]

mea culpa:  https://twitter.com/GinSecurities/status/1239970548412645379?s=20

 

Yea, I think this would be too hard to implement.

 

Maybe at the commercial level to give small businesses a break on mortgage loans while they shutter to prevent the spread, but to give everyone one in America a mortgage moratorium?

 

Most homeowners are likely salaried and won't need it. Those who do would likely better served through beefing up unemployment benefits. Also, what about those who rent? Are we expecting that landlords will just give them a break on non-payment?

 

Just seem like this would be largely ineffective, very difficult to implement without further disruption to capital markets, and largely targets the wrong people.

 

 

[Luke 532]

https://www.realvision.com/shows/trade-ideas/videos/fannie-mae-the-road-to-recapitalization 

 

At 8:15 in the video linked above, ACG's Heffesse says "If you stop the sweep and amend the PSPA in a settlement in the judicial branch it's not reversible in the same way.  If you put a fourth amendment in the PSPA who knows if you have another administration and they just add amendments to change it back.  I mean there are some permanent things but if it's done by a court in a settlement you can't really go back."

 

Coupling this with the Goldman meeting two weeks ago where Admin is going to implement irreversible actions in calendar year 2020, wouldn't it be a more concrete move to do the PSPA amendment via settlement rather than as a stand alone action?

 

The Goldman meeting jives with ACG's timeline (attached) from a month ago where it is estimated the PSPA and settlement would be completed calendar year 2020.

 

In other words, we're looking at a settlement this calendar year, not just a capital rule and some variation of a PSPA amendment.  Although a PSPA amendment may very well render the lawsuits moot, doing it via a settlement would be more permanent.

 

Thoughts?  Am I way off base here?

ACG_Timeline_2-14-2020.jfif

[Guest cherzeca]

https://www.realvision.com/shows/trade-ideas/videos/fannie-mae-the-road-to-recapitalization 

 

At 8:15 in the video linked above, ACG's Heffesse says "If you stop the sweep and amend the PSPA in a settlement in the judicial branch it's not reversible in the same way.  If you put a fourth amendment in the PSPA who knows if you have another administration and they just add amendments to change it back.  I mean there are some permanent things but if it's done by a court in a settlement you can't really go back."

 

Coupling this with the Goldman meeting two weeks ago where Admin is going to implement irreversible actions in calendar year 2020, wouldn't it be a more concrete move to do the PSPA amendment via settlement rather than as a stand alone action?

 

The Goldman meeting jives with ACG's timeline (attached) from a month ago where it is estimated the PSPA and settlement would be completed calendar year 2020.

 

In other words, we're looking at a settlement this calendar year, not just a capital rule and some variation of a PSPA amendment.  Although a PSPA amendment may very well render the lawsuits moot, doing it via a settlement would be more permanent.

 

Thoughts?  Am I way off base here?

 

remember, the PSPA is an agreement between treasury and fhfa as conservator, on behalf of GSEs.  in connection with a release from conservatorship into consent order phase, a 4th amendment would be the last amendment, since fhfa would no longer have power under HERA to amend agreement, since no longer a conservator.

 

so while ACG is right that a settlement stipulation terminating litigation would be final, so would be an amendment by fhfa/treasury upon termination of conservatorship.  so as per usual, ACG is half right

[Luke 532]

remember, there PSPA is an agreement between treasury and fhfa as conservator, on behalf of GSEs.  in connection with a release from conservatorship into consent order phase, a 4th amendment would be the last amendment, since fhfa would no longer have power under HERA to amend agreement, since no longer a conservator.

 

so while ACG is right that a settlement stipulation terminating litigation would be final, so would be an amendment by fhfa/treasury upon termination of conservatorship.  so as per usual, ACG is half right

 

Great, thank you!

[Guest cherzeca]

see https://www.cnbc.com/2020/03/17/chief-mortgage-regulator-working-on-coronavirus-delinquency-plan.html re mortgage relief prospects.  also took a look at contract clause of US constitution and it limits only states from impairing contracts

 

see also:  https://finance.yahoo.com/news/trump-considering-plan-let-homeowners-173954961.html

 

[Luke 532]

Playing out a worst-case scenario here where we enter into a deep recession that renders an external capital raise in 2021 inconceivable ("I don't think that word means what you think it means," -Princess Bride.  But I digress...).  Not that I think that is going to happen, but stay with me here.  So, in that scenario, would Admin still take the steps in 2020 to re-propose and finalize capital rule, as well as amend PSPA, and settle lawsuits?  Or would they just say forget it and do nothing.  I have my own thoughts as to the answer, but don't want to spoil the well before you guys answer.

 

In other words, are we setting up for an insane perfect storm where prefs are made whole (or close to it) while the entire stock market is on sale?  Thanks.

[Guest cherzeca]

@Luke

 

I think no one in administration is thinking about GSEs right now other than calabria, and no one is taking his calls right now.  first things first.  this corona madness needs to be attended to, say, over next 4 months, then everyone is going to raise their heads and say, phew, what now, and then they will say a number of things, but GSEs will be one of those.  during this time the legal situation will mature and we will see where we are.  one big variable will be delinquency rates on mortgages.  right now, very low.  in 4 months, how much higher?

[Luke 532]

@Luke

 

I think no one in administration is thinking about GSEs right now other than calabria, and no one is taking his calls right now.  first things first.  this corona madness needs to be attended to, say, over next 4 months, then everyone is going to raise their heads and say, phew, what now, and then they will say a number of things, but GSEs will be one of those.  during this time the legal situation will mature and we will see where we are.  one big variable will be delinquency rates on mortgages.  right now, very low.  in 4 months, how much higher?

 

Understood, but I would think the re-proposal of capital rule can come out even with this crisis.  Latest word on the street is first week of April.  And finalizing that rule is a rubber stamp a few months down the line if FHFA really believes in the figure they put out in April.  With that said, I could see the PSPA being delayed.

[Guest cherzeca]

@Luke

 

I think no one in administration is thinking about GSEs right now other than calabria, and no one is taking his calls right now.  first things first.  this corona madness needs to be attended to, say, over next 4 months, then everyone is going to raise their heads and say, phew, what now, and then they will say a number of things, but GSEs will be one of those.  during this time the legal situation will mature and we will see where we are.  one big variable will be delinquency rates on mortgages.  right now, very low.  in 4 months, how much higher?

 

Understood, but I would think the re-proposal of capital rule can come out even with this crisis.  Latest word on the street is first week of April.  And finalizing that rule is a rubber stamp a few months down the line if FHFA really believes in the figure they put out in April.  With that said, I could see the PSPA being delayed.

 

the GSE thesis is two pronged, admin reform and legal.  lots of focus recently on former.  my eye is on latter.

[Luke 532]

the GSE thesis is two pronged, admin reform and legal.  lots of focus recently on former.  my eye is on latter.

 

Understood, it's your primary area of expertise.  I found it interesting that SCOTUS isn't holding oral arguments right now.  Perhaps an opportunity for them to spend the extra time completing orders for pending cases like Seila.

[Guest cherzeca]

the GSE thesis is two pronged, admin reform and legal.  lots of focus recently on former.  my eye is on latter.

 

Understood, it's your primary area of expertise.  I found it interesting that SCOTUS isn't holding oral arguments right now.  Perhaps an opportunity for them to spend the extra time completing orders for pending cases like Seila.

 

it is interesting to contemplate the background to the GSE admin plan now that admin will be doling out >$1T in stimulus.  will this make admin more or less likely to proceed with its plan?  I think more likely since all of the chatter about "bailing out the hedge funds etc" will sound a bit more shrill once $1T goes out the door to the airline industry, taxpayers etc

[james22]

Probably a good point.

 

With any kind of legal cover, no one will care about the GSEs.

 

There'll be lower hanging fruit to complain about (Boeing, etc.).

[Guest cherzeca]

Ha!  right, Boeing. even a bigger bogeyman than hedge funds

[Luke 532]

it is interesting to contemplate the background to the GSE admin plan now that admin will be doling out >$1T in stimulus.  will this make admin more or less likely to proceed with its plan?  I think more likely since all of the chatter about "bailing out the hedge funds etc" will sound a bit more shrill once $1T goes out the door to the airline industry, taxpayers etc

 

I don't think it will happen, but at the same time I wouldn't be surprised if we're made whole (or close to it) much earlier than anyone expects.

 

seysmont from Google Groups said this yesterday: "Before UST was maximizing profits. During the crisis, their priorities have changed to battling the crisis. It's a whole new math for them. When you look at ways to maximize UST returns, you operate with constraints. Constraints are all gone. Our protection is we are not convertible. Helicopter money is here. The UST priority is to help home owners now, not maximize their profits. Helps MBS holders too. It's all on the table now."

 

[investorG]

Playing out a worst-case scenario here where we enter into a deep recession that renders an external capital raise in 2021 inconceivable ("I don't think that word means what you think it means," -Princess Bride.  But I digress...).  Not that I think that is going to happen, but stay with me here.  So, in that scenario, would Admin still take the steps in 2020 to re-propose and finalize capital rule, as well as amend PSPA, and settle lawsuits?  Or would they just say forget it and do nothing.  I have my own thoughts as to the answer, but don't want to spoil the well before you guys answer.

 

In other words, are we setting up for an insane perfect storm where prefs are made whole (or close to it) while the entire stock market is on sale?  Thanks.

 

'forget it and do nothing' is the leader, perhaps by far.  that gives more time to see how things play out economically in the coming quarters as they tend to other more pressing matters.  odds favor it actually going the other way from release where they use FnF as public policy tools. 

 

 

[Guest cherzeca]

it is interesting to contemplate the background to the GSE admin plan now that admin will be doling out >$1T in stimulus.  will this make admin more or less likely to proceed with its plan?  I think more likely since all of the chatter about "bailing out the hedge funds etc" will sound a bit more shrill once $1T goes out the door to the airline industry, taxpayers etc

 

I don't think it will happen, but at the same time I wouldn't be surprised if we're made whole (or close to it) much earlier than anyone expects.

 

seysmont from Google Groups said this yesterday: "Before UST was maximizing profits. During the crisis, their priorities have changed to battling the crisis. It's a whole new math for them. When you look at ways to maximize UST returns, you operate with constraints. Constraints are all gone. Our protection is we are not convertible. Helicopter money is here. The UST priority is to help home owners now, not maximize their profits. Helps MBS holders too. It's all on the table now."

 

this is getting at what I was saying, though this is better expressed.  treasury is holding warrants that it wants to monetize worth billions...but that is chump change in this environment