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

[Luke 532]

Ackman today on GSE's at 14-minute mark: https://finance.yahoo.com/video/bill-ackman-u-recession-threat-192341688.html

[Midas79]

To me, receivership/insolvency seems to be the elephant in the room. Calabria said in his November Fox News interview, twice, that if FnF go insolvent he will wipe out shareholders (3:00 and 13:30).

https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

 

It seems quite possible that FnF could sustain losses greater than the $23B of capital they have (combined). Then they would have to draw once again on Treasury's support to avoid mandatory receivership under HERA, which is triggered by 60 consecutive days of balance sheet insolvency (liabilities exceed assets). Calabria could choose to not draw the money if receivership is his goal.

 

However, his interview makes it pretty clear that receivership is not his goal at all, and that he would only invoke it if HERA requires it. His quotes at 13:40 "If we are in a condition where the statutory requirements of receivership are met, then we're gonna do receivership and that would result in shareholders being wiped out. But it's my intention that we don't find ourselves in that position." and 14:00 "Even in receivership, if there's value then shareholders will get something, but if there's not value the shareholders get wiped out. So again if we find ourselves in a situation where they are insolvent, that's the path we will be taking."

 

That last part is telling imo because Calabria ties receivership to insolvency, as opposed to the rest of the list given in 12 USC 4617(a)(3).

https://www.law.cornell.edu/uscode/text/12/4617

Insolvency is covered by (A), (F), and (G), though this last one is tied to capital classifications that Calabria has refused to apply to FnF.

 

While a wave of missed mortgage payments seems like exactly how FnF can deplete their thin capital margin, Calabria declaring receivership is fraught with danger. For one, 4617(a)(5) allows challenges to FHFA appointing itself receiver. You can bet your last dollar such challenges would immediately come from multiple angles. The more important consideration, though, is the court cases. If the NWS had never happened, then instead of FnF having $23B of capital to absorb losses they would have at least $148B, and more if any penalties or interest are applied to the overage (Treasury received $125B more in dividends than they would have if the NWS had never happened).

 

As long as FnF sustain losses less than $148B, then a court victory or settlement that unwinds the NWS means that the receivership would have to be unwound as well, because the conditions for it being imposed would not have been fulfilled. This is where Calabria's refusal to stick capital classifications on FnF matters because if he did, they would certainly be critically undercapitalized: FnF reported core capital of negative $170B at the end of 2019 and receiving $125B from Treasury still doesn't bring that positive, therefore FnF would be critically undercapitalized because their core capital is negative.

 

Unless the boards consent to receivership, but that's a whole new can of worms because not only would it be immediately challenged, this option isn't related to insolvency, while Calabria's interview makes it clear that he would only (?, correct me if I'm wrong) impose receivership in connection to insolvency.

 

There's also the possibility that a settlement involves the seniors being retroactively wiped out (treated as if FnF could have paid them down at any time). This is problematic for two reasons, though:

 

1) The original PSPAs don't allow FnF to pay down the seniors any time they want.

2) Treasury would only return $25B in this case, and not necessarily all at once. If FnF sustain losses greater than $23B (or $48B if Treasury does return the whole $25B at once) then it justifies receivership after all. The plaintiffs would not agree to a settlement with this end result, though with the seniors gone and FnF with $25B in capital, the juniors get around 75% of par ($25B / $33.2B ~= 75%).

 

In the end, I don't think receivership is a credible threat, at least as long as we assume that the plaintiffs end up prevailing in Lamberth or get granted backward relief in Collins.

 

Another good point from seysmont (from the Google Groups board) is that if FnF end up sustaining enough losses to wipe out their $23B in capital, that means all holders of CRTs get zeroed out. Will Calabria and Mnuchin go the receivership route when this is a consequence? I doubt it. For all the bellyaching over the lack of economic sense that the CRTs make for FnF, it would be ironic if those are what keep FnF out of receivership.

[Luke 532]

Midas, well said. I agree that's likely the elephant in the room given the uncertainty of the markets and economy as a whole.  To everybody reading, if r'ship doesn't happen, what else can realistically kill/severely hurt the prefs?  That's the big question.  If the answer is "nothing really" then the only concern is how long it will take.  The duration is a big concern, of course, as the longer it takes the more it depletes rate of return.

 

-election risk (if irreversible action isn't taken by the current Admin prior to Inauguration)

-losses in court

-some other black swan event

[Luke 532]

Democrat House Bill: https://appropriations.house.gov/sites/democrats.appropriations.house.gov/files/COVIDSUPP3_xml.pdf

 

Searched the following terms with no hits: Fannie, Freddie, Mae

Searched the following with hits but nothing related to GSE's: Mac, housing

Searched the following with a hit: GSE

 

Here's what it says...

(k) EXTENSION  OF  THE GSE PATCH.—The Director 18of  the  Bureau  of  Consumer  Financial  Protection  shall  re-19vise section 1026.43(e)(4)(iii)(B) of title 12, Code of Fed-20eral  Regulations,  to  extend  the  sunset  of  the  special  rule  21provided  under  such  section  1026.43(e)(4)  until  January  221,  2022,  or  such  later  date  as  may  be  determined  by  the  23Bureau.

[Guest Covid-19_Survivor]

To me, receivership/insolvency seems to be the elephant in the room. Calabria said in his November Fox News interview, twice, that if FnF go insolvent he will wipe out shareholders (3:00 and 13:30).

https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

 

It seems quite possible that FnF could sustain losses greater than the $23B of capital they have (combined). Then they would have to draw once again on Treasury's support to avoid mandatory receivership under HERA, which is triggered by 60 consecutive days of balance sheet insolvency (liabilities exceed assets). Calabria could choose to not draw the money if receivership is his goal.

 

I wish Calabria luck on the excuse of insolvency. Treasury raped $140m from our books, and Sweeney analogized the relationship as mafioso in structure. I'd absolutely load up on our then penny stocks.

 

A goal of receivership though, that one has had me thinking. I mean, FnF is a farce, we ARE govt entities, we are not public entities, no matter how much we try to act like one. Once again Treasury is using us to prop up credit markets, forcing us to eat potentially bad debt, albeit with a supposed guarantees, again. Since when is govt allowed to control public entities in such a way?

 

LOL, this is the 2nd time in ~10 years that the govt is handing out trillions to prop up the financial system. "Save the taxpayers" is such a stupid premise. Once the shit hits the fan, taxpayers have nothing to do with it, as will always be.

 

I fear, slightly, that govt will come to its senses and just nationalize us, and then leave our compensation to the courts.

 

On a brighter note; we are the only one's working under the protective shield of the govt., something that CMO, CMI, MFA, etc. have not.

 

[investorG]

 

I fear, slightly, that govt will come to its senses and just nationalize us, and then leave our compensation to the courts.

 

 

There is some chance of this imo due to the crisis / capital levels and a lot of DC is against the hybrid structure.  The compensation side could be decided by the courts or also some negotiated deal. 

 

Does anyone know when Sweeney (if it occurs in 2021) and Lamberth (scheduled for 2021 trial) would reach final stage after appeals? 2022,2023,2024?

[orthopa]

I think as Calabria mentioned a couple of days ago the stress of what is going on will help others realize the importance of FnF and the role they play.

 

Imagine if this was all privatized and the big banks had to take on all of these mortgages, forebarance, and MBS issues? That would be a huge stress to the system now. We are seeing real time the function FnF perform and how valuable they are. They just need more capital, and will get it eventually.

[Luke 532]

I think as Calabria mentioned a couple of days ago the stress of what is going on will help others realize the importance of FnF and the role they play.

 

Imagine if this was all privatized and the big banks had to take on all of these mortgages, forebarance, and MBS issues? That would be a huge stress to the system now. We are seeing real time the function FnF perform and how valuable they are. They just need more capital, and will get it eventually.

 

+1

[Luke 532]

Tim Howard response when asked "If you care to comment on the recent FED actions as it relates to the GSEs and the calls to allow them to buy MBS paper it would be helpful to get your take on the government’s response."

 

https://howardonmortgagefinance.com/2020/01/16/how-we-got-to-where-we-are/#comment-14794

I’m not sure where to begin on this one.

 

Prior to the 2008 financial crisis, Fannie Mae’s portfolio investment business had been the “bete noire” of the Financial Establishment for longer than the 17 years I was responsible for it (from 1988 to 2004). Fannie had indeed almost failed in the early 1980s because of a mismatch between its mortgage and debt durations, but in the late 1980s the company began using callable debt and derivatives to “rebalance” those durations much more frequently and cost-effectively. From the early 1990s, Fannie’s portfolio was not the “snarkily managed hedge fund” the Wall Street Journal labeled it, but instead a consistent buyer of 30-year fixed-rate mortgages that helped keep interest rates on mortgages low, while at the same time being a significant source of profitability for Fannie. This, however, did not stop Treasury from requiring Fannie (and Freddie, which had been a late entry into the portfolio business) to shrink its portfolio by ten percent—later increased to 15 percent—per year after it was put into conservatorship.

 

Well, now portfolio investments in mortgages and MBS ARE risky. The recent sharp widening in mortgage-to-Treasury spreads reflects not just the typical “flight to safety” one sees during times of market stress but also the fact that with short-term interest rates at zero 30-year fixed-rate mortgages originated today could become extremely long-duration assets. A debt-based mortgage investor in new long-term mortgages therefore must have a very large rebalancing budget to cover the risk of having the durations of these loans extend to an unprecedented degree. It doesn’t surprise me that the Financial Establishment would like to have Fannie and Freddie be permitted to add to their portfolios again—the mortgage market is badly in need of support—but its willingness to ignore the interest-rate risk these investments would pose to the companies, which seemed to be of such great concern when those risks were considerably less, can’t be allowed to go without comment.

 

Yet, “be careful what you wish for.” The current vision of Fannie and Freddie as recapitalized and released companies limits their portfolios to purposes incidental to the credit guaranty business, such as aggregating purchases from smaller lenders prior to packaging for sale as MBS, or holding non-performing loans bought out of existing MBS pools. Were Fannie and Freddie to be allowed to rebuild their investment portfolios, Treasury and FHFA almost certainly would have to agree to extend whatever government support they intend to provide for their MBS credit guarantees (most likely continued access to draws of senior preferred stock, for a fee, in the event of financial difficulty) to the debt that funds their newly expanded portfolio business. Buying government-backstopped MBS using debt without such a backstop is not a viable business proposition. (Remember, banks can fund their fixed-rate MBS with FDIC-insured consumer deposits, and incur no capital penalty for the interest-rate risk they take in doing so). The question thus becomes: does the Financial Establishment want Fannie and Freddie’s support as mortgage purchasers over the next few months to a year badly enough to extend to their debt the same type of government support it’s willing to give to their mortgage guarantees in the companies’ post-conservatorship future? Somehow, I doubt it.

[Luke 532]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

[james22]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

 

More than interesting, no? Seems important.

[investorG]

Interesting comment...

https://twitter.com/Alec_Mazo/status/1242463500779151366

If the Gov't is going to take equity stakes in the companies to stabilize them, it must convert its warrants in Fannie Mae immediately to signal they wouldn't initiate a Net Worth Sweep with others like with Fannie- effectively nationalizing them. $fnma

 

Note: I think Alec meant the senior preferred shares.  That is the mechanism for the NWS.

 

More than interesting, no? Seems important.

 

why is this relevant?  the senate bill likely doesn't create a FHFA with unlimited powers.  and we don't know the format of the investments, it could be mostly loans.  it seems apples / oranges to HERA / FHFA / NWS.

[Guest cherzeca]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

[orthopa]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period. 

[investorG]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date. 

[Luke 532]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

[allnatural]

I imagine anything that removes snr pfds from cap structure would result in extremely bullish action for jr pfds which turn to snr.

 

Anyone else think the GSEs are going to profit handsomely on providing liquidity today as they are increasing the size of their internal portfolio at record wide spreads which should revert back once (if) this all cools down over next 3-6 months? They could theoretically be buying the lows right now.

 

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

[Guest cherzeca]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period.

 

it is Tim Howard's view that near term the GSEs wont suffer an impact to earnings from increased delinquencies (borrowing at near zero to make guaranty payments) as much as CECL and increase in loss reserves.  one hopes that CECL will be deferred in the stimulus bill...affects banks too

[orthopa]

I agree that there likely will not be a direct effect on GSEs from this new stimulus bill though it would be nice to see what comes out of that congress/sausage factory.  some sort of mortgage liquidity backstop (ie Fed) likely to be announced, but that would be mortgage industry wide, not focused on GSEs alone (though Fed has already announced it is buying GSE mbs).  but I think context may have changed with this virus and massive response.  it is easier for GSE-haters to make their antagonistic claims in a normal environment, but I think it would be perceived as tone deaf in current environment

 

Agree even that douche bag Whalen is crying uncle. Dave Stevens cant be loving the current environment either.  Based on Whalen's article it seems like his attitude changed from let them eat cake to you can save them now as long as you save me too.

 

Without seeing the text of the bill it is hard to know what happens but as a shareholder I would be very leary of the terms. Remember this is the first "round" of bailouts. Its still early in this and others may come in future in other industries and amounts if this drags on for 3, 6, 9 months. Remember AIG, C got multiple bailouts with increasingly harsher terms.

 

Granted not apples to apples but it does shine a little bit of a light on shareholder treatment and the completely random terms that each one seems to have.

 

With a 2 Trillion stimulus bill on the table and the Fed expanding their balance sheet by trillions is now really the time to wipe out the GSEs and put them on the govs balance sheet? It will take some time but eventually if FNF actions stabilize the market, help home buyers with forbearance the turd may come out smell like a Rose just in time for summer/late fall action period.

 

it is Tim Howard's view that near term the GSEs wont suffer an impact to earnings from increased delinquencies (borrowing at near zero to make guaranty payments) as much as CECL and increase in loss reserves.  one hopes that CECL will be deferrd in the stimulus bill

 

Agree, and any bailout I was referring to above was for airlines, boeing, etc. I dont think the GSEs are even on the radar for Congress at this time. FnF appear to be doing their job and out of the spot light.

[Luke 532]

Bloomberg Intelligence report out this morning (see attached).  It basically says if the economy (and housing) gets crushed for a sustained period of time, then the Admin plans will be delayed.  If the economy (and housing) has deep problems but rebound fairly quickly, then the Admin plan is still on track for calendar year 2020.  Nothing surprising with that assessment.

 

Probably worth noting the previous comments on this thread about CRT's and the like and how that will soften much of the blow in a recession.

BI_1_3-25-2020.jfif

BI_2_3-25-2020.jfif

BI_3_3-25-2020.jfif

[Guest cherzeca]

this is a self-induced problem, since the reason why there are delinquencies is the lockdown was imposed indiscriminately on the entire population, as opposed to those only at risk.  but the stimulus bill "should" provide a bridge to the time when everyone gets back to work, assuming there is still work to get back to after this massive mistake.  insofar as you mitigate everyone, you wont do a good enough job to mitigate those who really need it.

[investorG]

Mr. Josh Rosner is on a roll.  Thank you.

[Guest Covid-19_Survivor]

If the Senate bill passes, a good public policy move imo would be to immediately inject ~ $50bn into FnF in common equity while exercising the options and retiring the sr pref.  Keep them in conservatorship, no wasted time on conversions, IPOs, capital rules, legal settlements;  let Calabria burn the $75bn in capital on an aggressive 1-year relief plan for small and medium sized mortgages.  It effectively sets a ~ $6 exercise price for the warrants, which seems fair when viewed in conjunction with the 100bn+ net sr pref profits to date.

 

I wonder how prefs would trade in that scenario given the current market and many other equities depressed in price.

 

Have your answer yet?

 

Depressing how poorly these things are doing today. No deferment of mortgages in stimulus bill; these things should be screaming higher. Money's pouring into MREIT's (and everything else) first though, I guess.

[Luke 532]

Mr. Josh Rosner is on a roll.  Thank you.

 

If the #government expects any #corporations to trust them today they must show goodwill by recognizing #GSEs repayments & writing down the #GSE debt immediately. @USTreasury @FHFA  @realDonaldTrump  @larry_kudlow  @WhiteHouse

[Luke 532]

Have your answer yet?

 

Depressing how poorly these things are doing today. No deferment of mortgages in stimulus bill; these things should be screaming higher. Money's pouring into MREIT's (and everything else) first though, I guess.

 

I wouldn't sweat the daily price action.