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

[Luke 532]

but it should be lost on no one that the MBA-represented mortgage servicers are squealing while the GSEs are doing business as usual.

 

From "seysmont" https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/ePKPF6x8uCc

All I know is servicers did something that makes FHFA shun them and the FED shun them. They are not getting any help now and the only people talking about help and how it will happen is them. So they pissed off the FED and FHFA. That 3 months they are talking about forbearance is just them, the bill provides 12 months rolling into another 12 months. They did something that caused this treatment. Their funding is not in the bill with all the lobbying. I don't know what they did, but they did something unacceptable for the feds to provide timely help when everyone is getting help.

 

It's not an accident the bill provides for servicers to support 12-24 months forbearance with no funding. That was a decision that was made, and it was made for political reasons.

[Wiggins]

https://www.insidemortgagefinance.com/articles/217526-the-feds-buying-spree?v=preview

Buying agency-backed MBSs helps the agencies.

 

Also, the forbearance is not "forgiveness" at this point. It's just deferring P&I and tacking on at the end. This is helpful to mortgage holders as it entails no lump sum payments. It doesn't hurt the GSEs.

https://www.fhfa.gov/Homeownersbuyer/MortgageAssistance/Pages/Coronavirus-Assistance-Information.aspx

[orthopa]

Thanks,  Do you have an opinion on whether or not the current environment changes for better or worse the expected path out of conservatorship? and if what Pagliara is suggesting could happen or likely? It sounds like all we need is a PSPA amendment this summer right?

 

1) Given the post just above mine, I don't think the current environment will affect the timeline much if at all. Calabria tweeted a link to his Bloomberg interview titled "Fannie, Freddie Conservatorship Exit Not Impacted by Virus"; I'm going to consider that a big tell.

https://twitter.com/MarkCalabria/status/1242953955447013376

2) Some clowns on iHub seem to think that Pagliara was not referring to a pref-for-common share exchange when he mentioned a 10-15% haircut, but that's really the only thing he could have been talking about; FnF don't have the capital to do a subpar redemption. I do believe an exchange is quite likely, for reasons outlined in the post you replied to. Or were you not referring to a share exchange?

3) I believe there are three things we must have before any share exchange and re-IPO: seniors gone (either cancelled or converted to commons; this also kills the NWS), remaining lawsuits where FnF are liable settled (I think this is only Perry, please correct me if I'm wrong; also, killing the NWS should moot many of the cases), and a finalized capital rule.

 

No I wasn't so much referring to the share exchange. I do think that will happen also. Was just more or less talking about the rapid resolution Pagliara was referring to via a PSPA to get rid of the seniors and an exchange before the finalization of the capital rule, capital plan, etc. Although that would be a nice surprise I still don't see that happening at this point. There obviously has been a plan and cadence to all of this ever since the president requested a plan for the GSEs a year ago. Although it certainly seems to have been delayed multiple times I still feel like all parties involved follow the path they have plotted out unless there is a highly unusual set of circumstances that arises(yes I know there is a worldwide pandemic going on LOL. )

 

That being said some preferred issues allowing 4-5xs returns at near par. I will continue adding.

[Luke 532]

Calabria video: https://finance.yahoo.com/video/landlords-tenants-face-financial-strain-180139659.html

 

Paraphrased, not direct quotes:

-"This goes on for 2-3 months the system is OK"

That's slightly longer than the "2 months we're OK" he said last week.

 

-"This goes on for 6+ months that's a lot of stress on lenders, Fannie, Freddie"

He didn't say anything about the gap between 3-6 months, just 2-3 and 6+.

 

-"At that point might go to Congress or others step in for support"

Again does not mention Treasury, which is great.  Previously he mentioned Congress or Fed, perhaps "others" means Fed or the private market.

 

-"We want to make sure that we're not having to rescue Fannie, Freddie, or the lenders."

 

-"6 months... potentially face rescues, bailouts in mortgage market."

 

For what it's worth, his demeanor seemed more calm than it was last week.

[Guest cherzeca]

it is hard to forecast the level of forbearance activity GSEs will face.  like everything else with the crisis, I suppose you could model it based upon a range of assumptions, and get a reliable range of outcomes that is too wide to be of any guidance (for example, I have seen a mortality model show with a 95% degree of confidence that US deaths will be between 30K and 160K under a set of non-mitigation assumptions...so that is basically useless as a guide to action).

 

see https://www.fanniemae.com/portal/covid-19.html for "lender letters" outlining forbearance procedures.  who knows how these procedures pan out?  If the nation stops shelter in place for all but hot spots like NYC. New Orleans etc after another month, will forbearance period be reasonable? will onset of warmer/humid weather make forbearance period reasonable? my fear is that once forbearance is granted, getting mortgagors back on full pay may not be as easy as one would think.

 

I do expect however that GSE 1q results to be quite good and that capital levels to increase to a temporary ugh water mark.  hopefully there will be 1q commentary on how the GSEs the next quarter playing out

[Luke 532]

 

Tim P. seems to think preferred conversion adds 26 to 28 billion in capital. This appears to be the same mistake acg made, and Tim H. says conversion is capital neutral, which I agree with. Has Tim P. missed something? Seems pretty clear cut if preferred are classified as equity.

 

Note: I'm not saying I think any of the below will come to pass, just posting what Pagliara thinks...

 

Here is Pagliara's response...

Clarify- you don’t create $25 billion of new capital- you create additional capital by the ratio of Preferred (not viewed as 100%) to 100% equity once it is converted. $25 approximates the amount on the books after conversion.  Key is litigation settlement.

 

Money needs to go to work. Institutions are looking for ways to put it to work. These are two of the most profitable companies in the world.  They have unique earning power.  Yes, we can raise money by Q-4 2020- Q1 2021. It can be done in phases.

[investorG]

Calabria video: https://finance.yahoo.com/video/landlords-tenants-face-financial-strain-180139659.html

 

Paraphrased, not direct quotes:

-"This goes on for 2-3 months the system is OK"

That's slightly longer than the "2 months we're OK" he said last week.

 

-"This goes on for 6+ months that's a lot of stress on lenders, Fannie, Freddie"

He didn't say anything about the gap between 3-6 months, just 2-3 and 6+.

 

-"At that point might go to Congress or others step in for support"

Again does not mention Treasury, which is great.  Previously he mentioned Congress or Fed, perhaps "others" means Fed or the private market.

 

-"We want to make sure that we're not having to rescue Fannie, Freddie, or the lenders."

 

-"6 months... potentially face rescues, bailouts in mortgage market."

 

For what it's worth, his demeanor seemed more calm than it was last week.

 

5% seems low.  I am guessing he realizes this and is preparing a thorough plan B with Houlihan during this 2-3 month period. 

 

The first injection should come from Mnuchin's fund.

 

A second one should come from private equity at a later point when there is more visibility for a consent decree / re-IPO.

 

If the SC was paying attention they should deny Mnuchin's Collins appeal asap to get Atlas court going. Or follow Rule of Law's reasoning in Seila with clear and direct implications to Collins.  There might be legal restrictions on Mnuchin proactively deeming the sr pref paid off without court cover.

[Guest cherzeca]

"If the SC was paying attention they should deny Mnuchin's Collins appeal asap to get Atlas court going."

 

this is a nonsequitor.  there is nothing about the collins APA appeal that is stopping proceedings in front of fed district court judge Atlas.

[allnatural]

Calabria was on CNBC this morning. Will post clip when link is available.

 

On exiting conservatorship: "Modest delay in my opinion" ... "could put off exit by a couple of months" , still see's initial equity raise by 2021, fannie and freddie need to be strengthened.

 

He also reiterated that that he expects the take rate on the GSEs forbearance program by May to be 3-5% (currently seeing 1-2%) so doesnt expect much stress yet, can handle 2-3 months if people start going back to work after a few months, if lasts 6+ months and people stillunemployed and 25-30% take rate it will see stress the system.

 

 

 

[Luke 532]

can handle 2-3 months if people start going back to work after a few months, if lasts 6+ months and people stillunemployed and 25-30% take rate it will see stress the system.

 

Thanks for the notes, InvestorG.  This is great to hear. 

 

At yesterday's press conference, Dr. Birx reiterated Trump's comments from two days prior that peak death is in two weeks, so around mid-April.  In 1918, most workers returned after 7 weeks start to finish.  15-day thing started mid-March so 7 weeks brings us to first or second week of May.  That seems plausible given peak death mid-April, gives 3 weeks for things to calm down/make sure things are improving, then start getting back to work.  So, Calabria saying we'll be fine if this lasts 2-3 months would give us a "deadline" of June 1 or July 1... and if we're returning early May then that's good.

[investorG]

Calabria was on CNBC this morning. Will post clip when link is available.

 

On exiting conservatorship: "Modest delay in my opinion" ... "could put off exit by a couple of months" , still see's initial equity raise by 2021, fannie and freddie need to be strengthened.

 

He also reiterated that that he expects the take rate on the GSEs forbearance program by May to be 3-5% (currently seeing 1-2%) so doesnt expect much stress yet, can handle 2-3 months if people start going back to work after a few months, if lasts 6+ months and people stillunemployed and 25-30% take rate it will see stress the system.

 

thanks.  fairly large disconnect between current price and that interview imo.

[allnatural]

https://www.cnbc.com/video/2020/04/01/fhfa-director-approximately-700000-mortgage-loans-could-need-forbearance.html

[orthopa]

Calabria was on CNBC this morning. Will post clip when link is available.

 

On exiting conservatorship: "Modest delay in my opinion" ... "could put off exit by a couple of months" , still see's initial equity raise by 2021, fannie and freddie need to be strengthened.

 

He also reiterated that that he expects the take rate on the GSEs forbearance program by May to be 3-5% (currently seeing 1-2%) so doesnt expect much stress yet, can handle 2-3 months if people start going back to work after a few months, if lasts 6+ months and people stillunemployed and 25-30% take rate it will see stress the system.

 

thanks.  fairly large disconnect between current price and that interview imo.

 

Big time disconnect. I just added to my position by 10%. The man came out and said capital raise in 2021. As hashed out many times you cant have a capital raise without a settlement, final determination of preferred etc. This whole scenario highlights the importance of FnF and it seems even in a worst case scenario FnF will take a minimal hit.

[Guest cherzeca]

I dont know what kind of hit fnma takes but if it enters q2 with $15-20B capital, I think fnma is going to be part of solution, not problem

[Midas79]

Big time disconnect. I just added to my position by 10%. The man came out and said capital raise in 2021. As hashed out many times you cant have a capital raise without a settlement, final determination of preferred etc. This whole scenario highlights the importance of FnF and it seems even in a worst case scenario FnF will take a minimal hit.

 

Fannie and Freddie will be fine. Calabria, though, has said on multiple occasions that if they go insolvent (presumably along with a draw from Treasury) he will wipe out shareholders. That's the risk weighing on my mind, at least. The companies will survive, MBS investors will get 100 cents on every dollar contractually owed to them, but shareholders don't have to survive. Treasury won't even necessarily lose its stake if FHFA allows Treasury to port over its seniors and warrants to whatever comes out of the restructuring.

 

Today Calabria said that Fannie and Freddie can weather 2-3 months at a 20-25% takeup rate (of the mortgage forbearance in the CARES Act), but if it becomes 6 months or if the rate goes to 40-50% there will be some stress. What I'm wondering is: what's stopping the take rate from approaching 100%? Many people are short-sighted and would view a suspension of mortgage payments as something to be taken advantage of, even if they don't need to do it.

 

In my opinion, Calabria made a big mistake in today's interview by asking people to keep making their mortgage payments if they are able in order to support the housing finance system. Nobody is going to do that, or at least not enough to matter. If I were him I would have played up the fact that interest will continue to accrue if payments are not made. Emphasize that failing to make payments when you are able to hurts you in the long run. Frame it as self-interest and the takeup rate will go down.

 

What I don't understand is the common valuation. With the juniors at 20% of par the commons shouldn't be trading much above 30 cents if the capital structure means anything at all. If FnF have enough capital to cover the juniors then the juniors should be close to par, and if not the commons should be close to zero.

[Guest Covid-19_Survivor]

This asshole here: 

 

Democrats; not a word about being responsible, or trying, or just doing your best to balance needs and liabilities. Nope, here, take this, it's free.

 

That message by Schumer has to change.

[Guest Covid-19_Survivor]

Big time disconnect. I just added to my position by 10%. The man came out and said capital raise in 2021. As hashed out many times you cant have a capital raise without a settlement, final determination of preferred etc. This whole scenario highlights the importance of FnF and it seems even in a worst case scenario FnF will take a minimal hit.

 

Fannie and Freddie will be fine. Calabria, though, has said on multiple occasions that if they go insolvent (presumably along with a draw from Treasury) he will wipe out shareholders. That's the risk weighing on my mind, at least. The companies will survive, MBS investors will get 100 cents on every dollar contractually owed to them, but shareholders don't have to survive. Treasury won't even necessarily lose its stake if FHFA allows Treasury to port over its seniors and warrants to whatever comes out of the restructuring

 

 

How, exactly, would that work? Because FnF are under the control of an illegal govt agency, and raped of their capital cushions by another govt agency, they are instructed to forbear mortgages they guarantee for a year, but still pay interest on them, and in doing so they go tits up. Wouldn't that be an uglier case(s) then the last time(s) govt screwed shareholders?

[Midas79]

How, exactly, would that work? Because FnF are under the control of an illegal govt agency, and raped of their capital cushions by another govt agency, they are instructed to forbear mortgages they guarantee for a year, but still pay interest on them, and in doing so they go tits up. Wouldn't that be an uglier case(s) then the last time(s) govt screwed shareholders?

 

FnF have to pay MBS investors, but have less than the usual amount of money coming in due to the forbearance. The difference depletes their capital cushion of $23B combined, and if the difference exceeds that then technically FnF are insolvent and would have to draw from Treasury to make up the difference. Calabria might be able to trigger a shareholder wipeout at that point, though I don't know if he would have to invoke receivership to do so.

 

The court cases do help, because without the NWS the seniors would still be intact but FnF would have an extra $125B in capital. If FnF end up blowing through $150B (due perhaps to the crisis lasting a long time and/or a huge takeup rate for forbearances), though, us shareholders might be wiped out after all, regardless of the court cases.

 

This is exactly the specter that mortgage servicers face because they don't have direct contractual Treasury support to draw on, by the way.

 

If by "the last time govt screwed shareholders" you mean the NWS, I don't think this would be that ugly because the forbearances are authorized by law. FnF shareholders might end up having to bear the brunt of Congress's not accounting for who bears the brunt of the forbearances. And if you meant anything from 2008, that stuff is all going to stand anyway.

[Guest Covid-19_Survivor]

Sorry I wasn't clear. I was being sarcastic, ie, Calabria/govt wouldn't get away with it. Law or no law, if govt is going to strip a public company of its income stream - and primarily because it controls that company - it also has to insure that company won't go tits up by the decision to do so.

 

[Guest Covid-19_Survivor]

Anyway..

 

All in all I called this a month ago (I'm assuming many will take advantage of a free one year, non-interest bearing (actually, probably the opposite if they refinance in 12 months) loan of ~30% of yearly income. Still don't understand how the whole forbearance works, though. How would this affect a company like Annaly, for example, and how much damage throughout the entire financial system if more people than the half-wits who thought it up take advantage of it?

 

That said, people should be crowding into FnF P's now. I mean, even with so many "great" deals out there in REIT land, who wouldn't instead pay up for some legit mafia protected preferreds instead?

 

edit:  NM, NLY down 14%. Pretty clear.

[Luke 532]

That said, people should be crowding into FnF P's now. I mean, even with so many "great" deals out there in REIT land, who wouldn't instead pay up for some legit mafia protected preferreds instead?

 

But what if the mafia boss, or if not the boss at least he's a made man, Calabria decides to wipe out junior pref holders (per posts by Midas)?

[Guest Covid-19_Survivor]

That said, people should be crowding into FnF P's now. I mean, even with so many "great" deals out there in REIT land, who wouldn't instead pay up for some legit mafia protected preferreds instead?

 

But what if the mafia boss, or if not the boss at least he's a made man, Calabria decides to wipe out junior pref holders (per posts by Midas)?

 

The opportunity for cheaper shares before ultimately becoming whole should be a godsend to anyone who believes in the ultimate resolution

[Luke 532]

That said, people should be crowding into FnF P's now. I mean, even with so many "great" deals out there in REIT land, who wouldn't instead pay up for some legit mafia protected preferreds instead?

 

But what if the mafia boss, or if not the boss at least he's a made man, Calabria decides to wipe out junior pref holders (per posts by Midas)?

 

The opportunity for cheaper shares before ultimately becoming whole should be a godsend to anyone who believes in the ultimate resolution

 

OK, but that still doesn't answer the question.

[Luke 532]

Well, the Treasury just hired all three.  Moelis, PJT, and Weinberg.

https://www.reuters.com/article/us-health-coronavirus-usa-airlines/u-s-treasury-to-tap-wall-street-advisory-firms-on-airline-aid-wsj-idUSKBN21K01P?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28Business+News%29

 

"Each firm is likely to advise on aid to one of three subsectors: commercial airlines, cargo carriers and firms critical to national security..."

 

Fannie and Freddie for the financial security of the nation, or at least the 20% housing market?

 

 

SCOOP: @FHFA soon to select adviser on massive @FannieMae @FreddieMac

stock offering list narrorwed to several investment banks, including Perella Weinberg Partners, possibly PJT Partrners; Govt signaled decision after Thanksgiving to oversee massive IPO more now @FoxBusiness

 

either firm would be an excellent choice.  fhfa needs advisory work, not capital raising work which is where the bigger money will be, and those firms (JPM, Goldman etc) will do the underwritings.  PJT is a spin off from Blackstone, one of whose funds is partly behind the moelis blueprint.

 

I went to the moelis blueprint to confirm that Paulson and a Blackstone fund paid for the moelis blueprint, but their identities which I remember from the 2017 version seem to be absent from the 2018 update.  but I did reread the summary and recommendations again:

 

"The first step must be to begin rebuilding capital by suspending dividends paid to Treasury. The second step is to recognize the government’s profits by acknowledging that Treasury’s senior preferred stock has been repaid with interest. While the senior preferred remains outstanding, it will be impossible for the GSEs to raise equity from the private markets. The third step is for FHFA to direct Fannie and Freddie to submit capital restoration plans, as authorized by HERA. Taking these three steps immediately starts on the path towards restoring safety and soundness to protect American taxpayers."

 

seems like the moelis blueprint is off to a good start

[orthopa]

How, exactly, would that work? Because FnF are under the control of an illegal govt agency, and raped of their capital cushions by another govt agency, they are instructed to forbear mortgages they guarantee for a year, but still pay interest on them, and in doing so they go tits up. Wouldn't that be an uglier case(s) then the last time(s) govt screwed shareholders?

 

FnF have to pay MBS investors, but have less than the usual amount of money coming in due to the forbearance. The difference depletes their capital cushion of $23B combined, and if the difference exceeds that then technically FnF are insolvent and would have to draw from Treasury to make up the difference. Calabria might be able to trigger a shareholder wipeout at that point, though I don't know if he would have to invoke receivership to do so.

 

The court cases do help, because without the NWS the seniors would still be intact but FnF would have an extra $125B in capital. If FnF end up blowing through $150B (due perhaps to the crisis lasting a long time and/or a huge takeup rate for forbearances), though, us shareholders might be wiped out after all, regardless of the court cases.

 

This is exactly the specter that mortgage servicers face because they don't have direct contractual Treasury support to draw on, by the way.

 

If by "the last time govt screwed shareholders" you mean the NWS, I don't think this would be that ugly because the forbearances are authorized by law. FnF shareholders might end up having to bear the brunt of Congress's not accounting for who bears the brunt of the forbearances. And if you meant anything from 2008, that stuff is all going to stand anyway.

 

Sure anything is possible. To have come this far in the plan and to have a black swan-ish event possibly blow up the housing system seems less then likely.  In all honesty I think its more likely that a final PSPA amendment is done in a hurry to save FnF then to let them go belly up (insert confirmation/position bias). It would be pretty rich for the Treasury to stand by idle and watch FnF fail out of stubbornness over timing of a final amendment instead of recapping them and monetizing either via the Sr Preferred or warrants or FHFA provisioning an accounting measure as discussed by cherzeca to get them through the crisis . Similarly Calabria said today public offering in 2021. To me that means that is the plan and that plan necessitates a resolution of the Senior Preferred and over payments if any etc.  Whats the motivation for letting them fail if that means moving up an agreement by a couple months? Principle? Then you have a failed housing system model during a crisis, likely then in receivership on the govs balance sheet. Thats a big 180 from the recapping them in 2021. Not to mention this is stress from an external source caused by a government mandated option to forebear mortgages. I guess if the gov really did wanted to end FnF the way to do it would be by a law that puts them in a helpless position.

 

Im not arguing its impossible but I fail to see the motivation to let the MBS payments bleed FnF dry without coming up with a solution at this point. And I get current shareholders can get wiped out but again the same argument as before applies. Who is going to pony up money in the future when another virus/black swan event comes along when the outcome is shareholders get wiped out. The path of least resistance is to see this forward and fix the system then go the other route.

 

As much as this investment has been blind trust of MC and SM it maybe even more so now. As far as what do now with shares at 20% of par after holding for multiple years why sell now? I say F-it and let it ride.