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

[Wiggins]

+1

 

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.

[orthopa]

https://www.cnn.com/2020/03/26/business/mortgage-payment-coronavirus-stimulus-federal-reserve/index.html

 

Forgive me if I'm incorrect in my thinking here as its late and I have worked alot lately but doesnt this article spell out the solution to the forbearance issue? The Fed will set up a lending facility to the servicers, who will continue to forward the money to all parties including FnF when then in turn pay the MBS holders? Essentially the missing payments will be returned to the fed once the mortgage is refinanced, paid off, caught up on etc?

 

It seems to be cash crunch will involve the servicers.

 

"The problem is that mortgage servicers, even after granting homeowners forbearance, are still on the hook with investors to continue paying principal and interest on the mortgages. They also must make payments to mortgage insurers, property insurers and local tax authorities."

 

"The bill passed by the Senate would allow borrowers with federally backed mortgages who have a financial hardship directly or indirectly from the coronavirus pandemic to request forbearance. Borrowers can postpone mortgage payments for 180 days without incurring fees or penalties. And they can request to extend that forbearance for another 180 days.

This is not loan forgiveness. The missed mortgage payments would still be owed eventually, likely by extending the duration of the loan.

The mortgage industry, like many others, is turning to the Fed to invoke emergency powers and serve its role as the lender of last resort. In this case, the US central bank would provide a line of credit mortgage servicers could draw on to make the payments to mortgage investors on behalf of borrowers."

 

This below is a response from Tim Howard on a similar question asked on his website...

 

"The problem for servicers is that even though they ultimately get reimbursed for the monthly payments they are required to advance for 3 to 4 months (and perhaps more, under the government’s forebearance plan) on Fannie or Freddie-guaranteed MBS, many likely will have neither the capital nor the liquidity to be able to make these advances in the volumes that may be required. This is why state regulators are calling for some type of federal lending program for servicers."

 

https://howardonmortgagefinance.com/2020/01/16/how-we-got-to-where-we-are/#comment-14815

[Luke 532]

https://www.cnn.com/2020/03/26/business/mortgage-payment-coronavirus-stimulus-federal-reserve/index.html

 

Forgive me if I'm incorrect in my thinking here as its late and I have worked alot lately but doesnt this article spell out the solution to the forbearance issue? The Fed will set up a lending facility to the servicers,

 

Yes, but the Fed has not set up a lending facility yet.  If they do for the servicers then a lot of worry goes away.

 

Edit: I do fully expect the Fed to step in.  Too much damage if they don't, but it hasn't happened, yet.  Perhaps they are making sure the small business loan stuff is done first and then they'll tackle the servicer problem.

[Luke 532]

https://www.forbes.com/sites/ikebrannon/2020/04/01/gse-reform-remains-important/#64ebab7e49ca

"Given that the legislation President Trump signed into law last week allows the Administration to demand warrants from businesses who receive government assistance, recapitalizing the GSES would help the Administration argue—truthfully—that the cost of this bailout may end up to be significantly less than $2 trillion allocated via the CARES Act."

[Guest cherzeca]

I have been reading housing analysts and they universally say that housing prices will NOT tank during this crisis.  two reasons mostly:  there has been last few years a chronic undersupply, after absorbing all of the over-supply from immediately after GFC, and housing construction will slow down (even though housing starts had been holding steady).

 

this is important for two reasons:  support wealth effect (most homeowners have far more wealth tied to their home than their investment accounts), and avoid key mailing (most homeowners have at least some equity that they will want to "defend", even if they "take up" forbearance).

 

the biggest variable as far as I see is when we all get the back to work order (outside of NYC and any other hotspots). cant be later than early June.   

[Luke 532]

the biggest variable as far as I see is when we all get the back to work order (outside of NYC and any other hotspots). cant be later than early June. 

 

First or second week of May if we believe Dr. Birx 2-week peak death rate and use the 1918 situation of 7 weeks return to work after start of work from home (mid-March).

[Luke 532]

For those interested in what David Stevens has to say about current events, he is speaking at 12pm Eastern today... https://www.facebook.com/events/674966446573153/

 

-Stevens just said something along the lines of we're getting tremendous pushback from the Admin.

-And something about needing to apply pressure to the Trump Admin.

-Stevens: "right now it's just time to put pressure on them. Mnuchin comes from this industry at One West for God's sake..."

-the more he talks, the more he seems panicked

-Barry Habib: "margin call issue is fixed, the Fed heard what we were saying."

[Luke 532]

Whalen on junior prefs (attached)...

[orthopa]

For those interested in what David Stevens has to say about current events, he is speaking at 12pm Eastern today... https://www.facebook.com/events/674966446573153/

 

-Stevens just said something along the lines of we're getting tremendous pushback from the Admin.

-And something about needing to apply pressure to the Trump Admin.

-Stevens: "right now it's just time to put pressure on them. Mnuchin comes from this industry at One West for God's sake..."

-the more he talks, the more he seems panicked

-Barry Habib: "margin call issue is fixed, the Fed heard what we were saying."

 

I do have to say many who feel wronged by the whole GSE situation probably read this and smile. I wonder why the admin is pushing back so hard? To make them sweat? Teach them a lesson? This would imply that the admin/Mnuchin have sympathized with shareholders and or their treatment from the MBA types but if thats the case they sure have had a weird way of showing sympathy.

 

 

[orthopa]

Whalen on junior prefs (attached)...

 

So now he agrees preferred need to be made whole? Thats rich. Whats with the lever them up comment? Not sure I follow that.

[TwoCitiesCapital]

Bought more $50 par preferred @ $7.50 today

[orthopa]

Bought more $50 par preferred @ $7.50 today

 

Great price, I added more today too. If I go down it will be with guns a blazn.

[Luke 532]

GSE bailout article...

https://www.ft.com/content/575e818e-c35a-462b-8daa-ab784163f604

 

“I’m not the Fed,” Calabria said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

[Luke 532]

Whalen on junior prefs (attached)...

 

More Whalen attached...

Convert the prefs to common equity, then sweep goes away and 87% of earnings goes to @USTreasury An improvement from a #fanniegate perspective.

 

This was in response to...

Falling on deaf ears until you explicitly state you think the GSE Net Worth Sweep should be terminated.  Trust me, that's what will catch the ear of Mnuchin and Calabria.

[Wiggins]

So Whalen (and Carney) advocate for the NWS for years and then in a crisis wonder where the money is? It would be funny if it weren't so tragic.

 

Whalen on junior prefs (attached)...

 

More Whalen attached...

Convert the prefs to common equity, then sweep goes away and 87% of earnings goes to @USTreasury An improvement from a #fanniegate perspective.

 

This was in response to...

Falling on deaf ears until you explicitly state you think the GSE Net Worth Sweep should be terminated.  Trust me, that's what will catch the ear of Mnuchin and Calabria.

[Luke 532]

GSE bailout article...

https://www.ft.com/content/575e818e-c35a-462b-8daa-ab784163f604

 

“I’m not the Fed,” Calabria said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

 

Regulator says US mortgage guarantors have sufficient resources for about 12 weeks

 

Fannie Mae and Freddie Mac, the government-controlled companies that guarantee nearly half of US mortgages, could require their second bailout in just over a decade if the US economy remains in a lockdown for several months, their regulator has warned.

 

The two groups, which collectively underpin the $10tn US housing market, have sufficient resources to last through a lockdown of about 12 weeks, but would then need funds from Congress or the Federal Reserve, said Mark Calabria, director of the Federal Housing Finance Agency.

 

“If we start to go more than two or three months, then there is going to be real stress in the mortgage market, we’re talking in terms of what happened during the great recession,” he told the Financial Times.

 

“If we are talking about a drawn-out period where people are not in a position to pay their mortgages, if we are talking about 25 per cent of people having to ask for forbearance, the system doesn’t have that kind of liquidity. That would require Congress to step in, or the Fed.”

 

Mr Calabria’s warning underlines the potential consequences for the US economy if the current coronavirus-related shutdowns persist beyond summer, as many health experts warn.

 

Donald Trump, the US president, has said national social distancing guidelines would remain in place until the end of April. But many epidemiologists say they will have to be extended.

 

Almost 10m Americans have claimed unemployment benefits in the past two weeks, and Congress passed a bill allowing homeowners to forego mortgage payments for up to a year.

 

About 300,000 borrowers had asked for forbearance on loans backed by Fannie and Freddie as of April 1, Mr Calabria said. Since the agencies make up more than 40 per cent of the mortgage market, he said that implied a total of perhaps 700,000 homeowners seeking forbearance.

 

He said that number was likely to rise: “A lot of people got paid for half of March, so a lot of people who were able to make their payments in March won’t be able to make their May payment.”

 

Those seeking help did not tend to be those who had struggled to make payments in the past. “So far, forbearance is going to borrowers who have always paid on time,” he said. “This is someone who has hit a short-term hardship but has an intention to stay in that house.”

 

Homeowners do not have to prove that they have lost income before being granted a mortgage holiday. That provision would speed up assistance, Mr Calabria said, but could lead to fraudulent claims.

 

“We are operating on an honour system here,” he said.

 

One focus of concern in the industry and in Washington is the mortgage servicers, often banks and non-bank mortgage lenders, responsible for collecting payments from borrowers and passing them on to investors. They are still required to make the payments when borrowers take advantage of forbearance, and are not compensated by Fannie and Freddie for six months, potentially leaving many facing a liquidity crunch.

 

Mr Calabria said that while various solutions were under discussion, additional funds for the servicers would not be coming from Fannie and Freddie, which were placed in a government “conservatorship” during the financial crisis of 2008.

 

“I’m not the Fed,” he said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”

 

[DRValue]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

 

[orthopa]

https://www.bloomberg.com/news/articles/2020-04-03/mortgage-servicers-teeter-near-crisis-that-regulators-saw-coming?srnd=economics-vp

 

This quotes are great

 

"Mortgage Bankers Association Senior Vice President Pete Mills said it’s unfair to punish nonbanks for being unprepared for a calamity like the coronavirus because it couldn’t have been predicted."

 

"Over the past few years, academics and government regulators have sounded alarms that nonbanks don’t have the capital or liquidity to withstand an economic downturn. A 2018 paper by researchers at the Fed and the University of California-Berkeley warned that the nonbank mortgage sector “appears to have minimal resources to bring to bear in a stress scenario.”

 

"The MBA, the industry trade group, released its own white paper in 2019 calling the researchers’ warnings “overstated.”

 

Ginnie appears to be the bigger issue

 

If not solved, the epicenter of the nonbank crisis will be with Ginnie, which is part of the U.S. Department of Housing and Urban

Development. The company guarantees $2.1 trillion in mortgage bonds containing loans to low-wealth borrowers, veterans and others.

 

"They" are really letting the servicers hold the bag on this one. Really making them squirm. Is this really payback for lobbying so hard against FnF?

[DRValue]

Is this really payback for lobbying so hard against FnF?

 

 

I really hope it is, but i doubt it.

[Luke 532]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

We'd be fine in that scenario as we have the capital to cover it.  My caution, and my worry in this whole situation, is the line I bolded above: (1) what "default" entails in this situation...same as "take-up" (those taking advantage of forbearance) or something different, and (2) if it's up in the 20-25% range instead of 5%, then it's a different story. 

 

With that said, Calabria said if the "take-up rate" is 20-25% we'd be fine... that's at the 2:20 mark of this video: https://www.cnbc.com/2020/04/01/chief-regulator-says-mortgage-bailout-is-on-the-honor-system.html

[Luke 532]

Is this really payback for lobbying so hard against FnF?

I really hope it is, but i doubt it.

 

It's possible.  Wall Streeters have very long memories. 

 

For example, Dick Fuld in the 1990's wasn't too kind during the Asian crisis.  Then in 2008, guess who wasn't bailed out while many others were, Dick Fuld's Lehman.

[DRValue]

Some quick and dirty math, help me figure out where I'm wrong please.

 

Market share split of Fannie and Freddie - 60% Fannie, 40% Freddie.

Median Monthly Mortgage Payment - $1,100 (https://www.thebalance.com/average-monthly-mortgage-payment-4154282)

5% of FnF book in 'Default' - 1.5m loans

Duration - 6 months

 

If I plug these numbers in, that makes FnF payments over 6 months of $9.9b, split 60/40 $6b Fannie and $4b Freddie.

 

We'd be fine in that scenario as we have the capital to cover it.  My caution, and my worry in this whole situation, is the line I bolded above: (1) what "default" entails in this situation...same as "take-up" (those taking advantage of forbearance) or something different, and (2) if it's up in the 20-25% range instead of 5%, then it's a different story. 

 

With that said, Calabria said if the "take-up rate" is 20-25% we'd be fine... that's at the 2:20 mark of this video: https://www.cnbc.com/2020/04/01/chief-regulator-says-mortgage-bailout-is-on-the-honor-system.html

 

Default, is 'take-up' yup. Sorry, I've seen some articles today calling them defaults. My guess is that capital and earnings can cover this. A timing mis-match would need a loan from the Fed, which is what I think Mark Calabria is talking about. Good to hear him say that they'd need Congress or the Fed rather than Treasury.

[Luke 532]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

[DRValue]

Good to ear him say that they'd need Congress or the Fed rather than Treasury.

 

I've made a point to listen for that.  In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury."  He is making a point by excluding them as even a possibility.

 

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

[Luke 532]

I think the honor system is a huge risk. Saying that, it's not a free lunch as it's added to the principal. Some might take advantage to spend the money today though, if they want to, or may use it as a cushion for another rainy day.

 

I think take-up will be high, unfortunately.

 

Agreed.  I think he is underestimating the take up rate... however it is reassuring that take up of 20-25% and should be fine.  If it gets above that I think we'll have Fed/Congress do something... Calabria honestly didn't seem too worried about all of this, which ironically, has me more worried that he doesn't seem to be too worried :-)