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

[Guest cherzeca]

not good.  if servicers have already given out more than 4 month forbearances, GSEs now on the hook after 4 month date.  I suppose this was a compromise between mnuchin and calabria, and sensible to calabria if he thinks 4 months is a low risk...one assumes he has data to show what the risk is as of today in terms of lengths of forbearance already given out. this strikes me as a favor bank deposit by calabria...just hope he gets the favor back.  I have read that a GSE is formally the servicer on all of its mortgages in pools and it contracts for subservicing to the servicers, so on some theory a GSE might have been thought to be "morally" responsible for these forborne payments, even though I am sure the subservicing agreement calls for subservicer to make these payments.

[beaufort]

Correct me if I am wrong.  After 4 month mark GSEs pay principal and interest.  By keeping the loan in the MBS, the GSEs don't have to buy out the loan.  This results in less of a hit to capital for up to a year because the loan is not yet in default.  After 1 year, the GSEs would have to buy the loans out of the MBS, with the accompanying significant capital hit (if on a large scale) due to default. 

[Guest cherzeca]

Correct me if I am wrong.  After 4 month mark GSEs pay principal and interest.  By keeping the loan in the MBS, the GSEs don't have to buy out the loan.  This results in less of a hit to capital for up to a year because the loan is not yet in default.  After 1 year, the GSEs would have to buy the loans out of the MBS, with the accompanying significant capital hit (if on a large scale) due to default.

 

well, you are right that any loan in forbearance doesn't have to bought out of pool at par (confirmed by fhfa though I dont see how there was any doubt about that), so there is a "drip" in payment obligations for GSEs on these loans going forward after 4 months as opposed to a "drop" payment of par.  at end of forbearance period, it was always GSE's risk since if the mortgage goes into default at that point, GSEs would have to pay...though now a bit different as GSEs could have servicers extend/modify any forbearance loans that need further relief but that further forbearance now goes on the GSEs' account

[allnatural]

Keep in mind that prior to today's FHFA press release, the GSEs were ALREADY on the hook for making the MBS payments after 4 months. Calabria even highlighted this in the press release, "Today's instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac." I know Tim Howard was saying 3-4 months as well a few weeks back. Servicers were never on the hook past 4 months to begin with. It seems like this is an "optical" win for MBS at best, but what did they actually get out of this that was different before today? In reality no policy was actually changed other than Calabria reiterating the GSEs responsibilities after 4 months.

 

GSEs also bot themselves 6-12 months (depending on length of forbearance) by keeping the forbearance loans in the GSEs MBS pool. At the end of the 6-12 months we will know how much % of the forbearance loans translates to default events and thats the only time the GSEs will really start to take some losses. Keep in mind the average LTV @ FNMA is 57% and FMCC is 60%. Home prices would have to sharply correct by >20%+ before home owners start getting wiped out / defaulting.

[Guest cherzeca]

Keep in mind that prior to today's FHFA press release, the GSEs were ALREADY on the hook for making the MBS payments after 4 months. Calabria even highlighted this in the press release, "Today's instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac." I know Tim Howard was saying 3-4 months as well a few weeks back. Servicers were never on the hook past 4 months to begin with. It seems like this is an "optical" win for MBS at best, but what did they actually get out of this that was different before today? In reality no policy was actually changed other than Calabria reiterating the GSEs responsibilities after 4 months.

 

GSEs also bot themselves 6-12 months (depending on length of forbearance) by keeping the forbearance loans in the GSEs MBS pool. At the end of the 6-12 months we will know how much % of the forbearance loans translates to default events and thats the only time the GSEs will really start to take some losses. Keep in mind the average LTV @ FNMA is 57% and FMCC is 60%. Home prices would have to sharply correct by >20%+ before home owners start getting wiped out / defaulting.

 

I read that fmcc was going to take over forbearance payments after 4 months, but fnma wasn't there yet, so this pushes fnma to conform to FMCC policy.

 

bigger picture, the GSEs need to continue to display their centrality and importance to the mortgage finance industry, so this fhfa announcement is consistent with that...I just wonder when policy makers will finally give the GSEs effing credit for it

[allnatural]

According to T. Howard, FNMA was already on the hook after 3-4 months (we know FMCC was after 4 months), so i'm not sure how this policy diverges from that.

 

jtimothyhoward

MARCH 24, 2020 AT 10:25 AM "... A former Fannie Mae colleague wrote to remind me that under most of Fannie’s servicing arrangements servicers ARE required to advance the first 3 or 4 months’ missed payments, although they then are reimbursed for those advances so that Fannie ultimately bears the cost."

 

jtimothyhoward

MARCH 26, 2020 AT 12:46 PM

"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 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."

[beaufort]

Yes, my conclusion as well is that this cannot be what the MBA wanted.  Not much to hurt the recap and release efforts here.

 

If this continues, the MBA may realize that the only way out of this for the servicers (to not lose their shirts) is for FnF to be capitalized very, very quickly.  They should quickly start lobbying for that.

[Wiggins]

https://www.nhc.org/event/fhfa-to-discuss-covid-19s-impact-on-the-housing-finance-system/

[Luke 532]

https://www.jchs.harvard.edu/blog/americas-housing-finance-system-in-the-pandemic-part-4-seven-reports-from-the-battlefield/

 

Layton:

Good news...

"So, the current plan being executed by the FHFA and Treasury – where the GSEs are not wound down but instead exit conservatorship via administrative means, while maintaining the reforms of the last decade – is looking pretty good. In fact, it’s very close to the consensus that was seeming to emerge. Given the reforms that have been implemented, the GSEs in this scenario should operate properly and safely in normal times, and in crises it will enable the government to be nimbler and more effective in quickly delivering large-scale relief."

 

Bad news...

"Unfortunately, I believe the pandemic will materially delay the exit process, especially the first capital raises, for two primary reasons:

 

Both FHFA and Treasury will, and should, prioritize dealing with the deep economic disruption and downturn unleased by fighting the pandemic (which is far worse than thought just a month ago). The GSE exits are far less important, and with only so many hours in the day and people to work on priority issues, conservatorship exit-related decisions and actions will get pushed back. Of particular note, learnings from the current stress environment should inform the new capital rule that FHFA is in the midst of developing, which means its finalization should wait until the current crisis has mostly run its course.

 

Raising equity for the GSEs will require record-setting large new issues, which means investor appetite must be broad and strong. However, investors will not sign up to buy record-setting amounts of GSE shares at acceptable prices while the credit cycle, now beginning a severe and hard-to-predict downturn, has the GSEs seeing increasing delinquencies and large credit reserves. (This is known on Wall Street as “catching a falling knife”- i.e. to be avoided.) In fact, history shows that investors will largely wait to see that the credit cycle has credibly peaked before purchasing large amounts of new issue shares. As a guide, that peak happened three-plus years after the beginning of the last financial crisis in 2008. This time around, no one will get a clear picture of credit quality until at least the forbearance programs (which can last up to 12 months) have run their course, so investors can determine how much forbearance turns into re-started prompt monthly payments versus default.

So, there will be a delay, and likely by more than just a few months. It’s regrettable and unfortunate, but lots of well-laid plans are being delayed if not wholly changed by the current pandemic."

[TwoCitiesCapital]

https://www.jchs.harvard.edu/blog/americas-housing-finance-system-in-the-pandemic-part-4-seven-reports-from-the-battlefield/

 

Layton:

Good news...

"So, the current plan being executed by the FHFA and Treasury – where the GSEs are not wound down but instead exit conservatorship via administrative means, while maintaining the reforms of the last decade – is looking pretty good. In fact, it’s very close to the consensus that was seeming to emerge. Given the reforms that have been implemented, the GSEs in this scenario should operate properly and safely in normal times, and in crises it will enable the government to be nimbler and more effective in quickly delivering large-scale relief."

 

Bad news...

"Unfortunately, I believe the pandemic will materially delay the exit process, especially the first capital raises, for two primary reasons:

 

Both FHFA and Treasury will, and should, prioritize dealing with the deep economic disruption and downturn unleased by fighting the pandemic (which is far worse than thought just a month ago). The GSE exits are far less important, and with only so many hours in the day and people to work on priority issues, conservatorship exit-related decisions and actions will get pushed back. Of particular note, learnings from the current stress environment should inform the new capital rule that FHFA is in the midst of developing, which means its finalization should wait until the current crisis has mostly run its course.

 

Raising equity for the GSEs will require record-setting large new issues, which means investor appetite must be broad and strong. However, investors will not sign up to buy record-setting amounts of GSE shares at acceptable prices while the credit cycle, now beginning a severe and hard-to-predict downturn, has the GSEs seeing increasing delinquencies and large credit reserves. (This is known on Wall Street as “catching a falling knife”- i.e. to be avoided.) In fact, history shows that investors will largely wait to see that the credit cycle has credibly peaked before purchasing large amounts of new issue shares. As a guide, that peak happened three-plus years after the beginning of the last financial crisis in 2008. This time around, no one will get a clear picture of credit quality until at least the forbearance programs (which can last up to 12 months) have run their course, so investors can determine how much forbearance turns into re-started prompt monthly payments versus default.

So, there will be a delay, and likely by more than just a few months. It’s regrettable and unfortunate, but lots of well-laid plans are being delayed if not wholly changed by the current pandemic."

 

Honestly, this might be "positive"-ish news for the common. 3-more years of retained earnings instead of complete dilution in the near term? Changes the calculus for the preferreds more negatively since it will extend the time horizon, but I think as long as we get a permanent revision of the NWS that it will be positive for both in the medium term.

[Guest cherzeca]

this Layton piece is a fair assessment, and the first tell as to whether Layton is right will be whether or not calabria punts on the proposed capital rule in may.  I would be surprised if he does, since the rule should be stress event independent...whatever the event, here is required capital amount.  of course, calabria wont know by may whether this corona event is a "super-event" requiring even more capital, but any capital level that satisfied GFC "should" (as one expects the proposed rule will be designed to do) be also good for a pandemic.

 

edit:  once capital markets sense that the corona risk has attenuated sufficient to start buying stock, my experience is that there wont be a queue much as Layton implies...ie once the animal spirits return, then you will see any and all calling their investment bankers, and the GSEs will go to the front based upon size...because on Wall Street, size definitely matters.

 

also, while treasury will certainly be distracted over the near term, I sense that treasury has asked fhfa to do the initial plan implementation work, since fhfa and not treasury has retained advisors. I dont expect that Houlihan Lokey and Milbank will be slowed down because of treasury's distraction.

[onyx1]

edit:  once capital markets sense that the corona risk has attenuated sufficient to start buying stock, my experience is that there wont be a queue much as Layton implies...ie once the animal spirits return, then you will see any and all calling their investment bankers, and the GSEs will go to the front based upon size...because on Wall Street, size definitely matters.

 

Layton needs to be reminded that US banks raised capital during the GFC, not three years afterward when the dust settled.

[allnatural]

Layton also fails to recognize the big bang moment for GSEs isnt a "BIG IPO" but actually the 4th amendment which shouldnt be delayed more than a few months at best (unless lockdown situation gets much worse).

[Guest cherzeca]

@onyx/allnatural

 

I view Layton's value added to be his knowledge of FMCC operations, not investment banking.  while having a long career at JPM, it was all on the commercial side, and the more I have read of his investment banking pronouncements, the more I think he has no clue of that side of banking.  moreover, since he was a commuter to DC during his FMCC stint, keeping his Greenwich Ct residence for weekends, I am not sure how clued in he was to actual FMCC operations (and there was no fhfa oversight to deal with during Watt's tenure).  so his prognostications are worth as much as anybody's but imho not much more than anybody's

[Wiggins]

Been thinking about this for a while and WSJ had an article spurring the same thoughts:

https://www.wsj.com/articles/ppp-loan-terms-amount-to-legalized-fraud-11587422730?mod=hp_opin_pos_2

 

"the Paycheck Protection Program ... will function as a handout to companies that don’t need it. Billions of ... dollars will never be paid back."

 

Where's all the extra stimulus money going to go once it's clear the economy is coming back to life?

 

[orthopa]

Rosner apparently had a note out about the latest GSE servicer move. Anyone have the note by chance?

[Guest cherzeca]

Rosner apparently had a note out about the latest GSE servicer move. Anyone have the note by chance?

 

Tim Howard on fhfa move:

 

"The announcement by FHFA today on servicer obligations for advancing principal and interest (P&I) payments by borrowers in forbearance because of Covid-19 on mortgages sold to Fannie and Freddie is part confirmation of established practice and part new policy, intended, as FHFA notes, to enable servicers to “plan for exactly how long they will need to advance principal and interest payments” on forborne loans.

 

The new part of the announcement is limiting servicer advances of P&I on forborne loans sold to Fannie to 4 months. There had not been a formal maximum number of monthly P&I advances to Fannie previously, but typically Fannie would buy a loan that was 4 months delinquent out of its MBS pool–in order to do a modification of the terms of the loan, or create a repayment plan, that Fannie felt would maximize the chance of the loan returning to paying status or being paid off–and at that point the servicer would be reimbursed for its advances of P&I payments. The problem arose (for Fannie, not Freddie; Freddie had a 4-month maximum for P&I advances under all circumstances) when a loan was placed in forbearance because of a natural disaster or some other unforeseen circumstance, such as we are experiencing now. In those cases, servicers could be required to continue to advance monthly P&I payments to Fannie for loans under what are called “scheduled/scheduled” remittance programs–which are most of Fannie’s loans (the company has an “actual/actual” remittance program for some loans, on which it makes the monthly P&I advances itself)–for an indefinite period to time.

 

The uncertain duration of having to make P&I advances to Fannie on loans in forbearance was causing consternation among servicers, non-bank servicers in particular. FHFA’s announcement today is a response to that. There still may be uncertainty as to when servicers are repaid their 4 months of advances on Fannie (and Freddie) loans in forbearance, however. The FHFA announcement only says that Fannie will make the advances after month 4; it does not say Fannie will reimburse servicers at that point. Servicers may have to wait for their advance reimbursements until the loan either returns to paying status or is bought out of the pool.

 

I would view today’s FHFA announcement as (modestly) credit positive for Fannie, rather than neutral. The more clear and routine the P&I advancing process is for servicers, the more likely they are to act in borrowers’, and Fannie’s, best interest while working with borrowers to help them understand how the forbearance program works, and what future obligations it entails. That’s different, of course, from saying that the forbearance program itself is credit positive. It’s clearly not. As I’ve said before, the impact the pandemic will have on Fannie’s credit losses will depend on how many people lose their jobs (the number already is at depression levels), how long it takes them to be re-employed, and what effect the drop in earned income from lower employment has on the economy as a whole. I for one will be very interested to see what Fannie does with its provision for loan losses in the first quarter."

 

I wonder if shelter in place will affect timing and substance of GSEs' 1Q financials.  setting loss reserves is a collaborative process (and fraught with difficulty to avoid over and under allocation), and I just wonder whether this process will be messed up in zoom calls, leading to (I would expect) larger than might be expected loss reserves.  I am not a big fan of zoom collaboration, though that is all there is now

[orthopa]

https://thefly.com/landingPageNews.php?id=3076666

 

While it is early on in the economic downturn and many unknowns remain, Fannie Mae (FNMA) and Freddie Mac (FMCC) are well positioned for a recessionary environment and can emerge stronger on the other side, Nomura Instinet analyst Matthew Howlett tells investors in a research note. The COVID-19 crisis puts a greater urgency on policy makers to raise private capital, and Republicans and Democrats are more united on the future role of the government sponsored entities given the disruption in the mortgage market, contends the analyst. He believes this was evident by yesterday's announcement regarding servicing advance obligations. The crisis is also likely to unite the various parties involved toward a settlement, "sooner rather than later, as a sense of urgency has likely increased on both sides," says Howlett. The analyst believes Fannie and Freddie are ready for a recession and reiterates Buy ratings on both stocks with price targets of $5 and $4.50, respectively.

 

https://www.thirdpointoffshore.com/wp-content/uploads/2020/04/Third-Point-Q1-2020-Investor-Letter-TPOI-1.pdf

 

Loeb notes GSEs paid back and investors need trust in gov.

 

 

Looks like FnF will charge to take on the loans due to risk. Very nice Mark!!

[orthopa]

https://documentcloud.adobe.com/link/review/?uri=urn%3Aaaid%3Ascds%3AUS%3A2c1c44a8-7097-46ca-874f-a05130964e2f

 

Rosners note

[Midas79]

I hadn't yet joined the investing world during the 2008 financial crisis, but I have heard many stories that a lot of banks were forced to recapitalize at what turned out to be a really bad time for pre-raise shareholders. Massive equity raises at low prices in a time of crisis. Is this true?

 

If Nomura really is invoking this comparison, it's hard to see how the commons go to $5 given where they trade now. Then again, raising capital right now is impossible due to the lack of a capital rule and PSPA 4th amendment.

[orthopa]

I hadn't yet joined the investing world during the 2008 financial crisis, but I have heard many stories that a lot of banks were forced to recapitalize at what turned out to be a really bad time for pre-raise shareholders. Massive equity raises at low prices in a time of crisis. Is this true?

 

If Nomura really is invoking this comparison, it's hard to see how the commons go to $5 given where they trade now. Then again, raising capital right now is impossible due to the lack of a capital rule and PSPA 4th amendment.

 

Yeah a lot did, esp BAC and the Buffett deal. If capital rule really released in late May maybe the PSPA amendment is pulled forward a little if there is a big kumbaya? Per ACG by July 4th FnF capital advisors should be picked. PSPA amendment could maybe be a q3 thing but dont see how it could happen before capital plans are drawn up.

 

It seems the emerging collective thought is a realization that in the end all parties involved want the same outcome so why continue all the fighting? The sticky situation is the $$$ though.

[Guest cherzeca]

"The sticky situation is the $$$ though"

 

yes, but that will resolve itself over time if the pspa is amended, the litigation settled, and conservatorship into consent phase goes into effect.  I dont expect all of this to occur until we are over much of the covid shutdown and some return to a steady state of mortgage finance...ie no more forbearances granted, and a good read of the GSEs current delinquencies and loss reserves are established...maybe Q4.

 

once that is done, then capital markets will be capital markets, and fear may persist longer than anyone would wish, but the worm will turn as it always does and greed will replace fear.  and what is important to realize is that Wall Street will want to do the biggest deals possible when markets loosen, and that has GSE written all over it.

[orthopa]

"The sticky situation is the $$$ though"

 

yes, but that will resolve itself over time if the pspa is amended, the litigation settled, and conservatorship into consent phase goes into effect.  I dont expect all of this to occur until we are over much of the covid shutdown and some return to a steady state of mortgage finance...ie no more forbearances granted, and a good read of the GSEs current delinquencies and loss reserves are established...maybe Q4.

 

once that is done, then capital markets will be capital markets, and fear may persist longer than anyone would wish, but the worm will turn as it always does and greed will replace fear.  and what is important to realize is that Wall Street will want to do the biggest deals possible when markets loosen, and that has GSE written all over it.

 

cherzeca

 

You may have already answered this and its lost in this thread and my head but what do you think is delaying an inevitable settlement?  There are well known steps that have to occur. Milbank as you suggest will put in their $.02. HL is going to say the lawsuits must be settled, and all parties involved have same end goal.

 

What is holding Treasury up in your opinion from throwing in the towel? Selia ruling? Political cover? Easily accessible foot dragging just because? I guess my specific question is what forces treasury's hand in your opinion? Lawsuits? Combined incentive? Politics? Calendar?

 

Im no where near a lawyer but I believe you also said once in law things drag forever and then happen all at once. Is this what you see in Q3-Q4?

 

Thanks

[Guest cherzeca]

@orthopa

 

well, first HL and Milbank must do their work.  these are top flight advisors who are used to expedited schedules, but I dont think fhfa has put them on a particularly expedited schedule...plus shelter in place will slow down their work just a tad. 

 

second, I do believe that treasury is looking for political cover, and in my view seila will provide that if cfpb is ruled unconstitutionally structured and the seila CID is vacated.  seila will be the perfect opportunity for Milbank to tell fhfa that it is f*cked if that ruling comes down as I expect.

 

third, the capital rule should be reviewed very carefully by HL before it is issued so that it is financeable.

 

and now fourth, GSEs have to be viewed as part of the housing finance solution and not just a piggyback. and there are promising signs of that emerging...eg, this new lenders letter which says that GSEs will buy newly originated loans in forbearance, but at a pricing discount.

 

large shareholders and Ps have had no one to talk to about settlement, so there was no path to settlement.  now at some point, I expect HL and Milbank will formulate a common ground between them that can accommodate a substantive negotiation with large shareholders.  you could not have this negotiation with fhfa counsel who, I am guessing, leaves the office at 4:50pm to beat the evening rush hour.

[investorG]

It's very nice that Calabria is standing up for FnF.  However there's almost no chance he is going to be able to withstand the pressure aimed at him.  Tightening the mortgage market is not good for a) middle class Americans and b) Trump's prospects.  Mnuchin surely knows this.

 

At this point, we should be hoping that the solution involves injecting fair non-PSPA capital into the GSEs alongside a Collins settlement and warrant exercise.  It's the right thing for all parties, and involves probably a couple days of collaborative work.  Layton is likely right, a potential re-IPO is delayed materially from Plan A.

 

Calabria tried to get himself to late May but the situation is evolving faster than that.  The May 1 forbearance numbers are likely to explode with plenty more after that.  He canceled Tomorrow's webinar for good reason, the pressure is no doubt intense.  He likely would get fired if he stands still from here which I don't expect.