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

[beaufort]

The only positive I see in adopting the CECL standard, for the recap and release, is that this orchestrates the conditions for an instant recap.  But I am leaning towards the negative here. 

[orthopa]

Tim Howard has confirmed that Freddie (and likely Fannie will announce tomorrow) have adopted CECL accounting even though banks had the option to defer it for two years.  Tim thinks fhfa required this.  so the next two quarters will be difficult...hopefully flat but probably showing losses.  this is a very conservative posture, and it certainly doesnt help the GSEs to get to the full capital buildup position set forth in the treasury/fhfa letter agreement.  which feeds into Layton's narrative that the re-Ipo will be delayed. 

 

this seems like an unforced error to me since one might think that if the GSEs would have adopted CECL two years from now, the GSEs would be in a far better position to separate the "good" forbearance loans from the "bad" forbearance loans.

 

Thats quite annoying. I would have thought for sure they would have adopted CECL accounting. Add it to the list of disappointing delays over the past 2-5-7 years. If this does significantly alter the ability to get out of conservatorship or raise capital that certainly goes against Calabria earlier this month saying it may delay things by a couple of months. Maybe a couple of months is 1-6? Again who knows. I have tried to not read the tea leaves but what he says seems to change by month so who knows what to believe or think anymore. He for sure had to know FnF wasn't going to adopt CECL accounting when he made the statement things maybe only delayed for a couple of months. How do they hit the capital levels to get out on a consent decree when they may record a loss or only hundreds of millions of dollars in retained capital vs a previous expectation of 3-6 Billion? Do these reserves some how count towards capital with the new capital rules? Is that why they were delayed to see what happens with this? Im reaching for straws here.

 

What is rigid is the date of the election/court decisions.  As much as they (Calabria/Treasury) can push this shit back over and over and over again that is a rigid deadline. Maybe again they have an ace up their sleeve for a Trump loss that still gets them out of conservatorship in the couple of months between election and inauguration.

[Guest cherzeca]

I am getting the sense that the GSEs' GAAP equity capital on balance sheet (reduced by loss provisioning) is not the same as capital for purposes of risk based capital test that will come out hopefully in May (include back loss provisioning).  I believe Tim Howard will be covering this is a new post on his blog next week.

[Cox022]

small snippet from FNMA 10-q:

 

Our credit-related income or expense and our loss reserves can also be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses. The January 1, 2020 CECL standard implementation introduces additional volatility in our financial results as credit-related income or expense now includes expected lifetime losses on our loans and thus are sensitive to fluctuations in the factors detailed above.

 

The primary driver of credit-related expense for the first quarter of 2020 was an increase in our allowance for loan losses due to losses we expect to incur as a result of the COVID-19 outbreak, using an expected lifetime loss methodology. Estimating the impact of the COVID-19 outbreak on our expected credit loss reserves required significant management judgment, including estimates of the number of single-family borrowers who will receive forbearance and any resulting loan modifications that will be provided once the forbearance period ends. Under our CECL methodology, depending on the type of loan modification granted, loss severity estimates vary. In determining our allowance for loan losses as of March 31, 2020, we estimated that 15% of our single-family borrowers and 20% of our multifamily borrowers would ultimately receive forbearance due to a COVID-19-related financial hardship.

[Cox022]

A little more:

 

The primary factors that impacted our single-family provision for credit losses in the first quarter of 2020 were:

 

• Expected credit losses as a result of the COVID-19 outbreak, which was included as an adjustment to modeled results. Given the rapidly changing and deteriorating market conditions in recent weeks as a result of the unprecedented COVID-19 outbreak, we believe our model used to estimate single-family credit losses as of March 31, 2020 does not capture the entirety of losses we expect to incur relating to COVID-19. As such, management used its judgment to increase the loss projections developed by our credit loss model to reflect our current expectations relating to COVID-19’s impact. These judgments included adjusting our modeled results for (1) the expected impact of widespread forbearance programs, including the rate of borrower participation, and the volume and type of loan modifications as a result thereof, (2) the effect of TDR accounting relief from the CARES Act, and (3) lower expected repayment volumes given the sharp rise in unemployment rates that are expected to stay elevated over the near term. In developing the model adjustment shown in the table above, management considered the current credit risk profile of our single-family loan book of business, as well as relevant historical credit loss experience during rare or stressful economic environments.

 

• A decrease in our expectations for home price growth. We revised our forecast to reflect near zero home price appreciation on a national basis for 2020 due to COVID-19 market disruptions. The actual and forecasted home price impact shown in the table above reflects our revised forecast. Lower home prices increase the likelihood that loans will default and increase the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately increases our loss reserves and provision for credit losses.

 

• These factors were partially offset by lower actual and projected mortgage interest rates. As mortgage interest rates decline, we expect an increase in future prepayments on single-family loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the expected impairment relating to term and interest-rate concessions provided on these loans and results in a benefit for credit losses. The actual and forecasted interest rate impact shown in the table above reflects our modeled results. As noted above, we adjusted downward our modeled expectation of prepayment volumes due to the COVID-19 outbreak, which reduced this modeled benefit from interest rates.

 

[allnatural]

Something to keep in mind, Watt's capital proposal allowed loan loss reserves to count as statutory capital. So the $4.1b of loan loss allowance put in place by FNMA today for Corona (which assumes 15% forbearance) should still ultimately count as capital if Calabria doesn't change that.

 

From Watt's proposal:

"Total capital, using the statutory definition, means the sum of the following: (1) Core capital of an Enterprise; (2) a general allowance for foreclosure losses, which (i) shall include an allowance for portfolio mortgage losses, non-reimbursable foreclosure costs on government claims, and an allowance for liabilities reflected on the balance sheet for the Enterprise for estimated foreclosure losses on mortgage-backed securities"

[Guest cherzeca]

Something to keep in mind, Watt's capital proposal allowed loan loss reserves to count as statutory capital. So the $4.1b of loan loss allowance put in place by FNMA today for Corona (which assumes 15% forbearance) should still ultimately count as capital if Calabria doesn't change that.

 

From Watt's proposal:

"Total capital, using the statutory definition, means the sum of the following: (1) Core capital of an Enterprise; (2) a general allowance for foreclosure losses, which (i) shall include an allowance for portfolio mortgage losses, non-reimbursable foreclosure costs on government claims, and an allowance for liabilities reflected on the balance sheet for the Enterprise for estimated foreclosure losses on mortgage-backed securities"

 

yes, this goes to my comment above, reply #15341.  if it is true to say (as I think it is) that treasury/fhfa will focus most on the GSEs meeting the risk based capital level that fhfa will propose hopefully this month, I expect that proposed rule will measure capital to give credit to loss provisioning.  I dont think this will occur with respect to statutory capital, but this test (.45% of assets as I recall) will not be difficult.

 

so CECL adoption should be indifferent to the GSEs meeting the risk based capital proposed rule.  we shall see.

[Jcmeg35]

I know it is not fully comparable given the type of security, pricing, etc. However, tough to hear all the conversation last year about how the size of the potential raise would be tough and then see Boeing raise $25B in bonds. A lot of differences of course, but nonetheless makes one feel a bit frustrated about how slow Admin has moved with this.

[Guest cherzeca]

Tim Howard has confirmed that based upon fnma's assumptions re covid effect (15% single family/20% multi-family forbearance take up, management's assumed modification costs and housing prices staying flat during 2020), what fnma added to loss reserves in Q1 as per CECL are all of the loss provisioning fnma needs to do re covid in 2020...things would have to become worse than assumed in order for additional loss provisioning.

 

I think this is an important and quite frankly favorable takeaway.  for example, fnma indicated that current single family forbearance take up is at 7%.  fnma has already reserved based upon a doubling of the take up to 15%.  this seems to me to be reasonable...and if it holds true, then fnma's reserving this quarter shows a remarkable resilience to covid stress.

[Luke 532]

Latest from Gaby Heffesse.  4:45 minute mark:

[Guest cherzeca]

Latest from Gaby Heffesse.  4:45 minute mark:

 

Well gabby didn’t realize that GSEs would adopt CECL in Q1. But unless GSEs assumptions as to forbearance take up rate, costs of remediation and housing pricing prove inadequate the GSEs have already accounted for covid effect in Q1

[orthopa]

Tim Howard has confirmed that based upon fnma's assumptions re covid effect (15% single family/20% multi-family forbearance take up, management's assumed modification costs and housing prices staying flat during 2020), what fnma added to loss reserves in Q1 as per CECL are all of the loss provisioning fnma needs to do re covid in 2020...things would have to become worse than assumed in order for additional loss provisioning.

 

I think this is an important and quite frankly favorable takeaway.  for example, fnma indicated that current single family forbearance take up is at 7%.  fnma has already reserved based upon a doubling of the take up to 15%.  this seems to me to be reasonable...and if it holds true, then fnma's reserving this quarter shows a remarkable resilience to covid stress.

 

So a double favorable take a way then huh? Loss provisioning should still count towards statutory capital for release and reserving taken in Q1 seems to be more then sufficient for now?

 

I have to re read watts capital rule fine print now.

[Guest cherzeca]

"Loss provisioning should still count towards statutory capital for release..."

 

to be clear, it is my understanding that the minimum statutory capital rule in HERA (as I recall .45%) only measures equity from B/S, but the risk based capital rule from watt and expected from calabria would include equity + loss reserves. 

 

Midas should comment

[investorG]

The GSEs need private equity capital ASAP imo.

 

The earnings reports were solid.  The mgmts probably backed into a credit loss provision which ensured some modest headline profits but at the same time started the Loan loss reserve build.  LLR rose by 0.1pct at each to 0.4% (fnma) and 0.3% (fmcc).

 

It's very low odds imo this is the end of the lowered (or negative) earnings period from higher loan loss provisions and the companies / Calabria / Mnuchin know this.  Material organic capital build is likely not happening for a while at least --- a repeat of 1q for the next 6 quarters in terms of modest but positive cumulative profits would be good news imo.  I know what the mgmts said but I've seen this before and models have plenty of subjectivity.

 

Unemployment benefits are turbo charged thru Aug1.  When benefit payouts drop 50-75pct after that, the forbearance rate will almost certainly surge again unless Trump (unwisely politically) declares the window closed.  Home prices in some areas may well turn negative.  Even though the companies' books entered the crisis in good shape, material losses are likely.

 

I continue to believe it's important that they not wait until after the election for movement.  The team imo should:  a) settle collins in conjunction with a 4th amendment which deems sr pref paid off but forgoes the 30bn credit from Tsy while maintaining the govt backstop (paid-for)  b)  exercise half the warrants and forgive the other half  and c) issues [30]bn convertible preferred (equal seniority to outstanding jr pref) to private equity.   

 

The capital rule may or may not come out this quarter but I personally don't see the original / ACG plan in terms of consent decrees, conversions, pre-ipo planning as reliable.  I noticed there was no follow up commentary from the FMCC about hiring their own advisors.

[Guest cherzeca]

I dont think anything will happen until proposed capital rule and seila are out, next two months.  also GSEs and fhfa will be watching unemployment/forbearance trends over Q2.  GSEs do NOT need more capital now.  now is the worst time to try to execute a capital raise so you dont do it unless you need it, and the GSEs dont need it.  if the shit really hits the Fannie there is the treasury line...and you sure dont want to raise capital and then have the shit hit the Fannie...close the markets off to you when an issuance does poorly.  we are in watchful waiting...like having early stage prostate cancer

[Midas79]

"Loss provisioning should still count towards statutory capital for release..."

 

to be clear, it is my understanding that the minimum statutory capital rule in HERA (as I recall .45%) only measures equity from B/S, but the risk based capital rule from watt and expected from calabria would include equity + loss reserves. 

 

Midas should comment

 

There is nothing in HERA, that I am aware of, that sets out the conditions for release from conservatorship. While some, like ACG Analytics, have speculated that FnF will be released when they hit the statutory minimum capital requirement (which I believe was around $41B combined), I don't see anything that holds Calabria to that.

 

In fact, Calabria said "It has always been my view that an exit from conservatorship is going to require a large capital raise by Fannie and Freddie." a month ago. To me, that signals release at or near the full minimum capital standard. Watt's two proposed alternatives for that were $103.5B and $139.5B, and I would be shocked if Calabria's number comes in lower than that range. I would be much less surprised if it's higher, even though that would hamper release by requiring a $100B capital raise all at once.

 

Tim Howard said "I think both FHFA and Treasury will be more focused on where Fannie and Freddie’s core capital is versus the new minimum capital requirement in deciding on the timing of their release from conservatorship", and I completely agree.

[Luke 532]

Fannie Mae, Freddie Mac are preparing to cover servicers’ advances on loans in forbearance

https://www.housingwire.com/articles/fannie-mae-freddie-mac-are-preparing-to-cover-servicers-advances-on-loans-in-forbearance/

[orthopa]

"Loss provisioning should still count towards statutory capital for release..."

 

to be clear, it is my understanding that the minimum statutory capital rule in HERA (as I recall .45%) only measures equity from B/S, but the risk based capital rule from watt and expected from calabria would include equity + loss reserves. 

 

Midas should comment

 

There is nothing in HERA, that I am aware of, that sets out the conditions for release from conservatorship. While some, like ACG Analytics, have speculated that FnF will be released when they hit the statutory minimum capital requirement (which I believe was around $41B combined), I don't see anything that holds Calabria to that.

 

In fact, Calabria said "It has always been my view that an exit from conservatorship is going to require a large capital raise by Fannie and Freddie." a month ago. To me, that signals release at or near the full minimum capital standard. Watt's two proposed alternatives for that were $103.5B and $139.5B, and I would be shocked if Calabria's number comes in lower than that range. I would be much less surprised if it's higher, even though that would hamper release by requiring a $100B capital raise all at once.

 

Tim Howard said "I think both FHFA and Treasury will be more focused on where Fannie and Freddie’s core capital is versus the new minimum capital requirement in deciding on the timing of their release from conservatorship", and I completely agree.

 

Thanks, how do you view the loan loss reserves impacting expected happenings such as final PSPA agreement, and release on consent decree vs the deadline of the election and its consequences? It seems at a minimum it may take a little longer for the preferred to get to par if/once the srs are gone based on capital build alone right? Just more waiting it seems.

[investorG]

Mortgage rates are around 3.25%.  If they reverted to their historical spread to Tsy's they'd be 2.5% or lower.  This would obviously be stimulative 6 months out from the election.  it's better public policy to inject private equity $$ into FnF (who could then move quickly under calabria's direction to reverse the semi freeze in the mortgage mkt) than the Fed buy additional hundreds of billions of MBS.

[Guest cherzeca]

the "semi freeze" in the mortgage market is caused by tbtf banks that have pulled back on their warehousing lines to nonbank originators (over 50% of the market), because of the forbearance servicing liquidity issue.  has nothing to do with GSEs capital level.

[Guest cherzeca]

"April MBS issuance was up 44.1% from March, with the biggest gain coming in Fannie and Freddie issuance, which soared 61.3% in one month."  from IMF today.

 

one month doesnt make a trend, but this is nice to see.  big divergence between fnma and fnmas on the day's trading.  not sure what if anything to make of it

 

[buffetteer1984]

Is there any reason (or risk) to get fnmas over fmckn at this point if par is the same?  Sorry if this has already been answered.

[Guest cherzeca]

forbearance requests as a % of servicing volume declining (GSEs orange bar)

 

http://www.mortgagenewsdaily.com/05042020_covid_19_forbearance.asp

 

may be partly a function of more requests made in first week of month when mortgage payments may be due.  will be interesting to see if first week of may spikes up

[Guest Covid-19_Survivor]

Is there any reason (or risk) to get fnmas over fmckn at this point if par is the same?  Sorry if this has already been answered.

 

IMO, there's no difference between greater yielders like FNMAS or subpar yielders (not doing that math but I'm sure I own a few) as there's no difference between larger and lessor traders, as there's no difference between Freddie and Fannie. Eventually all will be resolved, dividends and separate corp entities mooted, and it won't make a hill of beans if FNMAS trades more shares on a given day or once had a larger divi.

 

Question now is if we will have to wait another 10 years for resolution or if it'll be more immediate than that. I don't know. But trade FNMAS or own the dog-faced pony soldier of the day. I prefer the latter. They're all the same. Again, imo.

[Guest Covid-19_Survivor]

forbearance requests as a % of servicing volume declining (GSEs orange bar)

 

http://www.mortgagenewsdaily.com/05042020_covid_19_forbearance.asp

 

may be partly a function of more requests made in first week of month when mortgage payments may be due.  will be interesting to see if first week of may spikes up

 

There is no constructiveness in your post. May has little to do with anything.

 

We're at 5%  now, our guru estimates 15%, and it's very possible we go way above that. To avoid that obviousness is counterproductive, given that experts have estimated ~50% of pop contracting virus but only a fraction has to date.

 

You know what would be productive? if some of you boardmembers entrenched in FnF for a decade (like me), but far more knowledgeable, would help us understand poor scenarios, instead of the same old 'the treasury is going to void their $200b because we're special'