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

[Midas79]

Anyone have a link to the arrowood dismissal?

 

https://ecf.cofc.uscourts.gov/doc1/01513723106

 

crappy argument and crappy opinion. given Fairholme and collins, this is no great loss.  it is a shame Sweeney was spending her time on this and not on Washington federal.

 

What's crappy about it? At least, is there anything crappy about it that wasn't crappy in the Fairholme opinion? It's mostly a copy-and-paste outside Section V (Standing).

 

I do agree that it's no big loss. She dismissed Arrowood's direct claims for basically the same reason she dismissed Fairholme's direct claims. I would expect her to dismiss all other similar direct claims (breaches of fiduciary duty and implied-in-fact contract).

 

I also think that the Washington Federal case is in grave danger of being dismissed in its entirety. If Sweeney decides that she lacks jurisdiction over any direct claims, doesn't that case just go poof like Arrowood?

[Wiggins]

@Midas

re: "why didn't you do the same thing at the end of 2019 as you did in 2018?"

The conditions were different. In 2018 the securities had gone down a lot over the year, so there was selling pressure for tax-loss harvesting. Additionally, the commons were really, really low (too much, IMO). One or both went below $1. In 2019 they didn't really lose value over the whole year, so there were likely few losses to be booked by most people. And I don't think there's a lot of selling pressure otherwise because people are waiting for recap or a ruling catalyst, so they're staying in. I should make a distinction between this strategy and the one discussed in Graham's book. In The Intelligent Investor it talks about a strategy to buy stocks in December and sell them in January, regardless of any other factors. There were a few years where people made money but soon a lot of people caught on and overall the practice is roundly discredited. What I am talking about is integrating multiple other factors into the tax-balancing strategy that many people do at year's end already; it's really a distinct strategy. The securities have to be down a lot so that many people are likely wanting to harvest the losses (hence the selling pressure), AND the thesis has to be solid so that folks will get back in them in the new year (buying pressure). All those factors were solidly present in late 2018 for the commons to my thinking.

 

As far as rotating between preferred and common according to a ratio like you're talking about, I guess I do that a little bit and the late 2018 was part of that (some of the funds I rolled into commons came from preferreds, while some other funds came from gains I was forced to book).  But I don't employ it as a general strategy because I have no great predicting strategy for it and it seems rather arbitrary and random. Plus, the spreads on preferreds make it difficult. Speaking of spreads, if you were patient you possibly could make money off of buying and selling the preferreds and working the spreads, but I have neither patience nor time for that personally, even if I could make it work which I doubt I could. Lastly, I am worried for the commons that there could be a sudden announcement for conversion of preferreds into common, and it'd be unfortunate if you weren't holding preferreds at that time. Are you worried about that? And isn't that what happened with Citi?

[Guest cherzeca]

"I also think that the Washington Federal case is in grave danger of being dismissed in its entirety. If Sweeney decides that she lacks jurisdiction over any direct claims, doesn't that case just go poof like Arrowood?"

 

good question.  my response is that Fairholme/arrowood's direct claims are with respect to what conservator did...so in the federal circuit's view a shareholder's complaint about what the conservator did is espousing the corporation's claim against the conservator, hence derivative's .  Washington federal claims are with respect to the whole appointment of the conservator.  I have not gone back to read the Washington federal papers but I suspect you are right, wash fed is making a direct claim.  not sure claims re the "appointment of conservator" fits under the same standing analysis as claims re the "acts of a conservator" 

 

edit:  yes, wash fed pleads direct claim, but distinguishes facts re imposition of conservatorship in its claim from fairholme' facts, dismissing direct claim. https://ecf.cofc.uscourts.gov/doc1/01513673776

 

edit:  I say crappy opinion because Sweeney addresses in Arrowood the conservator authority issue and says circuit courts have dismissed claim...apparently written before collins, and not revised after collins. in wash fed, supplemental brief linked above specifically points to collins as holding shareholders have a direct claim for damages arising from an ultra vires conservator act.

[Midas79]

@Wiggins

 

Thanks for the explanation. It makes perfect sense.

 

Yes, Citi's conversion took the market completely by surprise: the pref:common ratio in the exchange offer was more than 3 times that of the day before the announcement was made. Being caught off guard, i.e. with a large common position, when a FnF share exchange hits could be devastating compared to just owning all prefs. In fact, that's essentially the reason I only own the prefs most of the time, and never go below 90% (vis a vis the commons).

 

I wrote a post about Citi's conversion last year, it might answer some of your other questions if you haven't read it yet.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg382592/#msg382592

 

@cherzeca

 

I see your point that Washington Federal's claims are a very different animal than those made by basically all of the other cases. I just wonder if Sweeney will paint Washington Federal's claims with the same brush, whether it's out of laziness or that she really does think it's the proper thing to do.

 

I think you have a much better idea than I do about the similarities and differences between the cases. Which part appears to have been written before Collins and not revised since? The Collins decision was in September, while Sweeney's Fairholme decision was in December. So if she failed to update something as a result of Collins, she did so in both the Fairholme and Arrowood cases. It also means she had written her opinion before September, right? 3+ months would be a long time to sit on that.

 

 

 

[Guest cherzeca]

"The Collins decision was in September, while Sweeney's Fairholme decision was in December.'

 

no, sorry, it was the Arrowood opinion that just came out that doesnt reference collins.  but in any event, she was not going to find a direct claim in Arrowood after not finding one previously in Fairholme.  I disagree with Sweeney, I think that Arrowood (and Fairholme) has standing to assert direct claims, but I find Fairholme to be a better vehicle, even with only derivative claims.  as to Wash Fed, it seems to me that shareholders have standing to assert that their property interests (shares) were directly affected by a wrongful imposition of conservatorship. maybe Sweeney will soon let us know.

[DRValue]

Sweeney court makes me suspicious.

[Guest Covid-19_Survivor]

I've never had much faith in either case as the claim they make is that the govt conspired against FnF. Both are true as hell but I've never believed any judge would indict govt for its actions during a crisis by supporting either one (although "mafioso" comes damn close). But the fact they are true and most involved in banking know it undermines confidence in the system. Its why we're gonna get paid....

 

one day

[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.

 

Updating to Fannie's 15% expected forbearance expectation:

 

$18b Fannie and $12b Freddie.

[Guest Covid-19_Survivor]

Unless I'm mistaken both company's have already accounted for 15%, so the remaining risk re: forbearance is if more than 15% of FnF loans become affected. I think that's possible, likely even if a 2nd wave of CV presents itself and Trump is not re-elected. Than again, maybe my sister is right about the whole thing being a vessel to cancel Trump. She's always been a lil nuts about this stuff but we'll see.

 

edit: After reading Mr. Howard's posts I place less risk on forbearance than housing prices (which he doesn't believe is an issue). If full brunt of CV doesn't affect I'd be surprised, and I don't care about how current analysis deems it safe.

[Wiggins]

@Midas

Yes I had seen your post about the Citi exchange and thanks for reposting the link to that. It was really an outstanding bit of research on your part. It was good to re-read. I will continue to monitor the commons. I went back and looked and noticed that in December 2018 the FNMAS:FNMA ratio was 7. It's now at 4.5

[beaufort]

@Midas

Yes I had seen your post about the Citi exchange and thanks for reposting the link to that. It was really an outstanding bit of research on your part. It was good to re-read. I will continue to monitor the commons. I went back and looked and noticed that in December 2018 the FNMAS:FNMA ratio was 7. It's now at 4.5

 

+1

[orthopa]

https://www.fanniemae.com/portal/media/corporate-news/2020/financial-advisor-request-for-proposals-7020.html

 

"While we are fulfilling our mission and helping to keep people in their homes during this national emergency, we also remain committed to ensuring a responsible exit from conservatorship," said Hugh R. Frater, Chief Executive Officer, Fannie Mae. "Today's announcement is a significant step on that path, and we look forward to making a timely selection in the competitive process."

 

Engaging a financial advisor is an important milestone in meeting Fannie Mae's 2020 FHFA scorecard objective to prepare a responsible transition plan for a potential exit from conservatorship. The support of private capital will contribute to increasing the resiliency of the housing finance system.

 

https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-advances-rfp-financial-advisor?_ga=2.143864373.149550911.1589835909-614249754.1589835909

 

“Even as we work to stabilize the housing markets during this unprecedented pandemic, Freddie Mac has remained focused on exiting conservatorship responsibly,” said David Brickman, Freddie Mac CEO. “Today we begin the competitive selection process for a financial advisor that will ultimately facilitate our return to full private capital ownership. This is a significant milestone, and we look forward to making a thoughtful selection quickly.”

 

The financial advisor will provide strategic counsel and perform a range of tasks to facilitate Freddie Mac’s exit from conservatorship. Those tasks include assessing the company’s valuation, reviewing its business plan, identifying options for raising capital and evaluating regulatory considerations during a transition period.

 

I like Freddie's language better.

 

Calabria is talking tomorrow so maybe we get some capital rule clarity. Need to have a capital rule in place for the advisors to work with.

 

Big step IMO and sooner then I expected.

[beaufort]

Progress continues with this good news.  I also like that both CEOs acknowledge the pandemic, the commitment to stability and exiting conservatorship.  As Howard has previously mentioned, nothing FnF releases is not vetted by FHFA.  I just wish Calabria would get on with the PSPA amendment. 

[Fat Pitch]

Seems like the capital requirements are now known otherwise why hire the financial advisers?

 

https://www.fanniemae.com/portal/media/corporate-news/2020/financial-advisor-request-for-proposals-7020.html

 

"While we are fulfilling our mission and helping to keep people in their homes during this national emergency, we also remain committed to ensuring a responsible exit from conservatorship," said Hugh R. Frater, Chief Executive Officer, Fannie Mae. "Today's announcement is a significant step on that path, and we look forward to making a timely selection in the competitive process."

 

Engaging a financial advisor is an important milestone in meeting Fannie Mae's 2020 FHFA scorecard objective to prepare a responsible transition plan for a potential exit from conservatorship. The support of private capital will contribute to increasing the resiliency of the housing finance system.

 

https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-advances-rfp-financial-advisor?_ga=2.143864373.149550911.1589835909-614249754.1589835909

 

“Even as we work to stabilize the housing markets during this unprecedented pandemic, Freddie Mac has remained focused on exiting conservatorship responsibly,” said David Brickman, Freddie Mac CEO. “Today we begin the competitive selection process for a financial advisor that will ultimately facilitate our return to full private capital ownership. This is a significant milestone, and we look forward to making a thoughtful selection quickly.”

 

The financial advisor will provide strategic counsel and perform a range of tasks to facilitate Freddie Mac’s exit from conservatorship. Those tasks include assessing the company’s valuation, reviewing its business plan, identifying options for raising capital and evaluating regulatory considerations during a transition period.

 

I like Freddie's language better.

 

Calabria is talking tomorrow so maybe we get some capital rule clarity. Need to have a capital rule in place for the advisors to work with.

 

Big step IMO and sooner then I expected.

[Guest cherzeca]

I expect the proposed capital rule will be out around time financial advisors are hired. 

 

@orthopa while FMCC did use more florid language, fnma did use the phrase "underwriting" financial advisors...as if to make clear they are interested in the big boys...made me smile

[Midas79]

David Metzner, who I believe has reason to potentially know this, seems to think that it could be much sooner. As in this Friday. See this tweet thread:

 

https://twitter.com/HoldenWalker99/status/1262561563489140736

[Guest Covid-19_Survivor]

FnF equity must be the most unfollowed ever. Let me see if I have this right:

 

1) Street catches wind Friday of https://www.fanniemae.com/portal/media/corporate-news/2020/financial-advisor-request-for-proposals-7020.html

2) Reaction when FnF actually submit Monday is blah

3) Reaction is delayed until Tuesday, today.

 

"Mr. Market may have deeper knowledge than us"

[orthopa]

FnF equity must be the most unfollowed ever. Let me see if I have this right:

 

1) Street catches wind Friday of https://www.fanniemae.com/portal/media/corporate-news/2020/financial-advisor-request-for-proposals-7020.html

2) Reaction when FnF actually submit Monday is blah

3) Reaction is delayed until Tuesday, today.

 

"Mr. Market may have deeper knowledge than us"

 

It was submitted after hours yesterday. Where are you seeing the street caught wind of this Friday?

[opihiman2]

I actually wonder how these companies will be doing with all the mortgage stress coming onto the markets.  Especially in the next few years.  Any thoughts on this?

 

[Guest Covid-19_Survivor]

FnF equity must be the most unfollowed ever. Let me see if I have this right:

 

1) Street catches wind Friday of https://www.fanniemae.com/portal/media/corporate-news/2020/financial-advisor-request-for-proposals-7020.html

2) Reaction when FnF actually submit Monday is blah

3) Reaction is delayed until Tuesday, today.

 

"Mr. Market may have deeper knowledge than us"

 

It was submitted after hours yesterday. Where are you seeing the street caught wind of this Friday?

 

Look at the commons friday charts. news hit at 3pm

[orthopa]

I expect the proposed capital rule will be out around time financial advisors are hired. 

 

@orthopa while FMCC did use more florid language, fnma did use the phrase "underwriting" financial advisors...as if to make clear they are interested in the big boys...made me smile

 

From your past experience could you assume that HL has a good handle on what the FHFAs options are have advised enough that the GSEs got the go ahead to hire an advisor? Its been ~3 months now so it would seem HL has a pretty good handle on things.

 

Secondly this summer seems to be shaping up for some pretty good developments but no doubt HL and the GSE's advisors are going to recommend a final resolution of the Sr. Preferred in some fashion. I know we all want this done quickly and have gone though options in this thread multiple times but i assume both sides are going to be very methodical and drag their feet somewhat. I would imagine both advisors could hammer out a proposal in couple of weeks.

 

The Seila decision is expected in late June/early July correct? This would probably coincide with the hiring and I imagine any consultant would want that decision spelled out before any recommendations to be made.

[Guest Covid-19_Survivor]

I actually wonder how these companies will be doing with all the mortgage stress coming onto the markets.  Especially in the next few years.  Any thoughts on this?

 

It was a concern of mine that had me create CBF account and ask that question, before "forebearance" was even a thing. Read former Fannie CEO: https://howardonmortgagefinance.com/2020/05/05/first-quarter-takeaways

 

I'm not as concerned anymore.

[orthopa]

I actually wonder how these companies will be doing with all the mortgage stress coming onto the markets.  Especially in the next few years.  Any thoughts on this?

 

Good question and hashed out pretty good in the 10-20 pages before your post. Howards blog post a good read too.

 

Bottom line to mitigate mortgage industry stress you need strong, very well capitalized GSEs. Strangely enough the pandemic has strengthened the case to keep the GSEs. If we do slowly return back to somewhat normal housing market there will be likely be a shortage of housing (worsened by less building during March/April) which should support home prices. Higher housing prices=maintained equity and less walkway defaults.

 

Forbearance is the current concern and as things open up this summer should show that % of loans trend down.

[orthopa]

https://www.marketwatch.com/story/over-4-million-americans-are-now-skipping-their-mortgage-payments-2020-05-18?mod=home-page

[Guest cherzeca]

@orthopa

 

HL should have gotten fully up to speed by now.  I suspect they have been advising FHFA about ability to finance proposed cap rule draft, which I believe is their biggest value add at the moment.  while they can advise FHFA of the merits of the GSEs capital plans, they really are reactive rather than pro-active re this review.

 

as to seila, I expect at a minimum that calabria can learn he can be fired at will, so tempus fugit.  if as I also expect the CID is vacated, then I simply dont see how treasury/fhfa can maintain its litigation posture (no holds barred) anymore.  unrealistic.