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

[orthopa]

To show how crazy the market is last time alot of Fannie preferred traded to the upside at these levels was after Ottings comments in early 2019. Since that time we have had:

 

1. Calabria sworn in as FHFA head

2. Treasury plan

3. En Banc decision

4. Selia case argued

5. September capital cap PSPA amendment

6. FHFA hired a financial advisor

7. FHFA hired new council

8. FHFA releases capital rule

9. Freddie/Fannie announced RFP to underwrite/come up with recap plan.

 

Still at these levels market not believing FNMA will be recapped or Preferred get more then ~30% of par. Nuts.

 

major political risk.  mnuchin and calabria might have a plan for the next 8 months before a likely transition but it's sure not apparent to the mkt.  The political punt in summer of 2019 - per bloomberg story in july - to post-election for a potential 4th amendment + capital raise was disastrous.

 

No question that took the wind out of the sails big time. Looking back I wonder if it was the capital that they wanted to build. A year and a half before the election is a long lead time to determine to slow things down although the process itself isnt quick by any means.

[orthopa]

Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.

 

FnF's capital has nothing to do with the market price of the commons.

 

There is also no guarantee of any price appreciation after said events, let alone enough to get the price above $4 for 30 days to re-list. For all the good news FnF shareholders got in the last 16 months, the price is around 40% lower than it was at the end of January 2019.

 

A reverse split is the only realistic way to get an over-$4 share price to stick, and I fully expect it to happen later this year. Somewhere between 1:10 and 1:20 is my guess for now.

 

Moelis 2.0 is completely unrealistic anyway. Why would junior pref shareholders sign up for a plan that involves them converting at a re-IPO price in the teens (a far worse ratio than they could get right now in the open market), and giving existing common holders a much greater return than the junior prefs themselves?

 

OK, thanks for correcting me nicely. Stupidly confusing market cap with capital, to say the least.

 

Another dumb question on my part. My expectation like many others is that preferred get converted to common. Some have hypothesized a haircut for preferred but if that's the case how is treated for capital levels? ie There is 19B of Fannie preferred par value. If converted at say 80% of par you convert it into 15.2B of common. Does that 3.8B of capital just disappear into thin air? If not what is the offsetting asset that would keep the capital amounts pari passu?

[Guest Covid-19_Survivor]

https://www.investopedia.com/terms/p/paidincapital.asp

 

[DRValue]

Thoughts of the board on a couple of things, please. Wisdom of crowds and all that...

 

[*]As a Percentage, how much of the business do you expect new common to end up owning? 25%, 40%, 50%?

[*]As a Percentage, how much of the business do you expect existing Junior Preferred to end up owning? 25%, 40%, 50%?

[*]At what price will the Junior Preferred convert to Common and will it be the same as the SPO offering price?

[Guest Covid-19_Survivor]

Thoughts of the board on a couple of things, please. Wisdom of crowds and all that...

 

[*]As a Percentage, how much of the business do you expect new common to end up owning? 25%, 40%, 50%?

[*]As a Percentage, how much of the business do you expect existing Junior Preferred to end up owning? 25%, 40%, 50%?

[*]At what price will the Junior Preferred convert to Common and will it be the same as the SPO offering price?

 

No look cheap math:

Worth $200 bil

Needs $150 bil

 

commons + jps $50 bil

jps $33 bil

commons $17 bil

 

edit to actually answer poll:

1) 8.5%

2) 16.5%

 

[Midas79]

Thoughts of the board on a couple of things, please. Wisdom of crowds and all that...

 

[*]As a Percentage, how much of the business do you expect new common to end up owning? 25%, 40%, 50%?

[*]As a Percentage, how much of the business do you expect existing Junior Preferred to end up owning? 25%, 40%, 50%?

[*]At what price will the Junior Preferred convert to Common and will it be the same as the SPO offering price?

 

1) 50% at an absolute minimum imo. They are providing nearly all the capital, why would they take less than a controlling interest? This number could go as high as 80%.

More precisely, this is a function of how much capital FnF are trying to raise and the market's estimate of their future market cap. $100B of capital raised for $250B of market cap is a floor of 40%, and due to the certainty equivalent, $100B of cash is worth more than 40% companies that might be worth $250B, so I would expect the investors to demand at least 50% of the equity in case earnings drop in the future, etc.

2) Roughly half of what the new commons don't own. Using 50% for the new commons, that would leave 25% for converted juniors, 20% for Treasury's warrants, and 5% for the existing commons.

The juniors' collective $33B in capitalization doesn't count towards CET1 capital, and the full CET1 capital standard is $175B (wow!). A conversion to commons adds $33B to CET1, so FHFA has every reason to offer a conversion. Also, the re-IPO investors have every reason to insist on the existing juniors being converted because it is a costless way to remove $33B of liquidation and $2B of dividend preference from in front of the re-IPO commons.

3) The re-IPO price is a function of the answer to #1-2 and an estimate of FnF's market cap. I don't think the conversion will happen at the re-IPO price because I think it will happen prior to the re-IPO. It might be based on the trailing one-month market price (as with Citi), but instead it could very well be reverse engineered to whatever the juniors are willing to accept. All I know is that the market didn't anticipate how generous Citi's pref-to-common conversion would be, and I think the same thing is happening now.

 

Using the 50% new common, 25% converted juniors, 20% warrants, 5% existing commons example, we can get a final share count. The existing commons are 1.8B shares, so there would be 36B fully diluted shares: divide 1.8B by 0.05. If this seems absurdly high, apply a 1:10 reverse split to bring the number down to a reasonable level. Assuming a $250B market cap, that's a per-share price of $6.94.

 

If the new commons won't invest for less than 75% of the companies, that would leave 12.5% for the converted juniors, 10% for the warrants, and 2.5% for the existing commons. That doubles the share count, which halves the share price above to $3.47.

 

The juniors are money good in any case. The commons are worth something on the order of $5 in the end, which comports with other estimates I have made and seen (like Nomura).

 

Edit: Note that 12.5% of $250B is $31.25B, which is less than the total par value of the juniors. Below that percentage of the total equity, it's highly unlikely that the juniors accept a conversion at all. That, then, puts the re-IPO in danger. In fact, if investors (including current junior pref holders) only perceive the market cap to be $200B, the juniors wouldn't take less than 1/6 (16.7%) of the total equity in a conversion.

 

The first scenario I laid out gives the prefs $62.5B of value in the end, or almost 200% of par. Perhaps that's unrealistic, though obviously the junior pref holders would take it. It would be 150% of par if the market cap is $200B instead. The second scenario involves a slight to moderate haircut (to the total par value) for the prefs.

[DRValue]

Thanks Midas.

I would imagine the juniors would insist on a good deal relative to new common as they wouldn't want to convert and then be diluted. A sufficient discount to common price on conversion would help.

[investorG]

Wow, Calabria managed to upset even bank-centric Don Layton with the magnitude of his disastrous excessive capital requirements.

 

Meanwhile, mortgage credit has tightened -- hurting Trump's re-election chances and likely his own job in 8 months.

 

Smart guy, but he's screwing American citizens.  Capital of many multiples of the stress losses = higher mortgage rates and fatter bank profits. 

[Guest cherzeca]

it is one thing for Layton to write a blog piece, and quite another to say the same thing in a public proposed rule comment.  my bet is that he putzes out

[Guest Covid-19_Survivor]

Wow, Calabria managed to upset even bank-centric Don Layton with the magnitude of his disastrous excessive capital requirements.

 

Meanwhile, mortgage credit has tightened -- hurting Trump's re-election chances and likely his own job in 8 months.

 

Smart guy, but he's screwing American citizens.  Capital of many multiples of the stress losses = higher mortgage rates and fatter bank profits.

 

Dude, read the tea leaves. the numbers demanded mean one thing, and one thing only: The explicit guarantee is done with (and maybe that's why everything has been delayed, delayed, delayed. The principles involved realized that Congress was not going to bite on backstop so... new plan). I for one will gladly take a hit on ownership (~150 bil of new money) if it also means govt doesn't have us by the cajoles anymore, or at least would treat us like a tbtf bank.

 

I'm not sure how the market reacts once this becomes known but I'll stick around. I like it.

[Luke 532]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

[Cox022]

Jamie Dimon yesterday on forbearance:

 

○ 1/3 of people who ask for it, never actually use it

○ I suspect a lot of people who did use it are doing so as a safety precaution

○ My hope would be, as we see first people coming off forbearance, that the people who start repaying is higher than people think, not lower

§ This by the way gives them a chance to do a re-fi, which could be really smart for them in certain cases

○ We will start to see the first cohort of people coming off of forbearance in June

○ In the old days, it was a danger that once you stopped paying your mortgage, you never started again

§ But remember last time around, home prices were down 40%, there was a good reason not to pay, you weren't going to lose any equity value in your home, whereas today, it’s the opposite,

                          there are very few people underwater in their homes today

 

[investorG]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

 

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

[Guest cherzeca]

I thought this was a very good comment on the proposed capital rule:  https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15531

[Guest cherzeca]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

 

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

 

while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.

[DocSnowball]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

 

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

 

while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.

 

I think the key question is still whether this is a binary investment in either admin? At this point, and after the companies hire financial advisors, that risk is getting lower and lower. How much the preferreds will be worth in the end is in the "too hard" or uncertain pile, but they will be worth much more than they are at present as long as the companies are recapitalized. If the companies are recapitalized, it seems just too unlikely to me that a financial and legal advisor will take the risk of recommending something that invites even more lawsuits. More likely they will suggest something that is CYA and placates all sides that are willing to be placated.

[Midas79]

I thought this was a very good comment on the proposed capital rule:  https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15531

 

Well done. I especially like the implication that FHFA's mandates extend to making sure the recap actually happens rather than paying lip service to it.

[beaufort]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

 

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

 

while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.

 

Good comment submitted. 

 

I still have reservations about Calabria, but he's who we have.  A total 4 more potential years is not that long of a period to get both GSEs to a lower, more reasonable capital level. 

 

Despite Howard's views, we are not going back to capital levels pre financial crisis.  In addition, the excess capital is a way to guard against another risk that has manifested itself:  Treasury and other political interests.  If Fannie and Freddie had much more capital pre financial crisis, I am not sure they would have been taken over so easily.  Their capital weakness permitted political motives to do them in.  Having excess cash guards against that, and new money will be aware of that.

 

 

 

[TwoCitiesCapital]

Jamie Dimon yesterday on forbearance:

 

○ 1/3 of people who ask for it, never actually use it

○ I suspect a lot of people who did use it are doing so as a safety precaution

○ My hope would be, as we see first people coming off forbearance, that the people who start repaying is higher than people think, not lower

§ This by the way gives them a chance to do a re-fi, which could be really smart for them in certain cases

○ We will start to see the first cohort of people coming off of forbearance in June

○ In the old days, it was a danger that once you stopped paying your mortgage, you never started again

§ But remember last time around, home prices were down 40%, there was a good reason not to pay, you weren't going to lose any equity value in your home, whereas today, it’s the opposite,

                          there are very few people underwater in their homes today

 

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program.

 

The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time.

[investorG]

Howard's latest...

https://howardonmortgagefinance.com/2020/05/27/now-we-know/

 

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

 

while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.

 

He may have poisoned the well with capital requirements of 6x the housing bubble crisis stress test losses (2019).  An arbitrary buffer amount by a single regulator is a serious economic weapon, if the SC is paying attention this could push them closer to voiding all of the CFPB/FHFA's prior actions by registering them as unconstitutional with no forward remedy of removal.   

 

If Calabria wanted to show honor he would realize his mistake quickly and publicly change course -- by mentioning that it's a negotiating starting point / high end -- rather than let this garbage stink out in public for many months.

[DRValue]

"We need 8pct capital, work back from there."

 

Starting to think he's unfit.

 

#CancelCalabria

[Guest Covid-19_Survivor]

Jamie Dimon yesterday on forbearance:

 

○ 1/3 of people who ask for it, never actually use it

○ I suspect a lot of people who did use it are doing so as a safety precaution

○ My hope would be, as we see first people coming off forbearance, that the people who start repaying is higher than people think, not lower

§ This by the way gives them a chance to do a re-fi, which could be really smart for them in certain cases

○ We will start to see the first cohort of people coming off of forbearance in June

○ In the old days, it was a danger that once you stopped paying your mortgage, you never started again

§ But remember last time around, home prices were down 40%, there was a good reason not to pay, you weren't going to lose any equity value in your home, whereas today, it’s the opposite,

                          there are very few people underwater in their homes today

 

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program.

 

The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time.

 

http://www.freddiemac.com/about/pdf/covid_19_forbearance_servicer_script.pdf

[Guest Covid-19_Survivor]

"We need 8pct capital, work back from there."

 

Starting to think he's unfit.

 

#CancelCalabria

 

Calabria is attempting to fully disconnect FnF from govt and its support. If this initiative is cancelled so is incoming capital, as trust that once existed has been curbstomped for a decade+. Would you buy this shit with govt backstopping it, begging for an '08 repeat? I wouldn't.

 

Also, I don't give a rat's ass if we only wind up owning 1% of FnF. I just want my principle returned. All of it.

[DRValue]

"We need 8pct capital, work back from there."

 

Starting to think he's unfit.

 

#CancelCalabria

 

Calabria is attempting to fully disconnect FnF from govt and its support. If this initiative is cancelled so is incoming capital, as trust that once existed has been curbstomped for a decade+. Would you buy this shit with govt backstopping it, begging for an '08 repeat? I wouldn't.

 

Also, I don't give a rat's ass if we only wind up owning 1% of FnF. I just want my principle returned. All of it.

 

He's still wrong.

[Guest cherzeca]

"We need 8pct capital, work back from there."

 

Starting to think he's unfit.

 

#CancelCalabria

 

Calabria is attempting to fully disconnect FnF from govt and its support. If this initiative is cancelled so is incoming capital, as trust that once existed has been curbstomped for a decade+. Would you buy this shit with govt backstopping it, begging for an '08 repeat? I wouldn't.

 

Also, I don't give a rat's ass if we only wind up owning 1% of FnF. I just want my principle returned. All of it.

 

so here is an example of the difference between common and junior prefs.  common will get diluted by this capital rule and the public offerings. by how much we dont know but we can expect substantially. junior prefs have the opportunity to stay pref and look to the turn on of divs, or more likely look for a satisfactory exchange offer after the dust settles somewhat so that they can get more common in the exchange as common suffers dilution.  this exchange offer "second look" may not be executed well...issuer has tools to force an exchange offer upon a class if 2/3rds of class agrees, so it wont be a hostage-like hold up, just a negotiation led by junior pref big boys on our junior prefs holders behalf who know what they are doing.  but to the long debate of whether common or pref, you now have a good answer why junior pref.  [and it's principal, not principle]