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

[DRValue]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

 

Calabria can talk tough now but in reality -- and we'll know in the next 1 month and 5 months -- Zandi might very have more official impact on FnF's future than Calabria.  I wonder why most politicians and reporters avoid the elephant in the room regarding Calabria's likely shortened tenure.  It doesn't take a lot creativity to see how this will likely go.

 

If Calabria tenure is shortened measures will be taken to make sure that what is done is irreversable. One other tidbit I thought about was we look to inauguration as a deadline if Trump is not re elected but its likely the March, April time frame if not longer that a new FHFA director is sworn in.

 

The point he made about banks making jumbo mortgages and holding way more capital and their ability to still make money was worth listening to also. I think he will bend some on the capital rule but I don't see him breaking.

 

He better bend cos a banks nim is about 4x higher than the g-fee.

[Guest cherzeca]

"The point he made about banks making jumbo mortgages and holding way more capital and their ability to still make money was worth listening to also. I think he will bend some on the capital rule but I don't see him breaking."

 

banks dont have a duty to serve like GSEs (though they cant redline).

 

'He better bend cos a banks nim is about 4x higher than the g-fee."

 

I think this is where the rubber will meet road.  g fees will go up, which is not bad for GSE investors though not good for lower income borrowers, and the GSEs will be stronger entities with more capital...which is why this conservatorship release will sail through without political opposition (and not bad for GSE investors as well)

 

[investorG]

If Calabria tenure is shortened measures will be taken to make sure that what is done is irreversable.

 

Possible in some areas but perhaps not all areas.  You (and me) are likely guessing about their ability to get them out of conservatorship irreversibly by mid jan.

 

It's also weak that they don't have the guts to do the right thing and bravely tackle this in the open pre-election.  Among others this is one reason why I expect the Dem candidate to win; the Gse's should have capital infused by now handing out refi's (from tighter spreads), mods and forbearance like candy.

[Williams406]

I agree "it's very weak they don't have the guts to do the right thing and bravely tackle this in the open pre-election." Once the brakes were put on post Otting's "all in alignment" comments, I lost a lot of confidence about the administration's commitment with respect to releasing the GSE's. Yes, significant positive steps have occurred since then, but are they really committed to getting this done come hell or high water? Don't know.

[orthopa]

I agree "it's very weak they don't have the guts to do the right thing and bravely tackle this in the open pre-election." Once the brakes were put on post Otting's "all in alignment" comments, I lost a lot of confidence about the administration's commitment with respect to releasing the GSE's. Yes, significant positive steps have occurred since then, but are they really committed to getting this done come hell or high water? Don't know.

 

Not that this line of thinking is wrong at all but I think this is a good represenation of why the preferred trade at 25-30% of par.

[sholland]

$250B of capital needs ~$25B of earnings to attract investment (utility-like rate of return)

 

If there is a new FHFA Director next year he or she can just refuse to increase g-fees (or decrease g-fees) in the name of affordable housing and no capital other than retained earnings can be raised.

 

A new administration may have an automatic backlash against sweeping changes done during the lame duck period.

[Guest cherzeca]

$250B of capital needs ~$25B of earnings to attract investment (utility-like rate of return)

 

If there is a new FHFA Director next year he or she can just refuse to increase g-fees (or decrease g-fees) in the name of affordable housing and no capital other than retained earnings can be raised.

 

A new administration may have an automatic backlash against sweeping changes done during the lame duck period.

 

so to call a spade a spade, if Biden wins this fall, he can appoint a new fhfa director (I assume Seila will result in a finding of unconstitutional structuring for single director removable for cause), and this new director can replace Calabria's capital rule with another one...perhaps less stringent standards so as to accommodate lower g fees.  but what I expect, or perhaps better said hope, is that the GSEs prepare and deliver to fhfa capital restoration plans that set forth the roadmap for the GSEs to meet over time the final capital rule that fhfha will promulgate sometime this fall, which fhfa with Calabria as director blesses by releasing the GSEs form conservatorship and putting them into a consent decree status...and that conservatorship release cannot be reversed like the capital rule.

[investorG]

$250B of capital needs ~$25B of earnings to attract investment (utility-like rate of return)

 

If there is a new FHFA Director next year he or she can just refuse to increase g-fees (or decrease g-fees) in the name of affordable housing and no capital other than retained earnings can be raised.

 

A new administration may have an automatic backlash against sweeping changes done during the lame duck period.

 

Correct.  After the SC downsizes calabria's likely tenure via Seila there's a window in ~ August to make the appropriate move, a 4th amendment, that sets the state for a potential consent decree in the lame duck.  Your guess is as good as mine if they will have the courage to right the NWS wrong.

[Guest cherzeca]

if Calabria receives capital restoration plans from the GSEs that he finds satisfactory, then I think he will take next step...especially if this is before 11/3...and we may not know who potus is until well after 11/3

[Midas79]

$250B of capital needs ~$25B of earnings to attract investment (utility-like rate of return)

 

If there is a new FHFA Director next year he or she can just refuse to increase g-fees (or decrease g-fees) in the name of affordable housing and no capital other than retained earnings can be raised.

 

A new administration may have an automatic backlash against sweeping changes done during the lame duck period.

 

But $175B of capital, the threshold at which dividend payments can start (without a special exception granted by FHFA), needs $17.5B of earnings to get that same 10% return. FnF's earnings are already there. All money not paid out as dividends would be retained, allowing a slow build to the top-line $243B number.

 

So while ROC would go down if earnings stay flat and capital increases, ROIC should remain constant. Which do you think is more important to those who would participate in the re-IPO?

 

The upshot is that I don't think g-fees will necessarily have to increase. And if they do, it wouldn't have to be all at once. For example, if FHFA wnats FnF's earnings to go up to $25B per year and a 20 bps increase is needed to get there, but FnF are given 5 years to reach full buffers, they would only need to increase the g-fees by 4 bps per year. That's much more politically palatable than a huge 20 bps increase all up front.

[Guest Covid-19_Survivor]

if Calabria receives capital restoration plans from the GSEs that he finds satisfactory, then I think he will take next step...especially if this is before 11/3...and we may not know who potus is until well after 11/3

 

First thought was you fear election results may be questioned. Then I thought better and assume you're just referring to a very close vote.

 

Anyway, https://www.banking.senate.gov/hearings/oversight-of-housing-regulators was painful. Anyone interested in listening to the entire thing (as I did), a strong warning: Like always, 90% of it is just grandstanding dem senators. Besides the aforementioned Van Hollen question, there's only Sen moran addressing risk weighting @ 1:26.20, and the always d-baggy Warner @ 1:56

 

govt owes me those 2 hours back

[Guest cherzeca]

see https://www.wsj.com/articles/fed-debates-how-to-set-policy-for-the-post-pandemic-economy-11591781402?mod=hp_lead_pos1

 

fed will buy $.5T of mbs (GSE of course) annually for next two years.

 

this helps...

[investorG]

$250B of capital needs ~$25B of earnings to attract investment (utility-like rate of return)

 

If there is a new FHFA Director next year he or she can just refuse to increase g-fees (or decrease g-fees) in the name of affordable housing and no capital other than retained earnings can be raised.

 

A new administration may have an automatic backlash against sweeping changes done during the lame duck period.

 

But $175B of capital, the threshold at which dividend payments can start (without a special exception granted by FHFA), needs $17.5B of earnings to get that same 10% return. FnF's earnings are already there. All money not paid out as dividends would be retained, allowing a slow build to the top-line $243B number.

 

So while ROC would go down if earnings stay flat and capital increases, ROIC should remain constant. Which do you think is more important to those who would participate in the re-IPO?

 

The upshot is that I don't think g-fees will necessarily have to increase. And if they do, it wouldn't have to be all at once. For example, if FHFA wnats FnF's earnings to go up to $25B per year and a 20 bps increase is needed to get there, but FnF are given 5 years to reach full buffers, they would only need to increase the g-fees by 4 bps per year. That's much more politically palatable than a huge 20 bps increase all up front.

 

It's nice that you don't think G-fees will increase but Calabria doesn't even believe that with a straight face based on his back and forth with senator van hollen about providing data to support his view.  Citing commercial banks and jumbo loans is not applicable given apples / oranges comparison.

 

On the plus side Calabria did comment with Senator Moran that they are open to evaluating the rule after comments.  American citizens, especially those less well-off, are depending on him doing exactly that.

[Guest Covid-19_Survivor]

With every upside there is downside (per Mr. Howard we are limited here):

 

"I continue to be concerned that both FHFA and Moelis have pegged Fannie and Freddie’s post-conservatorship capital and guaranty fees at too high a level for the companies to be able to serve a broad and wide enough set of the country’s potential mortgage borrowers to enable the companies to do the volume of business implicit in Moelis’ financial and valuation projections. Specifically, I’m concerned that the average 60 basis point charged guaranty fee Moelis shows for the companies in 2022 (in Figure 8) may be too high to attract the business of high-quality borrowers–who will find bank portfolio or non-agency securities execution more competitive–and that the resulting loss of this high-quality business will push Fannie and Freddie’s risk-based guaranty fees up even further, pricing out medium-quality borrowers as well. But this is a topic for another time–and after we’ve seen the range of comments on FHFA’s June capital proposal submitted near or at the deadline of November 16." - Tim Howard

[Midas79]

It's nice that you don't think G-fees will increase but Calabria doesn't even believe that with a straight face based on his back and forth with senator van hollen about providing data to support his view.  Citing commercial banks and jumbo loans is not applicable given apples / oranges comparison.

 

On the plus side Calabria did comment with Senator Moran that they are open to evaluating the rule after comments.  American citizens, especially those less well-off, are depending on him doing exactly that.

 

I didn't say I don't think g-fees will increase. I said they don't necessarily have to, depending on whether the re-IPO investors care about ROIC (return on invested capital) versus ROC (return on capital). The former will easily exceed 10%, and the latter won't dip below 10% until FnF get more than $180B in capital, which is enough to pay 20% of income as dividends. It is these investors who will determine whether or not g-fees go up and by how much. I also said that a g-fee increase could be phased in rather than occurring all up-front.

[investorG]

It's nice that you don't think G-fees will increase but Calabria doesn't even believe that with a straight face based on his back and forth with senator van hollen about providing data to support his view.  Citing commercial banks and jumbo loans is not applicable given apples / oranges comparison.

 

On the plus side Calabria did comment with Senator Moran that they are open to evaluating the rule after comments.  American citizens, especially those less well-off, are depending on him doing exactly that.

 

I didn't say I don't think g-fees will increase. I said they don't necessarily have to, depending on whether the re-IPO investors care about ROIC (return on invested capital) versus ROC (return on capital). The former will easily exceed 10%, and the latter won't dip below 10% until FnF get more than $180B in capital, which is enough to pay 20% of income as dividends. It is these investors who will determine whether or not g-fees go up and by how much. I also said that a g-fee increase could be phased in rather than occurring all up-front.

 

Yes, you're right.  I should have read your post closer.   

 

 

[Cox022]

Can someone correct me if I've got this wrong?

 

 

(1) Currently, FHFA is constitutional and FHFA director cannot be fired at will.

 

(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will.

 

If (2) occurs and Trump loses, Calabria is out in Q1 2021.

 

If (2) doesn't occur and Trump loses, Calabria remains FHFA director until his term ends in 2024.

 

If Trump wins, Calabria remains FHFA director regardless. 

 

Intelligent legal analysis suggests SCOTUS will *very likely* rule CFPB unconstitutional sometime this summer.

 

There are reasons to be hopeful, but it's still *very uncertain*, that SCOTUS grants relief we want in Seila.

 

[thanks to rolg's past work, which can be reviewed here: https://tinyurl.com/y9odyjka .  May be worthwhile since Seila ruling expected soon (i think)]

[Guest cherzeca]

Can someone correct me if I've got this wrong?

 

 

(1) Currently, FHFA is constitutional and FHFA director cannot be fired at will.

 

(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will.

 

If (2) occurs and Trump loses, Calabria is out in Q1 2021.

 

If (2) doesn't occur and Trump loses, Calabria remains FHFA director until his term ends in 2024.

 

If Trump wins, Calabria remains FHFA director regardless. 

 

Intelligent legal analysis suggests SCOTUS will *very likely* rule CFPB unconstitutional sometime this summer.

 

There are reasons to be hopeful, but it's still *very uncertain*, that SCOTUS grants relief we want in Seila.

 

[thanks to rolg's past work, which can be reviewed here: https://tinyurl.com/y9odyjka .  May be worthwhile since Seila ruling expected soon (i think)]

 

there is a possible timing issue

 

"(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will."

 

well, as a legal matter if CFPB director can be fired at will, so can FHFA director...but suppose calabria fights the application of Seila to Collins tooth and nail?  he will lose...but maybe as late as a year after Seila comes down. 

 

[Midas79]

Can someone correct me if I've got this wrong?

 

 

(1) Currently, FHFA is constitutional and FHFA director cannot be fired at will.

 

(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will.

 

If (2) occurs and Trump loses, Calabria is out in Q1 2021.

 

If (2) doesn't occur and Trump loses, Calabria remains FHFA director until his term ends in 2024.

 

If Trump wins, Calabria remains FHFA director regardless. 

 

Intelligent legal analysis suggests SCOTUS will *very likely* rule CFPB unconstitutional sometime this summer.

 

There are reasons to be hopeful, but it's still *very uncertain*, that SCOTUS grants relief we want in Seila.

 

[thanks to rolg's past work, which can be reviewed here: https://tinyurl.com/y9odyjka .  May be worthwhile since Seila ruling expected soon (i think)]

 

there is a possible timing issue

 

"(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will."

 

well, as a legal matter if CFPB director can be fired at will, so can FHFA director...but suppose calabria fights the application of Seila to Collins tooth and nail?  he will lose...but maybe as late as a year after Seila comes down.

 

This is a great, and I believe heretofore overlooked, point. Calabria might not be fired on day 1 of a Biden presidency if he can drag things through the courts long enough.

 

In the past I thought this wouldn't matter because a Treasury Secretary that is hostile to recap and release could just refuse to allow release, but Calabria and Mnuchin can do enough in the lame duck period to cut Treasury out of the loop entirely. Amending the SPSPA to get rid of the seniors and finally kill the NWS for good, along with releasing FnF under consent decree, should be enough that Biden's Treasury Secretary wouldn't be able to get involved, and Calabria could do as much as he is able to while fighting to keep his job.

[Williams406]

I think Calabria and Mnuchin could do enough in a lame duck period to cut out future Treasury involvement. But would they? It seems clear to me that steps are being taken that, cumulatively, will have the effect of changing the DC momentum cherzeca has talked about in explaining the continued legal battles. But based on how each has acted, can I look at either Calabria or Mnuchin as a caped crusader trying to right a wrong? No. A principal who feels strongly about acting to recap/release? Maybe. Not sure. An agent of an administration who has thus far not chosen to expend much political capital trying to reverse actions taken by two prior administrations neither of which it is on great terms with? Maybe. If the latter model applies to either one, I'm not sure shareholders can count on irreversible action in a lame duck period.

[investorG]

Can someone correct me if I've got this wrong?

 

 

(1) Currently, FHFA is constitutional and FHFA director cannot be fired at will.

 

(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will.

 

If (2) occurs and Trump loses, Calabria is out in Q1 2021.

 

If (2) doesn't occur and Trump loses, Calabria remains FHFA director until his term ends in 2024.

 

If Trump wins, Calabria remains FHFA director regardless. 

 

Intelligent legal analysis suggests SCOTUS will *very likely* rule CFPB unconstitutional sometime this summer.

 

There are reasons to be hopeful, but it's still *very uncertain*, that SCOTUS grants relief we want in Seila.

 

[thanks to rolg's past work, which can be reviewed here: https://tinyurl.com/y9odyjka .  May be worthwhile since Seila ruling expected soon (i think)]

 

there is a possible timing issue

 

"(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will."

 

well, as a legal matter if CFPB director can be fired at will, so can FHFA director...but suppose calabria fights the application of Seila to Collins tooth and nail?  he will lose...but maybe as late as a year after Seila comes down.

 

How would this work logistically?  How does the 5th circuit of appeals ruling in Collins play out, does it go back to Atlas?  And finally if it was still murky in January and biden tried to fire him, would he have the leave while the courts decided Collins or would he stay in the mean time?  Thanks in advance.

[orthopa]

I think Calabria and Mnuchin could do enough in a lame duck period to cut out future Treasury involvement. But would they? It seems clear to me that steps are being taken that, cumulatively, will have the effect of changing the DC momentum cherzeca has talked about in explaining the continued legal battles. But based on how each has acted, can I look at either Calabria or Mnuchin as a caped crusader trying to right a wrong? No. A principal who feels strongly about acting to recap/release? Maybe. Not sure. An agent of an administration who has thus far not chosen to expend much political capital trying to reverse actions taken by two prior administrations neither of which it is on great terms with? Maybe. If the latter model applies to either one, I'm not sure shareholders can count on irreversible action in a lame duck period.

 

I think you have to look at this from the perspective of why is this even happening at all in the first place? That reason I believe is John Paulson (and those other who are invested/supported Trump pre election). The same reason Mnuchin said the day after the election Fannie was a priority. Did Trump run on that platform and I missed it? Now true its going on 4 years but in the end who does all of work this benefit? The housing system had continued to work under conservator ship. The gov continued to collect $$ under conservator ship via the NWS. There was no reason to change the status quo. No one on either side of the aisle would have said a word if nothing was done. This is being done for the same reasons Mnuchin went from a no name Goldman banker to the Trump finance manager to Treasury Secretary in less in a year.  The same reason Mark Calabria was picked to to be FHFA chairman. The same reason that Otting said "everyone signed off on the plan". The same reason why Paulson and Trump have gone mum in regard to FnF both distancing themselves as much as possible.  Reforming FnF is a priority for the administration but a priority that the most boisterous President in recent history has completely avoided talking about compared to China, Free trade, immigration etc? Its obvious why. Its going to really benefit people who supported him pre election.

 

Mnuchin did say 3.5 years ago that it would get done during this administration. I still believe it will get done.

[Guest cherzeca]

@IG. so assume I am right and in seila scotus finds cfpb director must be at will, and voids the seila CID.  scotus logically would GVR collins to 5th C, at which point the big issue becomes not whether calabria can be fired (though HERA still states only for cause), but whether 5th C must give backward relief as well and void NWS.  fhfa could find ways to distinguish the seila CID from the collins NWS.  also, fhfa could distinguish itself from the cfpb in ways that make a direct read through from seila to collins inappropriate. again, I think this is a losing argument, but even losing arguments take time to lose.  this would require briefing/argument etc, and this would take time, and fhfa might have strategic reasons to string all of this out as long as possible.  frankly, if Biden wins, P shareholders might also want this to be strung out as long as possible if they think it will be in their interest

[Guest Covid-19_Survivor]

I think Calabria and Mnuchin could do enough in a lame duck period to cut out future Treasury involvement. But would they? It seems clear to me that steps are being taken that, cumulatively, will have the effect of changing the DC momentum cherzeca has talked about in explaining the continued legal battles. But based on how each has acted, can I look at either Calabria or Mnuchin as a caped crusader trying to right a wrong? No. A principal who feels strongly about acting to recap/release? Maybe. Not sure. An agent of an administration who has thus far not chosen to expend much political capital trying to reverse actions taken by two prior administrations neither of which it is on great terms with? Maybe. If the latter model applies to either one, I'm not sure shareholders can count on irreversible action in a lame duck period.

 

I think you have to look at this from the perspective of why is this even happening at all in the first place? That reason I believe is John Paulson (and those other who are invested/supported Trump pre election). The same reason Mnuchin said the day after the election Fannie was a priority. Did Trump run on that platform and I missed it? Now true its going on 4 years but in the end who does all of work this benefit? The housing system had continued to work under conservator ship. The gov continued to collect $$ under conservator ship via the NWS. There was no reason to change the status quo. No one on either side of the aisle would have said a word if nothing was done. This is being done for the same reasons Mnuchin went from a no name Goldman banker to the Trump finance manager to Treasury Secretary in less in a year.  The same reason Mark Calabria was picked to to be FHFA chairman. The same reason that Otting said "everyone signed off on the plan". The same reason why Paulson and Trump have gone mum in regard to FnF both distancing themselves as much as possible.  Reforming FnF is a priority for the administration but a priority that the most boisterous President in recent history has completely avoided talking about compared to China, Free trade, immigration etc? Its obvious why. Its going to really benefit people who supported him pre election.

 

Mnuchin did say 3.5 years ago that it would get done during this administration. I still believe it will get done.

 

Interesting and probably valid perspective. However, I'll still maintain that this entire conservatorship has been wrong since day 1 and NWS 3x wrong, and this being America both will eventually be resolved and all stakeholders made happy because this country does not "take" property (never has, once). It's as simple as that and also my thesis. That Trump, a law and order guy, initiates it all is probably not coincidental.

 

Also, to all of you contemplating Biden just stop.

 

[investorG]

@IG. so assume I am right and in seila scotus finds cfpb director must be at will, and voids the seila CID.  scotus logically would GVR collins to 5th C, at which point the big issue becomes not whether calabria can be fired (though HERA still states only for cause), but whether 5th C must give backward relief as well and void NWS.  fhfa could find ways to distinguish the seila CID from the collins NWS.  also, fhfa could distinguish itself from the cfpb in ways that make a direct read through from seila to collins inappropriate. again, I think this is a losing argument, but even losing arguments take time to lose.  this would require briefing/argument etc, and this would take time, and fhfa might have strategic reasons to string all of this out as long as possible.  frankly, if Biden wins, P shareholders might also want this to be strung out as long as possible if they think it will be in their interest

 

Thanks.  Let's say Seila rules that CFPB head can be fired by the prez and that Calabria fights that by suggesting FHFA is different than CFPB.  If Biden tries to fire Calabria in January who gets the benefit of the doubt -- Calabria gets to stay until it's resolved in the courts or Calabria has to leave and can come back if he wins in court?