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

[Midas79]

Or it's a tell that he thinks converting the sr. pfd to some sort of capital instrument is a foregone conclusion!  So all of this higher liquidation preference eventually becomes capital (CET1 or Tier 1, TBD) at the stroke of a pen.

 

If the seniors are either converted to common or straight up extinguished, $193B gets added to both CET1 and Tier 1 capital instantly.

 

That might sound like a lot, but the problem is that FnF's Tier 1 capital deficit (current Tier 1 capital minus Calabria's standard, no buffer) is $322B and it's $279B for CET1. Raising those amounts is essentially impossible, especially with the seniors in place. This just reinforces the fact that the seniors have to go one way or another.

 

Also, the extra liquidation preference doesn't get added to capital because it that amound has already accrued to capital through the retention of earnings. The dollar-for-dollar increase of the seniors' liquidation preference has not shown up on FnF's balance sheets. It's the amount of the seniors on the balance sheets ($193B, not the current liquidation preference of $210B) that would get added to Tier 1 and CET1 capital upon cancellation or conversion of the seniors.

[WB_fan82]

I think it's a walk in the park to raise the capital.  Most of it is already there.  $125B of excess sr pref divs over the 10% pre-NWS rate + the existing liquidation pref converted into either common or non-cum pfd = more than $300B of capital.

 

All it needs is the stroke of a pen from TSY/FHFA.

 

And to that end, I find the new FSOC review encouraging.  The obvious conclusion of that body is GSEs need capital.  And two of the members of that body have the authority to create that capital through the above.  Seems like this gives them cover.  The Financial Stability Oversight Committee is much harder to argue with than unilateral actions from Calabria/Mnuchin.

 

 

[Midas79]

I think it's a walk in the park to raise the capital.  Most of it is already there.  $125B of excess sr pref divs over the 10% pre-NWS rate + the existing liquidation pref converted into either common or non-cum pfd = more than $300B of capital.

 

All it needs is the stroke of a pen from TSY/FHFA.

 

And to that end, I find the new FSOC review encouraging.  The obvious conclusion of that body is GSEs need capital.  And two of the members of that body have the authority to create that capital through the above.  Seems like this gives them cover.  The Financial Stability Oversight Committee is much harder to argue with than unilateral actions from Calabria/Mnuchin.

 

This route does result in FnF being instantly recapped. It also requires Treasury to write a $125B check to FnF, and they can only recoup that money by converting the seniors to commons (conversion to prefs, even if they are non-cumulative and mandatory convertible, leaves CET1 capital negative) and selling them.

 

That has the side effect of squishing the existing commons into almost nothing, and any share exchange of the juniors would have to come from the goodness of Treasury's heart.

 

I think it's the giant check that stops this from happening. That's hugely negative political optics, and while I do expect Trump to go scorched-earth in a lame duck session, I don't think even he would go that far.

 

That's why I brought up the idea of Treasury sending FnF $125B but then selling the seniors back to FnF for the same sum. It accomplishes the same thing (mooting the cases, removing the need for settlements) and allows Treasury to claim they got "something" for the seniors.

[WB_fan82]

It might help to write the overage check if TSY first converts the sr pfd.  I haven't done the math, but let's assume after warrant exercise and conversion the government holds 98%. 

 

Now write the overage check and the story is the government is basically paying itself.  The lawsuits are settled, the taxpayer is protected, GSEs are super capitalized and will support a healthy mortgage market, the shares can re-list, etc. 

 

Then the next administration can decide what to do with the shares (sell them).  But the GSEs would be out of c-ship, or under a consent decree with the govt shares likely held in a voting trust like YRCW so there aren't concerns about the govt using its 98% power to replace the board.

 

Everyone wins!

 

The main issues I see would be:

 

1.  Is Calabria's consent order reversible by Biden if the FHFA is later found unconstitutional?  (I don't know why he would pick this fight, but it's possible)

 

2.  The Lamberth lawsuits where damages would be paid BY the GSEs.  This might be an obstacle to new CET1 equity, but probably not Tier 1 prefs.  Or maybe the CET1 equity is just raised that much cheaper to reflect the risk

 

I  know Mnuchin is a busy guy but this does not seem like a heavy lift to me post-election.

 

 

[Luke 532]

 

10% chance, according to ACG, that we lose both in court.

[investorG]

 

10% chance, according to ACG, that we lose both in court.

 

Thanks for sharing.  I won't guess on the SC but if we get to a verdict, Mnuchin would have dropped the ball on perhaps his most important legacy item.  Unless he wants to be remembered for sanctions and the PPP.

[Guest cherzeca]

 

10% chance, according to ACG, that we lose both in court.

 

[Guest cherzeca]

it appears to me that gabby of ACG has not been in many negotiations: 

[Guest cherzeca]

@midas79

 

I took the liberty of asking TH about your good twitter work:

 

"Tim

 

I have had a conversation with midas79, who posts on this blog periodically, who points out that a Mr. Sugarman at FHFA had this to say during the recent FHFA webinar on the proposed capital rule:

 

“The way buffers work is that it’s not a capital requirement. Rather the enterprises need to hold the prescribed buffer amount, or we start to limit the capital distributions such as dividends and stock repurchases, and we also limit discretionary bonuses to executives.” p. 11 see https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/642020_transcript.pdf

 

now, I will be the first to admit that FHFA is confusing regarding the buffers; see Question 26 in the proposed rule and my comment letter to FHFA regarding it: https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15531.

 

are the buffers a capital requirement that need to be met upon pain of regulatory action, or an inducement for GSE management to carry more capital than actually required by the rule in order to avoid dividend and bonus restrictions? the answer to this question is very important for the initial capital raises that will be necessary to at least meet the risk/leverage capital requirements, imo.

 

I have to believe that GSE lead underwriters, MS and JPM, are pounding FHFA for clarification on this point behind the scenes, but if you take what Mr. Sugarman said at face value, that buffers are not a capital requirement, then the capital market might take a more sanguine view of this rule.

 

rolg"

 

now, TH can be dogmatic on the matter of capital, and what is too much, but I have to believe the market will feel better if it is clarified by FHFA that the real regulatory required level is 2.5% an not 4%

 

[muscleman]

What happens if the Supreme Court case is lost? Then it is all over or is there any other possibility for a good outcome?

[DocSnowball]

What happens if the Supreme Court case is lost? Then it is all over or is there any other possibility for a good outcome?

Have been thinking of the same. Or even if it is a win but the monetary relief is a nominal $1

[SnarkyPuppy]

In order to raise common equity, the senior preferred stock cannot be outstanding. 

 

The current regulator, current administration, and the companies are all clearly moving towards raising equity. 

 

If the senior preferred stock is no longer outstanding, the junior preferred stock are money good. 

[Luke 532]

In order to raise common equity, the senior preferred stock cannot be outstanding. 

 

The current regulator, current administration, and the companies are all clearly moving towards raising equity. 

 

If the senior preferred stock is no longer outstanding, the junior preferred stock are money good.

 

+1

[Guest cherzeca]

In order to raise common equity, the senior preferred stock cannot be outstanding. 

 

The current regulator, current administration, and the companies are all clearly moving towards raising equity. 

 

If the senior preferred stock is no longer outstanding, the junior preferred stock are money good.

 

+1

 

while I agree, it seems possible that some big whale (BRK?) could come in and buy a private placement of newly created convertible senior preferred, after treasury's preferred is nuked.  that should still leave juniors at par, but the capital structure will still look top heavy initially.  see OXY's convertible pref that BRK bought for an example.

[locutusoftexas]

In order to raise common equity, the senior preferred stock cannot be outstanding. 

 

The current regulator, current administration, and the companies are all clearly moving towards raising equity. 

 

If the senior preferred stock is no longer outstanding, the junior preferred stock are money good.

 

+1

 

while I agree, it seems possible that some big whale (BRK?) could come in and buy a private placement of newly created convertible senior preferred, after treasury's preferred is nuked.  that should still leave juniors at par, but the capital structure will still look top heavy initially.  see OXY's convertible pref that BRK bought for an example.

 

I believe that, after the travesty that Buffett's own democrats perpetrated on the FnF shareholders, he would be very unlikely to buy into something that the government has exploited shamelessly and can exploit at will. The politics factor and the greed of previously well-meaning humans turned this supposed value investment into a base speculation, as defined by Ben Graham. To reiterate, we investors were taken for a ride. Not that I am bitter or anything -- Ha Ha. Even "great" value investors were fooled.

[Guest cherzeca]

it need not be BRK.  there are a lot of whales overseas that would love the stability and growth of owning a piece of the US housing mortgage market.  again, you get into political sensitivities, but I have talked to advisors to Middle East money in the past, and while they love themselves trophy assets such as marquee resorts/brands etc, they are looking foremost for political and economic stability and growth.

[orthopa]

https://www.boylecapital.com/filesimages/Equity%20July%202020%20No%20CRS.pdf

 

Nice summary and thought process here.

[Guest cherzeca]

https://www.boylecapital.com/filesimages/Equity%20July%202020%20No%20CRS.pdf

 

Nice summary and thought process here.

 

+1

[Guest cherzeca]

GSEs ringing the bell during the pandemic: 

 

"Fannie Mae and Freddie Mac saw a whopping 78.5% jump in issuance of single-family mortgage-backed securities during the second quarter. The government-sponsored enterprises recorded a 111.7% increase in refinance business and a 26.3% gain in purchase-mortgage acquisitions."

 

from IMF

[WB_fan82]

Reading the CMLA comment on the cap rule.. what are "G fee reserves"?

 

It's an odd letter in that it spends one line on a suggested capital adjustment, but does not define nor quantify it.  All the rest is policy preferences post c-ship.

 

Anyone know what those are?

[investorG]

Another day just like the prior thousands -- plenty of people wanting to sell at distressed prices.

 

The window for a 4th amendment is now potentially open through Labor Day.  Waiting for a lame duck is weak.  Paulson closed his hedge fund, there's no strong political reason to wait.  The advisors have been on the field long enough to make it happen with a couple extra zoom conference calls. 

 

Mark Calabria's FHFA release, Sep 30 2019:  "FHFA commits to working with Treasury in the coming months to amend the share agreements and further advance broad housing reform....Now is the time to act."   

 

I wish everyone good luck and a great weekend.

[Guest cherzeca]

no reason to own GSEs right now if you are timing things.  the whole legal denouement awaits scotus next winter.  nothing administrative will be done until after Labor Day, when comment period has closed. 

 

will see some selling and price drift

[investorG]

ACG (no) vs. Craig Phillips (yes) on capital rule comment period extension. 

[Jcmeg35]

Interview with Craig Phillips today:

https://housingfinancestrategies.com/our-follow-up-with-craig-phillips/

 

Guessing that is where you got that from @investorG?

[investorG]

Interview with Craig Phillips today:

https://housingfinancestrategies.com/our-follow-up-with-craig-phillips/

 

Guessing that is where you got that from @investorG?

 

Yes. Unfortunately he's probably correct given the past patterns.