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

[orthopa]

https://www.cnbc.com/2020/08/07/trump-fundraiser-to-be-hosted-by-billionaire-john-paulson-in-hamptons.html

 

 

Just in time for an eventfull 3rd/4th quarter .

[TwoCitiesCapital]

https://www.wsj.com/articles/borrowers-face-new-fee-to-cover-heightened-risks-11597282215?mod=markets_lead_pos13

 

Fannie and Freddie increasing fees - seems temporary though given the "adverse market" title.

[Jcmeg35]

https://www.wsj.com/articles/borrowers-face-new-fee-to-cover-heightened-risks-11597282215?mod=markets_lead_pos13

 

Fannie and Freddie increasing fees - seems temporary though given the "adverse market" title.

 

I could be wrong but this doesn't seem like a temporary move. Guessing this is one of a few levers FHFA is going to pull to increase rev and be able to demonstrate a higher ROE on the high capital level they will have the companies raise over next year.

[TwoCitiesCapital]

https://www.wsj.com/articles/borrowers-face-new-fee-to-cover-heightened-risks-11597282215?mod=markets_lead_pos13

 

Fannie and Freddie increasing fees - seems temporary though given the "adverse market" title.

 

I could be wrong but this doesn't seem like a temporary move. Guessing this is one of a few levers FHFA is going to pull to increase rev and be able to demonstrate a higher ROE on the high capital level they will have the companies raise over next year.

 

Could be. Politically it'll be unpopular due to those costs just being passed on to consumers in a month or two.

 

And with a title like "adverse market fee", it'll be hard to justify continuing once forebearance and defaults renormalize.

 

But I also understand that the one of the most powerful forces in the political universe is inertia and so once the fee is there it may not come off.

 

 

[Guest cherzeca]

Tim Howard points out that given current very low rates and high refi activity there won’t be much refi activity in future years which will depress GSE revs to some extent.  So this fee is a way for GSEs to earn more revs on the refi activity which is being pulled forward. Big plus for GSE near term income statements

[investorG]

Calabria-Mnuchin are racking up bonus points for housing anti-stimulus 3 months ahead of their boss's election.  Instead they should have a meeting and sign a 4th amendment rather than weakly wait for potential action post November -- it's called 'lame' duck for a reason.

[Guest cherzeca]

This refi fee suggests to me that the GSEs and their financial advisors are well along in their modeling and analysis. And that FHFA is on board. I don’t see a significant economic change to the business model occurring without a lot of backup work having been done, and without the goal of a cap raise being very much on target.

[Midas79]

https://twitter.com/NickTimiraos/status/1293986044057182209

JP Morgan: At the GSEs current level of roughly $150 billion a month in refi loan guarantees, this new fee will incrementally increase the GSEs' revenue by $9 billion a year

 

That is significantly higher than I thought. The $9B should almost all go straight to pre-tax income because I doubt there is much marginal cost associated with the fee increase.

 

More significant is the fact that it's JPM saying this. Freddie's financial advisor. Let that sink in a bit.

 

I doubt this $9B is sustainable, but it shows me how easily FnF can tweak their income, ostensibly for the purpose of attracting private capital.

[Guest cherzeca]

As said in earlier comments, is this refi fee sticky?  With rates low and expected to remain low thanks to uncle fed, this fee can generate a lot of revs that should fall directly to the bottom line if it persists and if everyone with a mortgage originated over a few years ago refis. This can be nice “window dressing” for cap raising.

[Guest cherzeca]

If you are into magical thinking maybe someone in WH now tells Calabria to lighten cap targets so as to avoid need to reach for revenue

[Jcmeg35]

Apparently the CBOE came out with a report today on the GSEs "Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions"

https://www.cbo.gov/publication/56496

 

I have yet to read it and assesment. Initial thought is clearly a + to see more governement agencies putting out reports on recap. Hard to think this work would be put in if wasn't a high likelyhood of it happening.

[Guest cherzeca]

Apparently the CBOE came out with a report today on the GSEs "Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions"

https://www.cbo.gov/publication/56496

 

I have yet to read it and assesment. Initial thought is clearly a + to see more governement agencies putting out reports on recap. Hard to think this work would be put in if wasn't a high likelyhood of it happening.

 

just adds to the inertial movement forward, with CBOE acknowledging admin plan etc, though I have to say I couldn't read past the first few pages...your tax dollars at work

[DocSnowball]

Apparently the CBOE came out with a report today on the GSEs "Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions"

https://www.cbo.gov/publication/56496

 

I have yet to read it and assesment. Initial thought is clearly a + to see more governement agencies putting out reports on recap. Hard to think this work would be put in if wasn't a high likelyhood of it happening.

 

Lots of speculation on pages 13-14, quite positive for Junior preferred IMHO:

 

Redemption of Shareholders’ Claims in CBO’s Model

CBO’s model incorporates the judgment that in scenar- ios in which the GSEs’ common-stock sale did not raise enough funds to redeem the full face value of both the senior preferred and junior preferred shares, the Treasury would take a reduction (known as a haircut) in the value of its senior preferred stake before requiring junior pre- ferred shareholders to do so.30 That outcome would be inconsistent with the priority of interest between junior and senior preferred shares. But it recognizes that chang- ing the GSEs’ commitments to junior preferred share- holders would be difficult outside a receivership scenario, in which the Treasury, as owner of the senior preferred shares, also owned the GSEs’ common stock (through its warrants).

Junior preferred shareholders are in line to receive the dividends associated with their shares before holders of new or existing common shares. Thus, they might refuse to allow the GSEs to retire their claims on the GSEs’ assets and income at less than the face value of their shares in the lead-up to a sale of new common stock. That refusal would reduce the value of the new common shares, making recapitalization more difficult. Even though the Treasury’s preferred shares have seniority over the preconservatorship preferred shares owned by inves- tors, the Treasury would have an incentive to make an arrangement that took into account its ownership stake in the GSEs’ common stock.

Alternatives to the approach used in CBO’s model— such as having holders of junior preferred shares take reductions before the Treasury, or reducing both classes of preferred shares equally—would increase the pro- ceeds received by the Treasury. However, those alterna- tives would not have a large effect on the results of this analysis, CBO estimates.

If FHFA put the GSEs in receivership, it might be able to transfer some of their assets and liabilities to a new corporation to which no existing shareholders had a claim. The new corporation could then sell common stock and use the proceeds to capitalize itself and to reimburse shareholders in the old GSEs according to the priority of their claims. That priority order would require senior preferred stock to be redeemed before any junior preferred or common stock.

If, however, the Treasury wanted to raise capital through the sale of new common shares without resorting to receivership for the GSEs, the claims of junior preferred shareholders would have to be addressed. In this analysis, those shareholders are paid the full $35 billion face value of their shares from the proceeds of the common-stock sale, if possible, thus retiring their claims on the assets and income of the recapitalized GSEs. In addition, if possible, the Treasury liquidates its senior preferred shares and its warrants for common shares at the time of the common-stock sale. (Previously, when the Treasury provided financial commitments to private firms during the financial crisis, it exited from those commitments in multiple stages.31 A staged exit might work with the GSEs, but for simplicity, CBO’s recapitalization scenar- ios do not incorporate that approach.)

[undervalued]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

[SnarkyPuppy]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

20% position which is higher-end for me.  Was higher but has come down due to changes in my portfolio unrelated to the GSEs.  Higher conviction - Craig Phillips literally has spelled out what is going to happen.  Biggest risk IMO is miscalculating path dependency in a Biden win. 

[investorG]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

Less confident.

 

Mnuchin has been fighting for the NWS for 3.5 years in court even after the Collins en banc and Calabria's $240bn capital rule is sabotage against the companies / American middle class.

[TwoCitiesCapital]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

~10% at this point. Added a hair during COVID drawdown, but not much. Already very large and bumping my own person position limits.

 

Am optimistic about the direction and recent events, but definitely consistently disappointed on timing.

[Jcmeg35]

Looks like FHFA is delaying the 0.5% refi surcharge:

 

https://www.wsj.com/articles/fannie-freddie-to-delay-mortgage-refinance-surcharge-until-dec-1-11598385617

[Guest cherzeca]

Looks like FHFA is delaying the 0.5% refi surcharge:

 

https://www.wsj.com/articles/fannie-freddie-to-delay-mortgage-refinance-surcharge-until-dec-1-11598385617

 

seems fair.  wouldn't be surprised if the fee sticks for awhile if rates stay low for awhile...become a part of refi landscape for so long as refi stays strong...

[WB_fan82]

The great irony of this entire situation is that the 0.5% fees don't have to matter.  The 4% capital requirement and ROEs don't have to matter.

 

All Calabria has to do is get TSY on board with converting the sr pfd and settling the lawsuit to send the $125B back to the GSEs (which would be like writing a check to itself given the warrants and shares issued on a pfd exchange). 

 

The GSEs would be fully recapped almost immediately.  You don't have to worry about raising new capital at X ROE, or raising fees on mortgage holders or people looking to refi.  Heck, the government could release them from c-ship with the mandate that they have to LOWER g-fees by 10 bps for 5 years.  The GSEs would still be profitable and the shares will trade wherever they trade, even if it's a discount to book value (like every other fin institution right now).  None of that matters b/c they don't need to raise additional common equity and the government can sell its shares into the market over time.

 

This is so darn easy.  I really hope this is the game plan and we are just waiting for the first steps first:  capital rule finalized, recap plans submitted, then one big SPSA amendment to wrap it all up the day after the election.

[DocSnowball]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

~10% at this point. Added a hair during COVID drawdown, but not much. Already very large and bumping my own person position limits.

 

Am optimistic about the direction and recent events, but definitely consistently disappointed on timing.

 

+1 here.

~10% and with the understanding this may drag on for another 3-4 years, with lots of volatility around the elections.

Just don't see how the institutions can be recapped without taking care of JPS shareholders; CBO report pretty much said the same. Major risks are delayed timing, being dependent on the kindness of strangers, and another attempt at nationalization by Democrats in that order.

[SnarkyPuppy]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

~10% at this point. Added a hair during COVID drawdown, but not much. Already very large and bumping my own person position limits.

 

Am optimistic about the direction and recent events, but definitely consistently disappointed on timing.

 

+1 here.

~10% and with the understanding this may drag on for another 3-4 years, with lots of volatility around the elections.

Just don't see how the institutions can be recapped without taking care of JPS shareholders; CBO report pretty much said the same. Major risks are delayed timing, being dependent on the kindness of strangers, and another attempt at nationalization by Democrats in that order.

 

+1

The IRR on this is still very attractive relative to the market even if you assume years and years of delay.  I'd be more worried if I had to manage clients through volatility

[Fat Pitch]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

~10% at this point. Added a hair during COVID drawdown, but not much. Already very large and bumping my own person position limits.

 

Am optimistic about the direction and recent events, but definitely consistently disappointed on timing.

 

+1 here.

~10% and with the understanding this may drag on for another 3-4 years, with lots of volatility around the elections.

Just don't see how the institutions can be recapped without taking care of JPS shareholders; CBO report pretty much said the same. Major risks are delayed timing, being dependent on the kindness of strangers, and another attempt at nationalization by Democrats in that order.

 

+1

The IRR on this is still very attractive relative to the market even if you assume years and years of delay.  I'd be more worried if I had to manage clients through volatility

 

When you factor in opportunity costs and inflation that has been occurring this investment has been an absolute disaster.

[Midas79]

When you factor in opportunity costs and inflation that has been occurring this investment has been an absolute disaster.

 

I disagree. The opportunity cost argument assumes two things: that one should have been able to predict what actually happened (both with this investment and the alternatives), and that what actually happened had a 100% chance of happening. Both of these are questionable at best, and in my opinion both are completely fallacious.

 

Could I have made more money elsewhere in the last few years? Sure. That's going to be true of just about every investment ever.

Should I have seen what happened coming? Not necessarily. If the future was that easy to predict there wouldn't be a market at all.

 

Seeing other investments take off while mine languishes used to bother me, but not anymore. Beating myself up over "opportunity costs" and such only leads to despair. If other people make more money than I do, good for them.

[Guest cherzeca]

For those of you who are still invested, how much of your portfolio are you betting on FNMA/FMCC related securities? Have you become more convinced of the end game will be positive or becoming negative?

 

~10% at this point. Added a hair during COVID drawdown, but not much. Already very large and bumping my own person position limits.

 

Am optimistic about the direction and recent events, but definitely consistently disappointed on timing.

 

+1 here.

~10% and with the understanding this may drag on for another 3-4 years, with lots of volatility around the elections.

Just don't see how the institutions can be recapped without taking care of JPS shareholders; CBO report pretty much said the same. Major risks are delayed timing, being dependent on the kindness of strangers, and another attempt at nationalization by Democrats in that order.

 

+1

The IRR on this is still very attractive relative to the market even if you assume years and years of delay.  I'd be more worried if I had to manage clients through volatility

 

When you factor in opportunity costs and inflation that has been occurring this investment has been an absolute disaster.

 

stupid remark, fat pitch.  what inflation? over what period of time? what alternatives?

 

if you compare SPY to FNMAS for example over various periods of time, FNMAS beat SPY more often than not.