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

[orthopa]

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?

 

50% ish here. More convinced end game will be positive, ever since the otting comments the biggest risk has been time for this to execute IMO. Not permanent loss of capital.

[orthopa]

Comment period not extended.

 

 

 

Cue the timeline Mark.

 

 

[Midas79]

Comment period not extended.

 

 

 

Cue the timeline Mark.

 

Awesome news imo, at the very least in the sense that him extending the comment period would have been a pretty bad sign.

 

I like his use of the 103-day period from May 20 (public release of rule) to August 31 (end of comment period). I put those exact numbers and dates in my comment letter when I made the recommendation not to extend the comment period.

 

Included in this sense of urgency is avoiding any extraneous delays, such as extending the comment period for the RCR. Its complexity is not so excessive as to warrant more than the 103-day comment period (from release of the RCR on 05/20/20 to the close of the comment period on 08/31/20) that has already been provided.

[Guest cherzeca]

Comment period not extended.

 

 

 

Cue the timeline Mark.

 

Awesome news imo, at the very least in the sense that him extending the comment period would have been a pretty bad sign.

 

I like his use of the 103-day period from May 20 (public release of rule) to August 31 (end of comment period). I put those exact numbers and dates in my comment letter when I made the recommendation not to extend the comment period.

 

Included in this sense of urgency is avoiding any extraneous delays, such as extending the comment period for the RCR. Its complexity is not so excessive as to warrant more than the 103-day comment period (from release of the RCR on 05/20/20 to the close of the comment period on 08/31/20) that has already been provided.

 

I had expected this but now that it has happened I think we can start to see some real work getting done this fall...no more tawk

[orthopa]

Do we know for sure if its 60 days after the comment period to finalize the rule? His letter today makes me believe he would like to keep any other timeline expectations in order.  If so that puts us just before the election. Then MC can ask for CRP from FnF.

[Guest cherzeca]

Do we know for sure if its 60 days after the comment period to finalize the rule? His letter today makes me believe he would like to keep any other timeline expectations in order.  If so that puts us just before the election. Then MC can ask for CRP from FnF.

 

as I recall there is no required "comment digestion" period.  calabria does say that FHFA will hold two "listening sessions" (next to last paragraph of letter) so I wouldn't expect anything finalized before October.

[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.

 

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.

 

Inflation has been averaging 9%-10% the last few years depending which part of the country you are living in: https://chapwoodindex.com/

 

As for opportunity costs there are plenty. If you are savvy enough to read & and analyze smart contract risk you can become a liquidity provider and earn 100%+/yr via US stable coins on Ethereum. There are even insurance you can purchase to protect yourself against bugs for a couple percentage points of the capital you are providing. There are plenty of other options, but I rather not divulge them.

 

 

[sholland]

Is this fake?  Is David Stevens of the MBA actually encouraging the JPS to be converted to common during a recap?

 

https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15591

[Guest cherzeca]

Is this fake?  Is David Stevens of the MBA actually encouraging the JPS to be converted to common during a recap?

 

https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15591

 

I had a chuckle over this.  could be just same name...although there is no formal ID vetting you had to go through before you submit a comment

[Midas79]

Is this fake?  Is David Stevens of the MBA actually encouraging the JPS to be converted to common during a recap?

 

https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15591

 

Yes, it's fake. Check the name of the organization carefully. It's still funny, though.

[COBFInfinity]

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

 

That obviously depends on when you bought and at what price. There are people who bought in mid-2014, before Lamberth's terrible decision, that are still losing money. There are those, like me, who bought a few months later at 1/3 the price and are doing just fine. Alas, I added last September after the en banc decision and those shares are down about 30%.

 

Always need to look forward, though, so the issue is not what your performance has been, but what you think it will be. It sure seems that Calabria wants to end the conservatorships, but it would appear that until the NWS is officially ended, Mr. Market no longer has much confidence in this story. Can't blame anyone who has lost faith after the many delays and inability to get final justice from the courts.

[Guest cherzeca]

Freddie and Fannie are in with their FHFA comment letters, and they both reiterate what many have said, that the rule improperly imposes bank capital rules, geared to interest rate and credit risk on many assets, to a monoline mortgage insurer that only bears credit risk, and only on mortgages.  but I found it interesting that they thought the current proposed capital rule would raise G fees by 20 or 15-35bps.  I would have thought it would be much more.  I realize that this is a significant increase over the 45bps or so currently earned by GSEs, and given current low interest rates, a significant increase over what a borrower might otherwise bear.  and it will force some low income borrowers into fha loans, and some other more credit worthy borrowers into banks who will hold in portfolio, but it doesn't sound to me like a insurmountable hurdle for GSEs to achieve their recaps.  when I saw this expected G fee bump projected by the companies that should know, I was a bit relieved.

 

edit:  missed this first time though Freddie's comment (p.9):  "In order to maintain an appropriate return, an increase of 20-50 bps could be required on the higher-risk segments of our acquisitions to offset the loss of higher returns and volume on our lower-risk segment, affecting low-income, affordable housing."

 

so 15-35bps G fee increase overall, but because lower risk loans will be sold increasingly elsewhere in event of G fee raise, much higher potential G fee raise for high risk loans...seriously affecting the GSEs' duty to serve mandate.

[investorG]

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

 

This is a fair conclusion.  I'd add in the risk involved as another factor making it so. 

 

The common is well below autumn 2016 prices.  The jr pref has done a little better to date but the current valuation is laughing at the perma bulls on this site and other social media outlets. 

 

If I read it correctly, the CBO report suggested in a footnote that the sr pref is adjustable if it serves the purpose of advancing exit from conservatorship.  Thus there has been no excuse not to settle Collins for the past 12 months with a 4th amendment post en banc and the Tsy report. 

 

The ink is not yet fully dry on this administration's team's efforts and this could all possibly change but at this point and these prices, fatpitch's conclusion is mostly accurate.

[orthopa]

With trump coming back in the polls I have read many election experts expecting that we may not know who the president is the day after the election or for maybe even weeks after due to challenges, mail in voting etc.  Aside from who you want or think will win I think this heavily plays in FnF favor. We all know time is of the essence after the election if there is a Biden win and I don't think Calabria has the lee way to wait until early December to figure out who the president will be and start the process.

 

In the event we are stuck not knowing who the president is for a couple of weeks if not decided on election night I think Calabria will have to act with the assumption Biden may win if its too close to call to keep things on track.

[WB_fan82]

I think there is a good reason not have settled Collins, yet.  It would have been impossible!

 

The current SPSA doesn't allow for more than $30B of retained earnings.  That makes it impossible to settle for the $120B of overpayments. 

 

The alternative (and in my mind inferior for recap purposes) settlement would be considering the sr pfd paid down w/ a tax credit for overages.  Well, that would required a 4th SPSA amendment to keep TSY involved.

 

Calabria has said he wanted one big amendment to clean it up.  Need the capital rule done first.  So either couldn't settle or had to wait for capital rule for the 4th SPSA.

 

This is why I expect (hope!) for a settlement in Q4, even weeks before the case is heard (I think it's unscheduled so far).

[investorG]

I think there is a good reason not have settled Collins, yet.  It would have been impossible!

 

The current SPSA doesn't allow for more than $30B of retained earnings.  That makes it impossible to settle for the $120B of overpayments. 

 

The alternative (and in my mind inferior for recap purposes) settlement would be considering the sr pfd paid down w/ a tax credit for overages.  Well, that would required a 4th SPSA amendment to keep TSY involved.

 

Calabria has said he wanted one big amendment to clean it up.  Need the capital rule done first.  So either couldn't settle or had to wait for capital rule for the 4th SPSA.

 

This is why I expect (hope!) for a settlement in Q4, even weeks before the case is heard (I think it's unscheduled so far).

 

The odds of Tsy sending $125bn cash to FnF are below low.  Only potential way I see would be for an immediate buyer of their pref stake / warrants for a similar amount such that there was no net $$ sent.

 

Why does a 4th amendment need a capital rule finalization?  Hopefully I'm missing something. 

[Guest cherzeca]

no one is buying the senior pref.  there will be a buyer of warrants/shares well down the road.

 

scotus briefing on both collins claims ends 11/23.  as said above, it may be uncertain who next potus is. if I were Milbank and asked to provide a memo of law on likelihood of success, I wouldn't do it until I had read all of the briefs.

[sholland]

Why does a 4th amendment need a capital rule finalization?  Hopefully I'm missing something.

 

IIRC either Calabria or Mnuchin said that the PCF needs to come after a Final Capital Rule because they don’t want to set the PCF twice.  Since the 4th amendment needs the PCF, and the PCF needs the Final Capital Rule, then the 4th amendment needs capital rule finalization.

[Guest cherzeca]

there are four things that need to occur. finalize a capital rule. 4th A that eliminates senior pref. provide junior prefs an exchange option (some might say that this is not necessary but I believe JPM and MS will very much want this). settle litigation. you can't raise huge amounts of equity capital with any of these not done imo.  I don't see them having to occur simultaneously, but there is leverage available to all parties to withhold acting until the other parties act....and so it is best if you try to have the whole ball of wax settled at once.

[WB_fan82]

InvestorG:

 

It would be done after a sr pfd conversion to common.  Following AIG example, US govt would 1. exercise warrants then 2.  exchange sr pfd into common, ending up with 95%+ of shares outstanding.  Therefore settling Collins by putting the $125B back into the company would effectively be writing a check to itself.  The economic leakage would just be a couple billion.

 

The net impact would be a GSE that is very close to the full capitalization figures, especially if cap rule is tweaked at all.

 

Heck, the GSEs could even be required to lower G-fees by 10 bps in return for the amendment.  ROEs don't really matter when they don't need to raise additional capital.

 

So to me, if there is a will there is a way with a couple penstrokes that serves every contingency.  More capital.  Lower mortgage rates.

[Guest cherzeca]

InvestorG:

 

It would be done after a sr pfd conversion to common.  Following AIG example, US govt would 1. exercise warrants then 2.  exchange sr pfd into common, ending up with 95%+ of shares outstanding.  Therefore settling Collins by putting the $125B back into the company would effectively be writing a check to itself.  The economic leakage would just be a couple billion.

 

The net impact would be a GSE that is very close to the full capitalization figures, especially if cap rule is tweaked at all.

 

Heck, the GSEs could even be required to lower G-fees by 10 bps in return for the amendment.  ROEs don't really matter when they don't need to raise additional capital.

 

So to me, if there is a will there is a way with a couple penstrokes that serves every contingency.  More capital.  Lower mortgage rates.

 

this is a very sensible scenario.  but when have you seen USG writing a >$125B check to settle litigation?  I guess there is always a first time.  your next question should be whether treasury needs congressional appropriation in order to write that check.  your answer is...?

[Midas79]

InvestorG:

 

It would be done after a sr pfd conversion to common.  Following AIG example, US govt would 1. exercise warrants then 2.  exchange sr pfd into common, ending up with 95%+ of shares outstanding.  Therefore settling Collins by putting the $125B back into the company would effectively be writing a check to itself.  The economic leakage would just be a couple billion.

 

The net impact would be a GSE that is very close to the full capitalization figures, especially if cap rule is tweaked at all.

 

Heck, the GSEs could even be required to lower G-fees by 10 bps in return for the amendment.  ROEs don't really matter when they don't need to raise additional capital.

 

So to me, if there is a will there is a way with a couple penstrokes that serves every contingency.  More capital.  Lower mortgage rates.

 

this is a very sensible scenario.  but when have you seen USG writing a >$125B check to settle litigation?  I guess there is always a first time.  your next question should be whether treasury needs congressional appropriation in order to write that check.  your answer is...?

 

One possibility I had thought of in the past is that instead of Treasury writing that check, they could pledge to send the first $125B of the proceeds of the sale of all that common stock to FnF. Treasury can't keep a 95% position (which I think would be more like 99+%) anyway. Then there is never a net cash outflow, though Treasury wouldn't see a "profit", on top of what it has already gained off the seniors, until after it sells the first $125B.

 

Since the market cap of FnF is likely to be $200-250B, Treasury shouldn't have any trouble recouping its $125B if it just drops the share price low enough to clear the market.

 

If I understand the court cases correctly, converting the seniors, pledging that $125B, and amending the NWS out of the PSPA should be good enough to get all the cases mooted, except Collins/Bhatti (constitutional defect) and maybe Perry (junior pref contract claims). This part is out of my wheelhouse though.

[WB_fan82]

Cherzeca, I don't know the answer on appropriation for a settlement payment.  That's a good question.  Do you have any thoughts on the answer?  Does TSY need approval to settle litigation?  Does it change if the FHFA requires something in exchange for that settlement?

 

If Supreme Court orders the same remedy, does TSY need approval to pay?

 

I only have questions, no answers, but if there's some obstacle to what seems like the perfect game theory outcome I'd love to know about it.

[Guest cherzeca]

@midas

 

if Ps get the relief they are seeking pursuant to a 4th A, then both claims should be muted (courts don't hear cases when there is no relief to be granted), but of course T/FHFA would get Ps to settle in connection with any big deal that gives Ps what (or close to what) they are looking for

 

@WB

 

as Midas points out, feds don't want to put all of GSEs liabilities on its B/S, which over 80% ownership would do.

 

as for congressional appropriation, I do know that HERA makes clear that all monies disbursed under PSPA are deemed appropriated....BUT this is for the purpose of purchasing SPS, not making settlements.

[WB_fan82]

Midas, that's a neat idea.  I hadn't thought of that (or any others) as a path to get $125B from the govt via settlement. 

 

One way is to write the check, but your way might work just as well.  Instead of cash, the GSEs could book a receivable of that amount from the government stock sales.  I think Calabria has the authority to decide what to treat / not treat as Cet1 or Tier 1 and maybe he would be fine counting that receivable.