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

[onyx1]

well said orthopa.  if Biden wins and SCOTUS is argued, then that would indicate that the inmates truly are running the Trump asylum.  though if you believe that Ps win before SCOTUS, you might want to sell only a little

 

 

In the event of a Biden win and a P SCOTUS win, it's unclear to me how the SPS gets written down.

[orthopa]

well said orthopa.  if Biden wins and SCOTUS is argued, then that would indicate that the inmates truly are running the Trump asylum.  though if you believe that Ps win before SCOTUS, you might want to sell only a little

 

 

In the event of a Biden win and a P SCOTUS win, it's unclear to me how the SPS gets written down.

 

Then you have Calabria whos job maybe on the line with the SCOTUS negotiating the future of housing finance in the US with a democrat treasury secretary being advised by Jim Parrot et al. Thats a nightmare. In that case is a consent decree even written if a 4th PSPA isn't agreed to? How can you have a Biden win, an argued SCOTUS case, no PSPA and a consent decree? That combo doesn't work.

 

If Calabria and Mnuchin are serious about this the SCOTUS is never argued, especially with a Biden win. If not time to walk away if not run.

[Guest cherzeca]

well said orthopa.  if Biden wins and SCOTUS is argued, then that would indicate that the inmates truly are running the Trump asylum.  though if you believe that Ps win before SCOTUS, you might want to sell only a little

 

 

In the event of a Biden win and a P SCOTUS win, it's unclear to me how the SPS gets written down.

 

gives rise to a damage remedy in excess of the SPS balance outstanding

[orthopa]

FWIW looking at the price action/chart for those believe it no matter who wins the election the move will be a doozy. Last time BB were this tight were end of Feb this year before the covid sell off and end of 2019 before the Otting comments.  Both were roughly ~50% +/- moves respectively for the preferred and 200%/-65% for the common. Buckle up.

[Guest cherzeca]

well said orthopa.  if Biden wins and SCOTUS is argued, then that would indicate that the inmates truly are running the Trump asylum.  though if you believe that Ps win before SCOTUS, you might want to sell only a little

 

 

In the event of a Biden win and a P SCOTUS win, it's unclear to me how the SPS gets written down.

 

Then you have Calabria whos job maybe on the line with the SCOTUS negotiating the future of housing finance in the US with a democrat treasury secretary being advised by Jim Parrot et al. Thats a nightmare. In that case is a consent decree even written if a 4th PSPA isn't agreed to? How can you have a Biden win, an argued SCOTUS case, no PSPA and a consent decree? That combo doesn't work.

 

If Calabria and Mnuchin are serious about this the SCOTUS is never argued, especially with a Biden win. If not time to walk away if not run.

 

can't deny this other than to say that my investment thesis would still be intact:  TINA and Ps will win.  IRR goes out the window I admit

[orthopa]

well said orthopa.  if Biden wins and SCOTUS is argued, then that would indicate that the inmates truly are running the Trump asylum.  though if you believe that Ps win before SCOTUS, you might want to sell only a little

 

 

In the event of a Biden win and a P SCOTUS win, it's unclear to me how the SPS gets written down.

 

Then you have Calabria whos job maybe on the line with the SCOTUS negotiating the future of housing finance in the US with a democrat treasury secretary being advised by Jim Parrot et al. Thats a nightmare. In that case is a consent decree even written if a 4th PSPA isn't agreed to? How can you have a Biden win, an argued SCOTUS case, no PSPA and a consent decree? That combo doesn't work.

 

If Calabria and Mnuchin are serious about this the SCOTUS is never argued, especially with a Biden win. If not time to walk away if not run.

 

can't deny this other than to say that my investment thesis would still be intact:  TINA and Ps will win.  IRR goes out the window I admit

 

The question is even if damage remedy decided how far of a 180 can a Dem President, Secretary, and FHFA director take FnF and shareholder returns with them.

 

 

[Jcmeg35]

Looks like FHFA finalized strategic plan for 21'-24' today. At least another step behind us now, admittedly a less important one.

 

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Strategic-Plan-for-FY-2021-2024-Finalized.aspx

[Guest cherzeca]

Looks like another timeline delay from what Calabria has said in the past. Though, also seems to imply the use of a consent decree:

 

 

https://www.americanbanker.com/news/fannie-and-freddie-will-likely-exit-conservatorship-by-2024-calabria-says

 

is he implying or are we inferring?  Calabria seems to think that being in consent decree is still being in conservatorship if he goes the consent decree route.  I think this is linguistics/PR unless the consent decree actually purports to carryover full conservatorship power, in which case there will be no public offerings.

[WB_fan82]

This is an old article...

[Jcmeg35]

You are right, my mistake! Thanks for pointing out.

 

This is an old article...

[orthopa]

It seems the way to move forward with this would be and could be much simpler then these 2(mnuchin and calabria) seem to make it. If we remember correctly Calabria came out guns a blazin here (https://www.foxbusiness.com/markets/fannie-freddie-ipo-could-come-in-2020-fhfa-mark-calabria) and then the Bloomberg article about waiting till after the election came out and the brakes have been on big time. FHFA/Treasury has needed to stall and he certainly did his aprt waiting 5-6 months longer then the above article implies for new capital rule after treasury waited 3-4 months for the Housing plan.  Hopefully the Bloomberg article is true or we may all have been taken for fools to believe what has been said.

 

Calabria seems pretty confident that he will be in office for his whole term. Granted this article was printed pre Selia but he still seems to believe he cannot be removed without cause. Surely he knows about the possibility of a Biden win and the Selia precedent in ruling.

[orthopa]

It seems the way to move forward with this would be and could be much simpler then these 2(mnuchin and calabria) seem to make it. If we remember correctly Calabria came out guns a blazin here (https://www.foxbusiness.com/markets/fannie-freddie-ipo-could-come-in-2020-fhfa-mark-calabria) and then the Bloomberg article about waiting till after the election came out and the brakes have been on big time. FHFA/Treasury has needed to stall and he certainly did his aprt waiting 5-6 months longer then the above article implies for new capital rule after treasury waited 3-4 months for the Housing plan.  Hopefully the Bloomberg article is true or we may all have been taken for fools to believe what has been said.

 

Calabria seems pretty confident that he will be in office for his whole term. Granted this article was printed pre Selia but he still seems to believe he cannot be removed without cause. Surely he knows about the possibility of a Biden win and the Selia precedent in ruling.

 

A quote from the above video 5/10/19.

 

"Calabria is currently waiting on a plan from the U.S. Treasury on reform for Fannie and Freddie, which he expects this summer. Then he will negotiate with Treasury and hopes to come to an agreement by the fall that would then allow them to stop Fannie and Freddie from sending all profits to Treasury later this year. That is, ending the so-called net sweep. By January, Calabria wants to start the capital-building process and thinks it’s possible an IPO could occur at the earliest in the first half of next year."

 

Wow.

[orthopa]

Going back to what Mnuchin has said publically on FnF its very interesting to hear this interview now, 13 months later knowing where we are with the Selia ruling and SCOTUS https://www.foxbusiness.com/markets/treasury-secretary-steven-mnuchin-trump-administration-fannie-mae-freddie-mac-reform

 

He says "regardless" of what happens with the court case he will not let the court case stand in the way of housing finance reform and "we" will restructure Fannie mae and Freddie mac so they have private capital. How the hell can they do that "regardless" of the court case NOW?

 

He says the court case is an "investor issue" that continues to go through the legal process. Clearly 13 months ago he viewed the 2 as separate issues. 1. An "investor issue" going through the legal process and 2. the building of private capital for FnF. Clearly DOJ has brought him up to date since that interview since they are unquestionably tied at the hip. Looks like to me the SG holds the reins on the SCOTUS case and not Mnuchin in anyway whatsoever.

 

 

[WB_fan82]

It's super easy to get private capital into the GSEs.  Just stop the NWS.  And convert it to common.  voila.

[Guest cherzeca]

It's super easy to get private capital into the GSEs.  Just stop the NWS.  And convert it to common.  voila.

 

no. you have to eliminate it not convert it.  if it were to be converted to common, common will go to $.10. good luck raising >$200B of equity then.

[Midas79]

It's super easy to get private capital into the GSEs.  Just stop the NWS.  And convert it to common.  voila.

 

no. you have to eliminate it not convert it.  if it were to be converted to common, common will go to $.10. good luck raising >$200B of equity then.

 

I would posit that raising equity, in any amount, is easier the lower the common share price is. At the very least the new investors should be agnostic to the market price because they are going to want (at least) a certain portion of the overall equity for the money they are being asked for. That would reset the market price to the offering price, no matter what the market price had been before.

 

Commons at $0.10 is not an issue in and of itself anyway because a reverse split can bring the share price up to whatever new investors want it to be.

 

I still think my idea to convert the seniors to convertible (but only by anyone but Treasury) zero-div non-cumulative prefs with a $193B total stated value is the best of all worlds in which Treasury sends $125B to FnF.

• 1. It fixes the final share count, allowing the market to accurately price the commons, in turn allowing Treasury to start selling their shares immediately. Multiple common equity raises, on the other hand, leave the final share count unknown until the last one, making them much more difficult to conduct.
  
• 2. FnF instantly become "adequately capitalized" under HERA, hitting core capital of 2.5% of adjusted total assets and removing all restrictions and authorities in HERA for lower capital classifications. The consent agreement would likely be restrictive in its own way, but avoiding the lower capital classifications in HERA is a nice bonus.
  
• 3. As a corollary, the leverage ratio drops to 40:1 overnight.
  
• 4. Treasury can unwind its position over time by just listing those preferred shares on the market and letting whoever wants to buy them do so. No need for large, structured offers.
  
• 5. FnF's total common equity should be worth at least $200B, so if Treasury gets 99.9% of it (no reason to leave anything for the existing commons) they will come out way ahead. Even further than canceling the seniors and exercising the warrants.
  
• 6. If Treasury can negotiate with outside investors quickly, they could privately place a portion of those new prefs and lessen the total cash outlay. If there is enough appetite (>$125B worth) they could eliminate the outlay entirely!
  
• 7. No worries about Treasury having voting rights because they would never own any common shares at all. Also no worries about balance sheet consolidation (at 80%) or majority shareholder duties (at 50%).
  
• 8. As the shares are converted by buyers, CET1 capital would rise. The total rise would be $193B by the time all shares are bought and converted. The purpose of the zero dividend is to not give Treasury an incentive to hold the shares, and give investors an incentive to convert upon buying, building CET1 capital.
  

 

I'd rate #4 as the most important one. No need for one huge all-at-once equity raise that the market might not have an appetite for in such a short time period. Treasury would have to do a mini road show in advance to make sure there are enough interested buyers to get the ball rolling, but after that the market gets to take over.

 

I'm not sure what would happen to the lawsuits at that point. The plaintiffs could be dealt with individually because none of the cases have been certified as class actions. The derivative suits in Sweeney's court would go poof, right? The constitutional case plaintiffs (Collins, Rop, Bhatti) are small enough to be bought off separately. The wild card is Perry, where (if I understand correctly) the companies themselves are the defendants. Still, the NWS ending and the seniors being gone would give few plaintiffs a reason to keep fighting, even if it's not enough on its own to allow the defendants to successfully get the cases dismissed as moot.

[WB_fan82]

There are so many levers to pull to put in private capital.

 

Convert the sr pfd common

Settle Collins for the NWS overages (TSY might prefer to wait for court outcome on this one)

List the common stock and make exchange offers to the existing agency bonds

Convert the public pfd to common

Sell new sr pfd to the public for the pfd part of capital requirements

 

All of this helps capital.  The common share price doesn't matter one iota here b/c nobody is buying newly issued common.

 

Seems to me the common shares are a bet on TSY killing the NWS and letting the GSEs accrete retained earnings over time with no increase in its preference.  Or a bet that you get some positive reflexivity in the price if Collins wins in court or we get more clarity on a recap or something where a higher price reduces dilution.  I don't really understand the investment case for the common shares, especially vs the pfd shares.

 

 

[orthopa]

20.7B net worth now. Only 4.3B until cap is hit which maybe end of Q4? This could be another lever to force Treasurys hand as it seems that the only way anything happens. Since that cap maybe hit or close to it with next Qs earnings I think looking at the last amendments language.

 

"The Enterprise and Treasury agree to negotiate and execute an additional amendment to the

Agreement that further enhances taxpayer protections by adopting covenants broadly consistent

with recommendations for administrative reform contained in Treasury's September 2019

Housing Reform Plan, in further consideration for the amendment contained in Part I of this

agreement. "

 

I guess Treasury could just start to sweep everything again over 25B but not sure how Calabria would publicly handle that with a very conservative capital rule eminent that he has taken heat over and FSOCs recent blessing and recognition that FnF many need more capital then the rule calls for. Seems like that would be against the regulators duties and the law as Calabria says.

 

The issue I see is if the SCOTUS is argued and decided then another interim amendment is need to account for 2 more quarters which doesn't seem consistent with the Treasurys September 2019 housing reform plan or the language of the last amendment. Of course I/we would believe that additional amendment would be the final amendment but of course Calabria and Mnuchin could just raise the cap and stretch us some more. That should probably be the base expectation for now.

[WB_fan82]

GSE earnings were amazing.  Major "amortization income".  Good explanation of how that MBS refi fee will be recognized over time.  Seems like a mismatch that the fee is to compensate for the GSEs providing Covid support, where they have to book the allowances upfront, but only recognize this upfront fee over the span of 30 years.

 

Maybe it's time to give them credit for unamortized upfront fees after all, like some of the commenters suggested (but not, interestingly, the GSEs or Tim Howard).

 

Also, FNMA CEO said on conf call they expect FHFA to finalize rule late 2020 or early 2021.

[investorG]

The Democrats are favored to sweep. 

 

Thus I guess we'll find out in the next 10 weeks - the last 5% of Trump's presidency - if the administration will admirably correct the NWS wrong.

 

Good luck to everyone!

[onyx1]

 

I still think my idea to convert the seniors to convertible (but only by anyone but Treasury) zero-div non-cumulative prefs with a $193B total stated value is the best of all worlds in which Treasury sends $125B to FnF.

• 1. It fixes the final share count, allowing the market to accurately price the commons, in turn allowing Treasury to start selling their shares immediately. Multiple common equity raises, on the other hand, leave the final share count unknown until the last one, making them much more difficult to conduct.
  
• 2. FnF instantly become "adequately capitalized" under HERA, hitting core capital of 2.5% of adjusted total assets and removing all restrictions and authorities in HERA for lower capital classifications. The consent agreement would likely be restrictive in its own way, but avoiding the lower capital classifications in HERA is a nice bonus.
  
• 3. As a corollary, the leverage ratio drops to 40:1 overnight.
  
• 4. Treasury can unwind its position over time by just listing those preferred shares on the market and letting whoever wants to buy them do so. No need for large, structured offers.
  
• 5. FnF's total common equity should be worth at least $200B, so if Treasury gets 99.9% of it (no reason to leave anything for the existing commons) they will come out way ahead. Even further than canceling the seniors and exercising the warrants.
  
• 6. If Treasury can negotiate with outside investors quickly, they could privately place a portion of those new prefs and lessen the total cash outlay. If there is enough appetite (>$125B worth) they could eliminate the outlay entirely!
  
• 7. No worries about Treasury having voting rights because they would never own any common shares at all. Also no worries about balance sheet consolidation (at 80%) or majority shareholder duties (at 50%).
  
• 8. As the shares are converted by buyers, CET1 capital would rise. The total rise would be $193B by the time all shares are bought and converted. The purpose of the zero dividend is to not give Treasury an incentive to hold the shares, and give investors an incentive to convert upon buying, building CET1 capital.
  

I'd rate #4 as the most important one. No need for one huge all-at-once equity raise that the market might not have an appetite for in such a short time period. Treasury would have to do a mini road show in advance to make sure there are enough interested buyers to get the ball rolling, but after that the market gets to take over.

 

I'm not sure what would happen to the lawsuits at that point. The plaintiffs could be dealt with individually because none of the cases have been certified as class actions. The derivative suits in Sweeney's court would go poof, right? The constitutional case plaintiffs (Collins, Rop, Bhatti) are small enough to be bought off separately. The wild card is Perry, where (if I understand correctly) the companies themselves are the defendants. Still, the NWS ending and the seniors being gone would give few plaintiffs a reason to keep fighting, even if it's not enough on its own to allow the defendants to successfully get the cases dismissed as moot.

Midas – This is  an exceptional idea in the scenario where Biden wins.  It locks up and simplifies the recap process to a point that it can’t be reversed, keeps Calabria in place (constitutional plaintiffs would crazy not to settle), is consistent with the UST Reform Plan and Calabria’s recent messaging.  The $125mm payment is easily justified by the common sale proceeds, and no political downside.  Current common holders won’t like it but Calabria warned them of dilution over a year ago.

 

My experience in dealing directly with Mnuchin (years ago, in a much smaller matter) is that he is very thorough and cognizant of alternative outcomes.  It wouldn’t surprised me if your idea (or something very similar) is part of his playbook in the event of a Biden victory.

 

[COBFInfinity]

Also, FNMA CEO said on conf call they expect FHFA to finalize rule late 2020 or early 2021.

 

I assume they have changed their minds since then, but no more than a month ago ACG Analytics had been predicting the capital rule would be finalized before the election. So yet another delay.

 

The idea that if Trump loses, Treasury and FHFA are going to settle the lawsuits before SCOTUS hearing and wrap everything up in our favor with PSPA amendment and consent decree by mid-January looks less and less likely. Theoretically, it can be done, but the reality is nothing has been achieved in a timely manner throughout this process. I've been in the junior preferreds for 6 years and I'm not going to throw in the towel now when they are still at 30% of par, but I have to admit I'm as worried about the outcome now than I have been at any other time. With all the steps that Calabria has made in the right direction, nothing of any permanence has truly been accomplished. If the NWS hasn't been written down by early December and the case goes to SCOTUS, there is a real possibility that we come out of this with nothing.

[Luke 532]

The Democrats are favored to sweep. 

 

I suggest everybody take the time to watch this.  It is almost 5 hours long but it will give you an entirely different perspective, based on some very interesting and verifiable data, than what the polls are showing.  It drastically changed my opinion on the odds of who I think will win.  Super interesting.

[orthopa]

Also, FNMA CEO said on conf call they expect FHFA to finalize rule late 2020 or early 2021.

 

I assume they have changed their minds since then, but no more than a month ago ACG Analytics had been predicting the capital rule would be finalized before the election. So yet another delay.

 

The idea that if Trump loses, Treasury and FHFA are going to settle the lawsuits before SCOTUS hearing and wrap everything up in our favor with PSPA amendment and consent decree by mid-January looks less and less likely. Theoretically, it can be done, but the reality is nothing has been achieved in a timely manner throughout this process. I've been in the junior preferreds for 6 years and I'm not going to throw in the towel now when they are still at 30% of par, but I have to admit I'm as worried about the outcome now than I have been at any other time. With all the steps that Calabria has made in the right direction, nothing of any permanence has truly been accomplished. If the NWS hasn't been written down by early December and the case goes to SCOTUS, there is a real possibility that we come out of this with nothing.

 

It certainly has been a frustrating ride. Im going on 7 years with some of my earliest preferred holdings so I agree each delay feels like an eternity.  I have gone back and read/listened to the majority of Calabria and Mnuchin had to say as well as all the Treasury/FHFA documents etc just to make sure I didn't mentally make an error causing a miss judgement in holding this investment. After spending a great deal of time I came to the same conclusion. There is no alternative and if you go by the words and some of the actions these guys are serious about doing this. The problem is there has been many more words then action. I think there is some credence to how Mnuchins legacy is affected by this as I posted before but he could easy tell us to f off and ride into the sunset I guess.

 

Last summer we first got the rumor that the admin was going to wait till after the election to do anything. That was obviously correct as much as it was counter intuitive to the momentum at the time and what was coming out of Calabria's mouth. If you think about it that way what has happened and the pace makes perfect sense. That doesn't mean at all that I agree with it as an investor or like it. Unfortunately we need deadlines and ultimatums to get anything to happen and 3 big ones are coming up; election, SCOTUS case, and inauguration. That being said as foolish as it was to hold for the last 7 years it would be just as foolish to let it go until at least inauguration.

 

As I delineated before in another post if Trump loses and the SCOTUS is argued then at a minimum I would heavily decrease my position as it really goes against the leverage I feel is there now and the point of no return in regards to judgement and who is in power when that judgement comes down. I don't feel confident enough in my understanding of legal outcomes to predict how things will look with the range of SCOTUS decisions with a Dem Treasury Sec and/or Calabrias job in jeopardy. Not to mention that now with the capital level to where it is you would have a Dem Treasury Secretary negotiating an interim PSPA agreement with a possible lame duck Calabria. What a nightmare in regards to leverage, investment time horizon and range of outcomes.  That could change with a consent decree signed by inauguration which would mean a jump in price but I think going into inauguration hoping on the goodwill of others in a lame duck session is a little nuts.

 

We have hashed this out a million times but if Trump doesn't win its pretty obvious what should happen and when if Mnuchin and Calabria are serious about reforming FnF, raising capital, yada yada.  If not just have to move on but as I said before count me out of the next one of these that comes along. I have severely underestimated investments with the gov and depending on the goodwill of others in an investment.

[DRValue]

The Democrats are favored to sweep. 

 

I suggest everybody take the time to watch this.  It is almost 5 hours long but it will give you an entirely different perspective, based on some very interesting and verifiable data, than what the polls are showing.  It drastically changed my opinion on the odds of who I think will win.  Super interesting.

 

The only way trump loses is if it's stolen.