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

[rros]

Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved.

Damn it! How nobody thought of this before? Shoot, let's nationalize the entire economy and stop worrying about bankruptcies or bailouts. Problem(s) solved! You wanna run for President?

[blackcoffee]

The entire post is saddening to read. If the companies are being steadily weakened over time, this turns into a one off gamble rather than a long term investment where they dominate the market after release from conservatorship. Hard to say how much of what he writes is true wrt CRT - maybe someone who has competence in that area can comment. Do Fannie and Freddie make money by selling CRTs? If yes, then aren't they transforming into a platform for secondary mortgage, which is not a bad thing long term if they are derisking themselves and acting more like a marketplace. Or does the risk still stay with them and only the profit margin shrinks?

.

 

Hey it's me - someone who understands how CRTs work - turns out they don't really.

 

They are essentially giving money away to their buyers at risk premiums that do not align with the risk actually being taken, which of course is up for debate on how you model it (by design), but the former CFO of one of the companies now issuing them wouldn't be doing so if he were still in charge because, as he notes, you're giving away too much $ for the amount of risk being mitigated.

 

The problem is that no one can tell because the market has only been going up. As Rosner et al have noted - CRTs are counter-cyclical.

 

Meaning that when the cycle enters a downturn no one who is currently buying them will continue to do so. So then all the risk will flow back to the GSEs and they will have already given away the amount of capital they should have kept in the equity position (the set up pre-conservitorship) but since these guys are all self serving frauds that were put in by all the people trying to cover this up and give the market to the banks, they go along with it because the need to get paid too.

 

And if they're willing to strong arm the BoD in 2008 into essentially a mob loan, what's to stop them from pressuring their current mgmt (who was replaced by the frauds) to do whatever they want. Which will further work to their ends of blaming the GSEs for privatized losses in the future when no one buys the CRTs in a downturn thus giving the gov't (but really the banks) ever more ammo to claim that the GSEs are a failed biz model or whatever horseshit they're going to say. And most people, including the politicians won't know it or won't admit they know it because they're getting paid too.

 

So yeah they're a scam and the people buying it won't say it becuase they know they're getting paid and the people selling it want the GSEs to fail long term so they're pushing it hard.

 

And no one anywhere is scrutinizing it because all the 'research' on it is coming from where? oh right the banks selling them.

 

So la la la the fraud continues.

 

Have a nice day.

 

I think the GSE’s work better under conversatorship than as private or private public enterprises. Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved. Keep things exactly the way they are, in this case the limbo status is the best case scenario for all stakeholders, except the shareholders of old of course

 

That's nice. It's not well thought out or accurate. But it's nice that you think that.

[blackcoffee]

Just to be fair - the people you are relying on (Rosner and Howard) stand to benefit monetarily from a recap release/moelis scenario.  That doesn't necessarily discredit any of the above but it's important to understand incentives, conflicts of interest, and human bias.

 

Just so you know. I can model things myself. Familiar with Intex? I am. So while yes they pointed it out, I can verify it myself. Believe me or not. I truly don't care.

 

What you and others should be asking, is "why is the FHFA mandating products that are structurally flawed?"

 

And yes while I understand that there may be motivations to shoot the messengers here, there are 0 dissenting voices or really anyone that has asked about what happens with these products in a downturn OTHER than those two and Parsons at Moelis, because no one is paid to do so. Howard actually addresses that on his blog. I'll let you dig around and find it.

 

And if you actually are John Carney I'm wasting my time, because in that case, you're possibly the worst journalist to ever claim to be one and are already bought. Joe Light coming in a close 2nd. 

 

Have a nice day.

 

 

[investorG]

to satisfy the universal demand of DC to bring more private capital into the mortgage market, would you rather keep FnF intact but give away 10pct(?) of revenues in the form of flawed CRTs or would you rather wind them down? 

[blackcoffee]

to satisfy the universal demand of DC to bring more private capital into the mortgage market, would you rather keep FnF intact but give away 10pct(?) of revenues in the form of flawed CRTs or would you rather wind them down?

 

I disagree that those are the binary options.

 

Though I would love to see them attempt to wind them down. The clowns that run the FHFA appear to have little idea of the fire they're playing with.

 

Further, I couldn't care less what politicians want.

It saddens me that people are still laboring under the delusion that pols actually want things rather than just being pass thru entities for the desires of their owners (who happen to be the banks in many cases golly gee whiz). Citizens United really just cemented that. I'd say follow the money, but you can't now.

 

[orthopa]

Exactly. Shareholders are indeed losing and he thinks is the ref.

 

You sound like Carney.

 

Just to be fair - the people you are relying on (Rosner and Howard) stand to benefit monetarily from a recap release/moelis scenario.  That doesn't necessarily discredit any of the above but it's important to understand incentives, conflicts of interest, and human bias.

 

You sound like the losing team complaining about the ref.

 

I think was referring to your constant whining an often little value added. Just a hunch.:)

[Eye4Valu]

Just to be fair - the people you are relying on (Rosner and Howard) stand to benefit monetarily from a recap release/moelis scenario.  That doesn't necessarily discredit any of the above but it's important to understand incentives, conflicts of interest, and human bias.

 

Just so you know. I can model things myself. Familiar with Intex? I am. So while yes they pointed it out, I can verify it myself. Believe me or not. I truly don't care.

 

What you and others should be asking, is "why is the FHFA mandating products that are structurally flawed?"

 

And yes while I understand that there may be motivations to shoot the messengers here, there are 0 dissenting voices or really anyone that has asked about what happens with these products in a downturn OTHER than those two and Parsons at Moelis, because no one is paid to do so. Howard actually addresses that on his blog. I'll let you dig around and find it.

 

And if you actually are John Carney I'm wasting my time, because in that case, you're possibly the worst journalist to ever claim to be one and are already bought. Joe Light coming in a close 2nd. 

 

Have a nice day.

 

Love it! You're awesome BlackCoffee!

[Spekulatius]

Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved.

Damn it! How nobody thought of this before? Shoot, let's nationalize the entire economy and stop worrying about bankruptcies or bailouts. Problem(s) solved! You wanna run for President?

 

I can’t run for president, because I am not US citizen and not born here anyways, but thanks for thinking of me.

 

Also, I don’t know how you get the idea that ai suggested to nationalize the whole economy, Inusut suggesteddp the revolutionary thesis that if everything works just fine for virtually anyone, but a few speculators, the current status quo is very likely to persist,  why would it not?

 

[Midas79]

Plaintiffs in Perry trying to nip defendants' talk about non-ripeness in the bud.

 

http://gselinks.com/Court_Filings/misc/13-mc-01288-0078.pdf

 

Does anyone have a link to the Perry briefing schedule? I can't seem to find it; my only real resource is gselinks.com and I didn't see a schedule ordered by Lamberth there.

[rros]

Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved.

Damn it! How nobody thought of this before? Shoot, let's nationalize the entire economy and stop worrying about bankruptcies or bailouts. Problem(s) solved! You wanna run for President?

 

I can’t run for president, because I am not US citizen and not born here anyways, but thanks for thinking of me.

 

Also, I don’t know how you get the idea that ai suggested to nationalize the whole economy, Inusut suggesteddp the revolutionary thesis that if everything works just fine for virtually anyone, but a few speculators, the current status quo is very likely to persist,  why would it not?

While this maybe correct, it doesn't make it right.

 

And, are things just working fine for virtually everyone? Are they? Do Fannie and Freddie engage in reasonable credit expansion while they have no capital of their own? I was under the impression Watt sees the companies operating with a straightjacket.

 

"working fine" is just in the eyes of the beholder. Or the eyes of the banks.

[TonyG]

mnuchin on cnbc at 1. doubt he'll mention housing finance though

[orthopa]

  :o :o :o :o :o :o :o

 

The only value you add is to constantly post garbage on Stockwits about common shareholders. You appear to be a nuisance to the society without much to offer.

 

Exactly. Shareholders are indeed losing and he thinks is the ref.

 

You sound like Carney.

 

Just to be fair - the people you are relying on (Rosner and Howard) stand to benefit monetarily from a recap release/moelis scenario.  That doesn't necessarily discredit any of the above but it's important to understand incentives, conflicts of interest, and human bias.

 

You sound like the losing team complaining about the ref.

 

I think was referring to your constant whining an often little value added. Just a hunch.:)

[blackcoffee]

Footnote on page 21

“Note that we used prime mortgage data from GSE, thus ignored the impact of subprime borrowers and private securitizations”

 

If you ignore impact of subprime and private securitization, this study is full of crap and so is Urban Institute. Interesting how the author puts the disclaimer in footnotes so no one sees it.

 

https://www.urban.org/sites/default/files/publication/97746/what_fueled_the_financial_crisis.pdf

 

Yes that is called lying. Intellectual dishonesty is rampant with the UI and AEI and really most of these places that purport to be experts. They're being paid to lie. That's all it is.

[Spekulatius]

Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved.

Damn it! How nobody thought of this before? Shoot, let's nationalize the entire economy and stop worrying about bankruptcies or bailouts. Problem(s) solved! You wanna run for President?

 

I can’t run for president, because I am not US citizen and not born here anyways, but thanks for thinking of me.

 

Also, I don’t know how you get the idea that ai suggested to nationalize the whole economy, Inusut suggesteddp the revolutionary thesis that if everything works just fine for virtually anyone, but a few speculators, the current status quo is very likely to persist,  why would it not?

While this maybe correct, it doesn't make it right.

 

And, are things just working fine for virtually everyone? Are they? Do Fannie and Freddie engage in reasonable credit expansion while they have no capital of their own? I was under the impression Watt sees the companies operating with a straightjacket.

 

"working fine" is just in the eyes of the beholder. Or the eyes of the banks.

 

I don’t think creditworthy borrowers have trouble accessing mortgages for homes, at least not from my experience. Housing markets are doing quite well and are becoming overheated in many areas.

 

What are the straighjackets that you are referring to? They don’t seem to have any impact on the mortgage financing.

[Spekulatius]

Can China reduce holdings of Treasury's as a retaliatory measure? Would that not increase rates and thus increase profits of GSE's?  or is that an exigent circumstance for FHFA? Such situation speaks against explicit guarantee.

If they sell treasuries, they need to buy something else from the proceeds. It would push prices up for whatever they decided to buy.

[rros]

I see. Does this possible scenario say "no explicit guarantee ever. Can be very dangerous" ?

 

Can China reduce holdings of Treasury's as a retaliatory measure? Would that not increase rates and thus increase profits of GSE's?  or is that an exigent circumstance for FHFA? Such situation speaks against explicit guarantee.

If they sell treasuries, they need to buy something else from the proceeds. It would push prices up for whatever they decided to buy.

re selling treasuries or stop buying them. Chinese probably know this will not work as the 2008 crisis has proven the Federal Reserve will buy whatever there is to buy in lieu of China, Russia, Japan or whoever. The US can finance itself, it appears, although at great risk to the dollar. Unknown territory, if you ask me. Remember too central banks require extremely liquid markets. What else is out there besides treasuries?

 

Spekulatius, one of the CEOs a while back stated his company (either Fannie or Freddie) is unwilling to extend credit (probably as in buying lower quality mortgages but still acceptable) because they would not put taxpayers capital at risk. This was a clear complaint on how the company had to operate day in day out. Meaning they were overly conservative with the credit box. Watt made a mention in this regard as well. You speak as in from 30,000 feet. Of course the banks will extend credit to the rich, well-to-do and the lucky ones scoring above 700 in their credit profile. Or you also think there are no issues in the lower percentile of the mortgage market where credit scores rank low, those mortgages Fannie and Freddie may not be willing to securitize given the risk in relation to a taxpayers' credit line?

 

Is it possible that your definition of "credit worthy borrowers" may be leaving a good amount of people in the cold, those who could still buy a home if credit standards loosen up a bit? Fannie and Freddie could -for lack of better words- relax standards so long as they put at risk their own capital.

[Guest cherzeca]

Their capital levels (essentially zero right now) don’t matter and if they make losses in a downturn, they have an infinite credit line from the Fed that they can rely on. So there can’t be a run in the bank. Problem solved.

Damn it! How nobody thought of this before? Shoot, let's nationalize the entire economy and stop worrying about bankruptcies or bailouts. Problem(s) solved! You wanna run for President?

 

I can’t run for president, because I am not US citizen and not born here anyways, but thanks for thinking of me.

 

Also, I don’t know how you get the idea that ai suggested to nationalize the whole economy, Inusut suggesteddp the revolutionary thesis that if everything works just fine for virtually anyone, but a few speculators, the current status quo is very likely to persist,  why would it not?

While this maybe correct, it doesn't make it right.

 

And, are things just working fine for virtually everyone? Are they? Do Fannie and Freddie engage in reasonable credit expansion while they have no capital of their own? I was under the impression Watt sees the companies operating with a straightjacket.

 

"working fine" is just in the eyes of the beholder. Or the eyes of the banks.

 

I don’t think creditworthy borrowers have trouble accessing mortgages for homes, at least not from my experience. Housing markets are doing quite well and are becoming overheated in many areas.

 

What are the straighjackets that you are referring to? They don’t seem to have any impact on the mortgage financing.

 

i agree with this, but the recent delta is beginning to worry people.  rates have crept up, from cellar floor to cellar ceiling.  recency bias abounds

[Spekulatius]

I see. Does this possible scenario say "no explicit guarantee ever. Can be very dangerous" ?

 

Can China reduce holdings of Treasury's as a retaliatory measure? Would that not increase rates and thus increase profits of GSE's?  or is that an exigent circumstance for FHFA? Such situation speaks against explicit guarantee.

If they sell treasuries, they need to buy something else from the proceeds. It would push prices up for whatever they decided to buy.

re selling treasuries or stop buying them. Chinese probably know this will not work as the 2008 crisis has proven the Federal Reserve will buy whatever there is to buy in lieu of China, Russia, Japan or whoever. The US can finance itself, it appears, although at great risk to the dollar. Unknown territory, if you ask me. Remember too central banks require extremely liquid markets. What else is out there besides treasuries?

 

Spekulatius, one of the CEOs a while back stated his company (either Fannie or Freddie) is unwilling to extend credit (probably as in buying lower quality mortgages but still acceptable) because they would not put taxpayers capital at risk. This was a clear complaint on how the company had to operate day in day out. Meaning they were overly conservative with the credit box. Watt made a mention in this regard as well. You speak as in from 30,000 feet. Of course the banks will extend credit to the rich, well-to-do and the lucky ones scoring above 700 in their credit profile. Or you also think there are no issues in the lower percentile of the mortgage market where credit scores rank low, those mortgages Fannie and Freddie may not be willing to securitize given the risk in relation to a taxpayers' credit line?

 

Is it possible that your definition of "credit worthy borrowers" may be leaving a good amount of people in the cold, those who could still buy a home if credit standards loosen up a bit? Fannie and Freddie could -for lack of better words- relax standards so long as they put at risk their own capital.

 

I don’t know the answer, but wasn’t it FNMA/FRE job to create a vehicle for conforming and standardized mortgages with 20% downpayments a certain minimum credit rating and income/debt service ratios? As long as these entities stayed with these parameters, they did OK, but when they moved downmarket starting in thr early 2000’, together with other subprime lenders, the mortgage market for really distorted.

 

Nobody prevents private capital to jump in and fill gaps left by FNMA/FRE which should and are run like utilities. I dont think they should be everything for all people.

 

FWIW, credit frothiness in the mortgage markets is already occurring as we speak right now.The evidence is clear when you look at the real estate markets in many urban centers. I don’t think now is the time to light the second stage of this rocket, because I think we know how this will end. At least FNMA/FRE should not be part of it, when market participants decide to do stupid things again.

[rros]

I see. Does this possible scenario say "no explicit guarantee ever. Can be very dangerous" ?

 

Can China reduce holdings of Treasury's as a retaliatory measure? Would that not increase rates and thus increase profits of GSE's?  or is that an exigent circumstance for FHFA? Such situation speaks against explicit guarantee.

If they sell treasuries, they need to buy something else from the proceeds. It would push prices up for whatever they decided to buy.

re selling treasuries or stop buying them. Chinese probably know this will not work as the 2008 crisis has proven the Federal Reserve will buy whatever there is to buy in lieu of China, Russia, Japan or whoever. The US can finance itself, it appears, although at great risk to the dollar. Unknown territory, if you ask me. Remember too central banks require extremely liquid markets. What else is out there besides treasuries?

 

Spekulatius, one of the CEOs a while back stated his company (either Fannie or Freddie) is unwilling to extend credit (probably as in buying lower quality mortgages but still acceptable) because they would not put taxpayers capital at risk. This was a clear complaint on how the company had to operate day in day out. Meaning they were overly conservative with the credit box. Watt made a mention in this regard as well. You speak as in from 30,000 feet. Of course the banks will extend credit to the rich, well-to-do and the lucky ones scoring above 700 in their credit profile. Or you also think there are no issues in the lower percentile of the mortgage market where credit scores rank low, those mortgages Fannie and Freddie may not be willing to securitize given the risk in relation to a taxpayers' credit line?

 

Is it possible that your definition of "credit worthy borrowers" may be leaving a good amount of people in the cold, those who could still buy a home if credit standards loosen up a bit? Fannie and Freddie could -for lack of better words- relax standards so long as they put at risk their own capital.

 

I don’t know the answer, but wasn’t it FNMA/FRE job to create a vehicle for conforming and standardized mortgages with 20% downpayments a certain minimum credit rating and income/debt service ratios? As long as these entities stayed with these parameters, they did OK, but when they moved downmarket starting in thr early 2000’, together with other subprime lenders, the mortgage market for really distorted.

 

Nobody prevents private capital to jump in and fill gaps left by FNMA/FRE which should and are run like utilities. I dont think they should be everything for all people.

 

FWIW, credit frothiness in the mortgage markets is already occurring as we speak right now.The evidence is clear when you look at the real estate markets in many urban centers. I don’t think now is the time to light the second stage of this rocket, because I think we know how this will end. At least FNMA/FRE should not be part of it, when market participants decide to do stupid things again.

I am not familiar with current real estate market so I appreciate the perspective.

 

I dont think they should be everything for all people.

My point actually is... would you risk your own money the same as you would other people's money? Perhaps, being overly conservative is hurting a segment of the population. Running FF as utilities will definitely cut improper risk taking. Yet, as utilities they may risk just a little bit more than in a conservatorship with no capital of their own giving some an opportunity to own a home. Sufficient capital levels, as well as other protections/regulations, should keep them safe from frothiness that may negatively impact the RE market. But I am really no expert, speaking from common sense only.

[muscleman]

Switching to preferreds ended up as a loss and holding commons would have been a loss too. This isn't an investment for me, too political. I am totally out on Monday after having sold half last week. I will continue to monitor it as I don't see any other place either where I can grow my measely sum, everything is down.

 

 

there is a lot to learn for you. Read the classic investing books by Warren and Graham. Understand the capital structures. Understand basics about bankruptcy. I don’t think you understand that yet.

 

 

[DocSnowball]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business, run by honest and competent people, with a durable competitive advantage, available at a wide margin of safety? Probably fails all four filters.

 

The only way this works is - you know your initial price, you know par, you figure out odds of success and realize the market is under weighing the odds because it hates this investment- then you discount par for time value of money and how long you are willing to stay in the speculation. You weight your portfolio to how much you can lose to zero (2% for me). Then you wait and wait and wait, or preferably do something else and forget about this. I think someone deciding to get out of this investment cannot be faulted. If I hadn’t seen some gains and had house money as the 2% I would have too. And I cannot see the logic in owning commons, sorry Ackman.

 

And I have a lot more than Emily to learn! In fact the education from this investment has been totally worth that 2% I have in it.

[rros]

Switching to preferreds ended up as a loss and holding commons would have been a loss too. This isn't an investment for me, too political. I am totally out on Monday after having sold half last week. I will continue to monitor it as I don't see any other place either where I can grow my measely sum, everything is down.

 

 

there is a lot to learn for you. Read the classic investing books by Warren and Graham. Understand the capital structures. Understand basics about bankruptcy. I don’t think you understand that yet.

Hey muscle, you surprisingly seem to know a lot about investing in spite of looking like someone who has spent most of his life at the gym! :)

[rros]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business,

What is not simple about this?

 

Goal: create a secondary liquid market for mortgages to stimulate housing.

 

1. borrow at the lowest possible low rate (from Fed).

2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%).

3. pool them to securitize.

5. issue securities (mbs) backed by the pool.

6. guarantee payments of principal and interest on the mbs in exchange for a fee.

7. sell the securities to institutional investors.

8. hedge interest rate.

9. make coin.

 

risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring.

[Spekulatius]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business,

What is not simple about this?

 

Goal: create a secondary liquid market for mortgages to stimulate housing.

 

1. borrow at the lowest possible low rate (from Fed).

2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%).

3. pool them to securitize.

5. issue securities (mbs) backed by the pool.

6. guarantee payments of principal and interest on the mbs in exchange for a fee.

7. sell the securities to institutional investors.

8. hedge interest rate.

9. make coin.

 

risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring.

 

The not so simple part is who owns this? The government think that they own this and you own toilet paper. Thes speculators who buy the “toilet paper” think otherwise. So far it looks, smells and feels like toilet paper for the last 10 years and especially since the government is on the other side of the table, I think chances are fairly high that this in fact is toilet paper. That’s my simple way of looking at this.

[muscleman]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business, run by honest and competent people, with a durable competitive advantage, available at a wide margin of safety? Probably fails all four filters.

 

The only way this works is - you know your initial price, you know par, you figure out odds of success and realize the market is under weighing the odds because it hates this investment- then you discount par for time value of money and how long you are willing to stay in the speculation. You weight your portfolio to how much you can lose to zero (2% for me). Then you wait and wait and wait, or preferably do something else and forget about this. I think someone deciding to get out of this investment cannot be faulted. If I hadn’t seen some gains and had house money as the 2% I would have too. And I cannot see the logic in owning commons, sorry Ackman.

 

And I have a lot more than Emily to learn! In fact the education from this investment has been totally worth that 2% I have in it.

 

Depending on how you view investing.

 

I think the biggest fallacy for the Graham and Buffet group is that people believe when they do their home work, their investment is a sure success.

 

In fact it is essentially a probability game. You can do the research and improve your odds of winning but it is never a sure thing unless you trade like Steve Cohen. You can have a simple business and a great operator and you buy at a cheap price and you can still lose.

 

This Fannie/Freddie bet is no different from this view.