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

[fareastwarriors]

U.S. Projects $179 Billion Profit From Fannie Mae, Freddie Mac

 

 

 

 

http://www.bloomberg.com/news/2014-03-10/u-s-projects-179-billion-profit-from-fannie-mae-freddie-mac.html

[fareastwarriors]

Westhus Reaping Fannie Windfall to Rival Big Short

 

 

 

 

The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae (FNMA) and Freddie Mac preferred shares at 2 cents on the dollar.

 

Perry, which manages $10 billion, now has about $500 million riding on the preferred shares, even after several rounds of sales, according to a person familiar with the investments.

 

 

 

 

http://www.bloomberg.com/news/2014-03-10/westhus-reaping-fannie-windfall-to-rival-big-short-mortgages.html

[gfp]

what's the story with the price move in the common shares today?

[xtreeq]

what's the story with the price move in the common shares today?

 

I believe it's this http://www.bloomberg.com/news/2014-03-11/senators-release-details-of-new-bill-eliminating-fannie-mae.html

[Yours Truly]

So the bill is to kill off the two companies, setup a new entity that would serve as a reinsurer of 90% of the losses and ask private entities (banks??) to assume the first 10% of the loss..

 

 

[brker_guy]

http://www.marketplace.org/topics/economy/plan-wind-down-fannie-and-freddie

 

Good story to listen to.

[fareastwarriors]

 

U.S. Wind-Down Bill Clips Fannie Mae, Freddie Mac Shares

 

 

http://www.bloomberg.com/news/2014-03-12/u-s-wind-down-bill-clips-fannie-mae-freddie-mac-shares.html

[nkp007]

None of this is concerning or unexpected...yet.

 

 

 

[bmichaud]

This decline is phenomenal - I've been wanting to add more.

 

Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.

[peter buffet]

Still up 33.3% not 50 %

 

[constructive]

This decline is phenomenal - I've been wanting to add more.

 

Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.

 

What evidence is there that preferred are in much better position than common? Yes they are senior, but in a downside legal scenario they are worth $0 and in an upside legal scenario they are both worth a lot more. What is the middle scenario (and the likelihood of it) where they don't live and die together?

 

Fairholme's preferred spinoff idea was a middle scenario, but it was dead on arrival, no real legislative interest.

[TwoCitiesCapital]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

[Guest wellmont]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

 

it's rule of law. these are public companies. there are rights associated with that. Ordinarily in usa, gov can't just confiscate shareholder wealth. this would set a terrible precedent. the us gov are just people we elected or hired to make decisions for us--for the public good. the thing is, the us gov can win, and shareholders can win. it just requires politicians to step up and think clearly and act for the public good. if you read the Fairholme letters to the BODs, it lays it all out right there.

[nkp007]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

 

1) I don't think the (conservative) House will be caught dead voting for this bill. They want government out of housing completely.

 

2) This bill seems really similar to Corker-Warner, and that bill stalled, likely due to intense backroom lobbying from the BBR (builders-bankers-realtors) lobby

 

3) All the builders-bankers-realtors coalition really needs to do is start a marketing blitz to the American public saying that after bailing out the banks and Goldman and AIG, the government now wants to get rid of the 30-year mortgage via elimination of Fannie and Freddie

 

Any ill will towards these organizations from the general public will likely quickly dissipate once the (hyperbolic) real estate implications are painted in terms America understands.

[bmichaud]

My bad on the math. 33% it is.

[morningstar]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

 

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

 

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.

[Packer16]

In terms of a new gov't insurer, how much stomach does the public have for a new gov't program after Obamacare.

 

Packer

[TwoCitiesCapital]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

 

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

 

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.

 

Fannie Mae and Freddie Mac also package the mortgages into securities and sell/service them. Unless private market issuance really steps up, the liquidity in this market would largely be removed. If banks can't sell mortgages to be securitized they'll be less likely to accept the interest rate risk of a 30Y mortgage. Even if private issuers step in, they can't access capital as cheaply and would still result in more expensive products (i.e. higher 30Y mortgage rates).

 

Also, tax payers could ensure their money wasn't at risk by refusing to elect politicians who support these mass bail outs or demand higher capital ratios with the government's implicit backstop. Neither of these options require getting rid of the 30 Y.

[muscleman]

I don't have a position in these but have been trying to follow the events:

 

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

 

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

 

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

 

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.

 

So your argument suggests that common and preferred are probably on the same boat. Is there any scenario when common loses and preferred wins?

[fareastwarriors]

Corker on ending ‘too big to fail’ Fannie, Freddie

 

 

 

http://www.cnbc.com/id/101490928

[morningstar]

 

So your argument suggests that common and preferred are probably on the same boat. Is there any scenario when common loses and preferred wins?

 

One possibility is that by the time you get the sweep undone, the firms are in relentless winddown and have no prospect of future earnings growth. Right now say the preferred offers a ~135% return to whatever date it gets taken out at par, in its upside case. To offer a similar return FMNA common would need a $50 billion market cap at the time of resolution, assuming no new shares are issued - the actual value might be higher or lower than this figure. While I agree that the common shares offer more upside optionality, this isn't coming cheaply when you are buying Fannie at a $20bn market cap.

 

There's also the fact that if the sweep is undone, something needs to happen to maintain the strong credit ratings of the GSEs. Undo the sweep amendment and you have massive balance sheets, only limited Treasury support and no book equity... not a formula for Treasury-like credit ratings. The companies might need to raise very large amounts of capital, so you could see meaningful dilution of the stock.

[brker_guy]

Not sure if guys have seen this:

 

http://www.bloomberg.com/news/2014-03-12/senate-s-fannie-mae-wind-down-plan-faces-high-political-hurdles.html

 

http://www.bloomberg.com/news/2014-03-13/fannie-mae-investors-fate-to-be-decided-by-courts-crapo-says.html

 

 

 

[fareastwarriors]

Fannie Mae Liquidation Seen Sparing Preferred Holders

 

 

 

 

http://www.bloomberg.com/news/2014-03-13/fannie-mae-liquidation-seen-sparing-preferred-holders-mortgages.html

[Mephistopheles]

If the bill passes and the firms are placed into wind down, but Fairholme and Perry still win the suit, can money that the government has taken up until the point of the conclusion of the case be reversed and given back to shareholders? If so then the preferreds can still be made whole with a wind down, right?

[fareastwarriors]

http://www.breakingviews.com/fannie-investors-may-be-using-magic-calculators/21136004.article