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

[Luke 532]

They are following HERA. R-ship then transfer charter to another entity and implement whatever they want. Possibly outcome will be a pass through entity where treasury back stops. Only hope is for treasury to call back jr prefs but why bother?

 

Fat Pitch, if the plan being discussed today is implemented, do you think Treasury just lets jr prefs sit and they do nothing with them?  Curious of your thoughts on how they deal with jr prefs.

[Fat Pitch]

Gov't needs a permanent revenue source and setting the GSEs as pass through entities where treasury collects fees looks like a solid plan (Has 250 billion authorized by Congress to backstop). Will Mnuchin treat jr prefs as a contract that he will honor? Common looks toast as far as I'm concerned.

 

Treasury's apprehension has always been equity, not the preferred holders. After all, preferred holders do not benefit of any increase in earnings or market share. From the original internal statements made during the first few years of this novel it was clear they were pointing their guns at common equity. Mnuchin, unfortunately, did not arrive to Treasury to impose his views but to absorb Treasury's. We'll see what happens.

[investorG]

They are following HERA. R-ship then transfer charter to another entity and implement whatever they want. Possibly outcome will be a pass through entity where treasury back stops. Only hope is for treasury to call back jr prefs but why bother?

Because there is already a ruling by the Appeals court, now at Lamberth's, protecting specific rights of preferred holders.

 

not really; the case was only remanded; and in a victory the reward is likely below the current market pricing. 

[Fat Pitch]

R-ship then bankruptcy court takes over.

 

1. Declare gov't was paid back and tangible equity is distributed to jr prefs and left overs to common.

2. Declare sr prefs is still outstanding and jr prefs get a donut.

3. Call jr prefs back.

 

Might be other scenarios but the above look most pragmatic.

 

They are following HERA. R-ship then transfer charter to another entity and implement whatever they want. Possibly outcome will be a pass through entity where treasury back stops. Only hope is for treasury to call back jr prefs but why bother?

 

Fat Pitch, if the plan being discussed today is implemented, do you think Treasury just lets jr prefs sit and they do nothing with them?  Curious of your thoughts on how they deal with jr prefs.

[Luke 532]

FP, thanks for the quick response!

 

R-ship then bankruptcy court takes over.

 

1. Declare gov't was paid back and tangible equity is distributed to jr prefs and left overs to common.

2. Declare sr prefs is still outstanding and jr prefs get a donut.

3. Call jr prefs back.

 

Might be other scenarios but the above look most pragmatic.

 

They are following HERA. R-ship then transfer charter to another entity and implement whatever they want. Possibly outcome will be a pass through entity where treasury back stops. Only hope is for treasury to call back jr prefs but why bother?

 

Fat Pitch, if the plan being discussed today is implemented, do you think Treasury just lets jr prefs sit and they do nothing with them?  Curious of your thoughts on how they deal with jr prefs.

[rros]

the utility model has material promise politically, economically, and for our securities imo.

 

it likely preserves the 2 companies, their shareholders, and infrastructure.

 

it simply regulates the hell out of them, leading to lower earnings than before.

 

no balance sheet simply means the portfolio side of the business is mostly wound down. 

 

if this article is literally true, which is debatable, I believe the common and preferred shares should be far higher today - despite the execution risk and time value - and even higher than that over time.

I did not think of this. It is actually a very good interpretation masked by the choice of words. The ongoing discussion has been how much retained portfolio to carry, from nothing to a little. Most likely InvestorG is correct in that the words balance sheet here represent their retained assets. Then, this would be a Bill Ackman *utility* solution with important, positive outcomes for equity/preferreds. If so, I highly doubt that in the middle of the night, at the last possible minute, they decide to give us the shaft in any restructuring/rechartering/change of names. The worst case, in my view, would be a short receivership and then distribution of new equity to legacy shareholders. Complete stupidity though. Thank you, IG.

[onyx1]

the utility model has material promise politically, economically, and for our securities imo.

 

it likely preserves the 2 companies, their shareholders, and infrastructure.

 

it simply regulates the hell out of them, leading to lower earnings than before.

 

no balance sheet simply means the portfolio side of the business is mostly wound down. 

 

if this article is literally true, which is debatable, I believe the common and preferred shares should be far higher today - despite the execution risk and time value - and even higher than that over time.

I did not think of this. ... the words balance sheet here represent their retained assets.

 

 

I didn't read that initially either.  Thanks investorG for pointing out a plausible alternative interpretation.

[Midas79]

The utility model checks a lot of boxes:

• Pre-conservatorship FnF were criticized for having a government backstop but were run with the aim of maximizing shareholder returns, the "private gains, public losses" model
  
• Utilities work best as highly regulated monopolies. No new charters would be needed and FHFA can act like a utility regulator to FnF
  
• There would be no point in aggressive lobbying if returns are capped by FHFA
  
• Current junior preferred shareholders could get a stake in the new utility, enough to satisfy the litigants
  
• The 30-year fixed-rate mortgage stays
  
• The process of converting to a utility model can be started administratively
  

 

Of course a utility model has points against it:

• TBTF banks would be shut out of the secondary market
  
• It is anathema to those in favor of less government control and/or more competition (in general and specific to housing finance)
  
• A full conversion to this model would take legislation
  

[Guest cherzeca]

The utility model checks a lot of boxes:

• Pre-conservatorship FnF were criticized for having a government backstop but were run with the aim of maximizing shareholder returns, the "private gains, public losses" model
  
• Utilities work best as highly regulated monopolies. No new charters would be needed and FHFA can act like a utility regulator to FnF
  
• There would be no point in aggressive lobbying if returns are capped by FHFA
  
• Current junior preferred shareholders could get a stake in the new utility, enough to satisfy the litigants
  
• The 30-year fixed-rate mortgage stays
  
• The process of converting to a utility model can be started administratively
  

 

Of course a utility model has points against it:

• TBTF banks would be shut out of the secondary market
  
• It is anathema to those in favor of less government control and/or more competition (in general and specific to housing finance)
  
• A full conversion to this model would take legislation
  

 

nice analysis, and i would add:

 

implementation of a "utility regulatory model" implies restoration of capital.  utilities imply capped returns yes, but sufficient returns to provide a return sufficient to satisfy capital return hurdle rates.  why would utility regulation be necessary if GSEs are to be nationalized, or mutualized, or wrapped with a govt mbs guaranty? 

[Luke 532]

Dick Bove today...

Two plans brewing in Washington could crush home prices, boost banks

https://www.cnbc.com/2017/11/09/washington-plans-could-crush-home-prices-boost-banks-commentary.html?__source=twitter%7Cmain

 

Seems like a bit of posturing by Bove as I don't think he really believes the Administration is planning on eliminating the GSE's.

[Luke 532]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

[Midas79]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

Bad news without a doubt. No capital buffer unless Watt decides to withhold and increase liquidation preference. Heck, no administrative-only reform at all given that the executive branch isn't bipartisan. Seems to me like Mnuchin is saying that he isn't going to do anything at all until Congress passes something forcing him to.

[doughishere]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

Bad news without a doubt. No capital buffer unless Watt decides to withhold and increase liquidation preference. Heck, no administrative-only reform at all given that the executive branch isn't bipartisan. Seems to me like Mnuchin is saying that he isn't going to do anything at all until Congress passes something forcing him to.

 

 

Awww....baby jesus mnuchin isnt going to get to it this year....so sad. I hope that college fund can wait. well as cubs fans use to say "hey, maybe next year". even they eventually got one.

[investorG]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

acknowledging it's a big priority is good news for those who:

a) believe he will try legislatively before resorting to administrative action

b) believe he cannot in any way upset congressional republicans at the moment

 

there could be more selling from those who were hoping for a magic wand on jan1, but the foundation has been laid and it's > 50pct odds to me that it's happening in 2018

 

[investorG]

Delay in corporate tax cut to 2019 by Senate: Does it mean we avoid losing DTA ? If so, that will be good news.

 

good observation.

 

i'm not sure about the answer but I believe mnuchin-watt have an undisclosed plan to avoid a 20bn draw.

[investorG]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

Bad news without a doubt. No capital buffer unless Watt decides to withhold and increase liquidation preference. Heck, no administrative-only reform at all given that the executive branch isn't bipartisan. Seems to me like Mnuchin is saying that he isn't going to do anything at all until Congress passes something forcing him to.

 

he has said since his confirmation hearings that he wanted to work with congress on this in bipartisan manner.  granted I was hoping for it at some point but administrative action is much less effective as a long term solution than legislative.  whenever tax reform is finished, win or lose, I expect to see an active mnuchin - phillips on this matter, the reverse of radio silence in 2017.

 

[rros]

 

Joe Light‏Verified account @joelight 2m2 minutes ago

 

Mnuchin at the Economic Club of New York today said Fannie-Freddie reform will be a "big priority for next year." Says it will also look at FHA and Ginnie Mae. Says he has not considered stopping the GSEs' dividends and expects GSE reform to be done on a bipartisan basis

 

Bad news without a doubt. No capital buffer unless Watt decides to withhold and increase liquidation preference. Heck, no administrative-only reform at all given that the executive branch isn't bipartisan. Seems to me like Mnuchin is saying that he isn't going to do anything at all until Congress passes something forcing him to.

 

he has said since his confirmation hearings that he wanted to work with congress on this in bipartisan manner.  granted I was hoping for it at some point but administrative action is much less effective as a long term solution than legislative.  whenever tax reform is finished, win or lose, I expect to see an active mnuchin - phillips on this matter, the reverse of radio silence in 2017.

All these matter because of the vacuum we are in. If Treasury discloses a roadmap, as per Paul Muolo, prices will firm and we are in business. No matter when it happens. The main problem, one that is concerning at this stage, is Treasury not offering a work plan. Reminds me of Geithner during Congress' hearings.

[Luke 532]

Wilbur Ross brings up GSE's in the interview with Mnuchin awhile back...

http://video.foxbusiness.com/v/5229369696001/?#sp=show-clips

 

https://www.insidemortgagefinance.com/imfnews/1_1232/daily/wilbur-ross-left-ocwen-just-in-time-1000043592-1.html?ET=imfpubs:e10062:73599a:&st=email&s=imfnews

Why should the mortgage industry care about Ross, now that he’s out of the business? From what we’ve been told, the White House is expected to tap his expertise as it tries to figure out a plan to reform Fannie Mae and Freddie Mac. Given his history in mortgages, he knows full well what a cyclical business residential finance can be. And if Ross is on the “GSE team” you can expect he will tap his friend James Lockhart, currently serving as vice chairman WL Ross & Co. Lockhart was the last person to hold the title of director of the Federal Housing Finance Agency before Fannie and Freddie were placed into their historic conservatorships nine-plus years ago…

[rros]

Wilbur Ross brings up GSE's in the interview with Mnuchin awhile back...

http://video.foxbusiness.com/v/5229369696001/?#sp=show-clips

 

https://www.insidemortgagefinance.com/imfnews/1_1232/daily/wilbur-ross-left-ocwen-just-in-time-1000043592-1.html?ET=imfpubs:e10062:73599a:&st=email&s=imfnews

Why should the mortgage industry care about Ross, now that he’s out of the business? From what we’ve been told, the White House is expected to tap his expertise as it tries to figure out a plan to reform Fannie Mae and Freddie Mac. Given his history in mortgages, he knows full well what a cyclical business residential finance can be. And if Ross is on the “GSE team” you can expect he will tap his friend James Lockhart, currently serving as vice chairman WL Ross & Co. Lockhart was the last person to hold the title of director of the Federal Housing Finance Agency before Fannie and Freddie were placed into their historic conservatorships nine-plus years ago…

Our friend Paul Muolo has not been very accurate in his predictions/information. A while back, rumors were of an imminent EO by Trump mandating GSE reform. Then, what was heard from *souces close to the WH* was that a utility model was the top preference. Now, hearing-through-the-grapevine we are learning W.Ross is the key guy. In my view, it is all bullcrap and Paulie knows notin'. And I hope so, because WR is an expert in bankruptcies and I would not want him to be involved in any GSE reform.

[orthopa]

It is interesting to re hear what mnuchin says about the gse's in light of the fact they are going to become a focus in a couple months.

 

*Restructured

*Out of Government ownership

*Out of Government control

 

So again I ask as I did almost 1 year ago. Who owns them and controls them if the govt doesnt? And does restructuring include recievership? Reading the tea leaves gets old after a while

[rros]

It is interesting to re hear what mnuchin says about the gse's in light of the fact they are going to become a focus in a couple months.

 

*Restructured

*Out of Government ownership

*Out of Government control

 

So again I ask as I did almost 1 year ago. Who owns them and controls them if the govt doesnt? And does restructuring include recievership? Reading the tea leaves gets old after a while

Where did he say this recently?

[Guest cherzeca]

It is interesting to re hear what mnuchin says about the gse's in light of the fact they are going to become a focus in a couple months.

 

*Restructured

*Out of Government ownership

*Out of Government control

 

So again I ask as I did almost 1 year ago. Who owns them and controls them if the govt doesnt? And does restructuring include recievership? Reading the tea leaves gets old after a while

Where did he say this recently?

 

mnuchin has consistently said, and i will try to get this verbatim, that it is crazy that fannie and freddie are still in conservatorship and under govtal control, he wants to fix them (as i recall he has consistently used this word), and he no longer wants taxpayers to be on the hook

 

while he hasnt said this specifically, one might infer that by getting out of conservatorship, they would get back into private ownership with, if the taxpayers are not to be exposed to risk, ample privately-sourced capital.

[rros]

It is interesting to re hear what mnuchin says about the gse's in light of the fact they are going to become a focus in a couple months.

 

*Restructured

*Out of Government ownership

*Out of Government control

 

So again I ask as I did almost 1 year ago. Who owns them and controls them if the govt doesnt? And does restructuring include recievership? Reading the tea leaves gets old after a while

Where did he say this recently?

 

mnuchin has consistently said, and i will try to get this verbatim, that it is crazy that fannie and freddie are still in conservatorship and under govtal control, he wants to fix them (as i recall he has consistently used this word), and he no longer wants taxpayers to be on the hook

 

while he hasnt said this specifically, one might infer that by getting out of conservatorship, they would get back into private ownership with, if the taxpayers are not to be exposed to risk, ample privately-sourced capital.

I understand, Chris. I was under the impression that in the last few months he became more cautious and would only express his willingness to work with Congress on comprehensive reform purposefully avoiding references like the ones above.

[Guest cherzeca]

It is interesting to re hear what mnuchin says about the gse's in light of the fact they are going to become a focus in a couple months.

 

*Restructured

*Out of Government ownership

*Out of Government control

 

So again I ask as I did almost 1 year ago. Who owns them and controls them if the govt doesnt? And does restructuring include recievership? Reading the tea leaves gets old after a while

Where did he say this recently?

 

mnuchin has consistently said, and i will try to get this verbatim, that it is crazy that fannie and freddie are still in conservatorship and under govtal control, he wants to fix them (as i recall he has consistently used this word), and he no longer wants taxpayers to be on the hook

 

while he hasnt said this specifically, one might infer that by getting out of conservatorship, they would get back into private ownership with, if the taxpayers are not to be exposed to risk, ample privately-sourced capital.

I understand, Chris. I was under the impression that in the last few months he became more cautious and would only express his willingness to work with Congress on comprehensive reform purposefully avoiding references like the ones above.

 

@rros

 

fair enough.  perhaps changed view, perhaps making nice while tax reform is still in process.  it seems that mnuchin is more out in front of tax reform process than cohn these days. 

[SnarkyPuppy]

Wilbur Ross brings up GSE's in the interview with Mnuchin awhile back...

http://video.foxbusiness.com/v/5229369696001/?#sp=show-clips

 

https://www.insidemortgagefinance.com/imfnews/1_1232/daily/wilbur-ross-left-ocwen-just-in-time-1000043592-1.html?ET=imfpubs:e10062:73599a:&st=email&s=imfnews

Why should the mortgage industry care about Ross, now that he’s out of the business? From what we’ve been told, the White House is expected to tap his expertise as it tries to figure out a plan to reform Fannie Mae and Freddie Mac. Given his history in mortgages, he knows full well what a cyclical business residential finance can be. And if Ross is on the “GSE team” you can expect he will tap his friend James Lockhart, currently serving as vice chairman WL Ross & Co. Lockhart was the last person to hold the title of director of the Federal Housing Finance Agency before Fannie and Freddie were placed into their historic conservatorships nine-plus years ago…

 

From 2014:

 

“It’s a stretch,” said Lockhart, the former chief of the Federal Housing Finance Agency who is now vice chairman at WL Ross. “The stock and the preferred (stock) is worthless and should be worthless,” he told Reuters.

 

“We have to figure out how to get the private market back into the mortgage market,” said Lockhart. “It’s going to be a question of how to do that without hurting the housing market. Obviously, a lot of that will be up to Congress.”