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

[TwoCitiesCapital]

Unbelievable.  I honestly think investor fatigue is a big part of the slow market realization.  Nobody wants to look at this again

 

The reactions here are nuts. You'd think the preferred weren't 40+% off their recent lows based on the commentary here. Markets have responded. It's going up, but there's just been so many head-fakes in the past that it's a bit more cautious. 

[SnarkyPuppy]

Unbelievable.  I honestly think investor fatigue is a big part of the slow market realization.  Nobody wants to look at this again

 

The reactions here are nuts. You'd think the preferred weren't 40+% off their recent lows based on the commentary here. Markets have responded. It's going up, but there's just been so many head-fakes in the past that it's a bit more cautious.

 

Prefs trading at 32% of par right now is nuts.

[Midas79]

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

 

Seems like yuge news to me. The administration has a clear plan and they trust Otting and Calabria to implement it. They also think that the GSEs are mostly okay as-is, and want the companies released by the end of 2020.

 

I doubt Calabria is too allergic to the administration's plans, otherwise I don't think he would have taken the job. I still think Calabria's past views are important because there are any number of yes-men Trump could have picked instead. He doesn't like the NWS, the companies need to be recapped before they can be released, and a recap can't happen while the NWS is in place. Thus the NWS's days are numbered.

 

Still, what's the downside thesis for the prefs from here? I'm really struggling. Seniors remain in place even after the NWS is gone? Government tries to force through an unfavorable conversion?

[Guest cherzeca]

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

 

Seems like yuge news to me. The administration has a clear plan and they trust Otting and Calabria to implement it. They also think that the GSEs are mostly okay as-is, and want the companies released by the end of 2020.

 

I doubt Calabria is too allergic to the administration's plans, otherwise I don't think he would have taken the job. I still think Calabria's past views are important because there are any number of yes-men Trump could have picked instead. He doesn't like the NWS, the companies need to be recapped before they can be released, and a recap can't happen while the NWS is in place. Thus the NWS's days are numbered.

 

Still, what's the downside thesis for the prefs from here? I'm really struggling. Seniors remain in place even after the NWS is gone? Government tries to force through an unfavorable conversion?

 

the common stock value (40% of its two year high) is still depressed on a relative basis as compared to junior pref (currently at 80% of two year high), and the junior pref is still only at par/3 .  so there remains still great uncertainty and fear. 

 

this is less an investment than a "black mirror" episode.

[rros]

An announcement that the NWS has been stopped seems imminent.

 

@JoshRosner

OTTING in Politico Pro: "Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market."

 

@Fanniegate101

Joseph Otting has made his first on the record comments about ending $FNMA & $FMCC conservatorships & releasing them. The end of this charade is getting closer by the day. Capital is the next logical step by amending the 'net worth sweep' #FannieGate

 

Hopefully really imminent. That piece from October said new people were going to act fast. Lets see it!

They can immediately suspend dividends and go for full earnings retention. But they cannot kill the NWS completely and do away with the Srs. That may have to be part of a complete overhaul, warrants, Srs. and perhaps conversion of Jrs.

[Guest cherzeca]

An announcement that the NWS has been stopped seems imminent.

 

@JoshRosner

OTTING in Politico Pro: "Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market."

 

@Fanniegate101

Joseph Otting has made his first on the record comments about ending $FNMA & $FMCC conservatorships & releasing them. The end of this charade is getting closer by the day. Capital is the next logical step by amending the 'net worth sweep' #FannieGate

 

Hopefully really imminent. That piece from October said new people were going to act fast. Lets see it!

They can immediately suspend dividends and go for full earnings retention. But they cannot kill the NWS completely and do away with the Srs. That may have to be part of a complete overhaul, warrants, Srs. and perhaps conversion of Jrs.

 

I agree the first part, stopping dividend distributions, is a likely first step in isolation, and I found the timing of the recent Milken report, advocating for that as well, may indicate that it will come sooner than one might think.  Milken's sources are likely not too shabby.  once that step is taken, then you will see Milken and others saying fine (of course that is not fine with them) but now lets do the heavy congressional work (competition and fed guarantee).  given the current congressional impasse and govt shutdown, good luck with that.  judging from the Otting interview, working with congress didn't seem to be at the top of his list.

[SnarkyPuppy]

Does anyone have a creative downside scenario which is consistent with all of these data points we now have?  Genuinely have none aside from Trump impeachment etc.  Anything else would contradict something one these guys said (when they simply could have stayed silent...)

[Eye4Valu]

Not even sure a Trump impeachment and conviction represents true downside, as Calabria was Pence's economist.

[DRValue]

Otting will be acting director for at most 6 months? Assuming calabria is confirmed.

[allnatural]

Tail-risk downside we must all be aware of even if low probability:

 

1) Market and housing market take a serious u-turn / recession. If capital markets dry up, there would be no appetite for this IPO. All the more reason they need to act while the window of opportunity is still there.

2) Trump wakes up on wrong side of the bed and fires Mnuchin- short term this would be hairy and im not sure they can replace him quick enough to act ahead of election cycle and with someone who shares his views.

 

The bull thesis remains stronger than ever today across the board when you evaluate the players in charge, their commentary to date, the recent court developments (dc circuit and fifth circuit + court of federal claims T'ed up finally). As Howard always says. TINA + WARRANTS. Get it done

 

[SnarkyPuppy]

It would seem that the one remaining key risk that Calabria represented - receivership - is out of the question based on Calabria's statements.  Assuming the guys first public statement wasn't an outright lie (when there was no incentive to lie)

[orthopa]

Important : no mention of legislation. It is finally crystal clear that legislative action is dead after a decade of politics and a lot of taxpayer money wasted on farce bills by Corker and Warner.

 

 

 

Full text:

 

Otting: ‘A lot’ can get done during acting FHFA tenure

 

By Victoria Guida

01/10/2019 12:45 PM EDT

 

Joseph Otting, who took over as acting director of the Federal Housing Finance Agency this week, said today there’s a lot he can accomplish to further housing finance reform during his tenure at the agency, despite the temporary nature of his position.

 

Otting, who is also comptroller of the currency, will be in charge of the agency that oversees Fannie Mae and Freddie Mac until a permanent replacement is confirmed. President Donald Trump has nominated vice presidential aide and libertarian economist Mark Calabria for that position.

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added.

 

Otting echoed Treasury Secretary Steven Mnuchin by saying that “ending conservatorship is a priority,” and maintaining the 30-year mortgage is important.

He declined to go into detail about his views on what type of reforms might be needed to the mortgage giants, often referred to as government-sponsored enterprises.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

 

What I find interesting is that he comments that there is a clear path and mission that has been laid out by Treasury and White house and what they want to accomplish. He also mentions a lot can be accomplished, and the path of the mission that has been laid out.

 

Did all of this go over my head? All we have heard from Treasury is ending conservatorship and not putting tax payers at risk. What has the White house said about this entire thing? Nothing from what I an remember or have read?

 

Clearly there is an administrative plan that looks at the liquidity capital (ie NWS dividends etc) and all of the above. That plan hasn't leaked but for sure Otting and Calabria/Mnuchin are aware of it.

[rros]

Important : no mention of legislation. It is finally crystal clear that legislative action is dead after a decade of politics and a lot of taxpayer money wasted on farce bills by Corker and Warner.

 

 

 

Full text:

 

Otting: ‘A lot’ can get done during acting FHFA tenure

 

By Victoria Guida

01/10/2019 12:45 PM EDT

 

Joseph Otting, who took over as acting director of the Federal Housing Finance Agency this week, said today there’s a lot he can accomplish to further housing finance reform during his tenure at the agency, despite the temporary nature of his position.

 

Otting, who is also comptroller of the currency, will be in charge of the agency that oversees Fannie Mae and Freddie Mac until a permanent replacement is confirmed. President Donald Trump has nominated vice presidential aide and libertarian economist Mark Calabria for that position.

“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

 

“If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added.

 

Otting echoed Treasury Secretary Steven Mnuchin by saying that “ending conservatorship is a priority,” and maintaining the 30-year mortgage is important.

He declined to go into detail about his views on what type of reforms might be needed to the mortgage giants, often referred to as government-sponsored enterprises.

 

“We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

 

He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

 

What I find interesting is that he comments that there is a clear path and mission that has been laid out by Treasury and White house and what they want to accomplish. He also mentions a lot can be accomplished, and the path of the mission that has been laid out.

 

Did all of this go over my head? All we have heard from Treasury is ending conservatorship and not putting tax payers at risk. What has the White house said about this entire thing? Nothing from what I an remember or have read?

 

Clearly there is an administrative plan that looks at the liquidity capital (ie NWS dividends etc) and all of the above. That plan hasn't leaked but for sure Otting and Calabria/Mnuchin are aware of it.

I believe the WH published a roadmap for Fannie and Freddie and it was mainly about (re)privatizing them. Could have been Mulvaney with OMB. I will look for it. It was a broader paper with a section for the GSEs.

 

Found it

https://www.whitehouse.gov/wp-content/uploads/2018/06/Government-Reform-and-Reorg-Plan.pdf

 

Page 75

[Luke 532]

What has the White house said about this entire thing? Nothing from what I an remember or have read?

 

https://www.politico.com/f/?id=00000164-2324-dbdc-a96d-373e4e2a0000

 

Page 17 (and repeated on page 75 nearly word-for-word)

Transform the way the Federal Government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of tax payer-funded bailouts, while maintaining responsible and sustainable support for homeowners.  Proposed changes, which would require broader policy and legislative reforms beyond restructuring Federal agencies and programs, include ending the conservatorship of Fannie Mae and Freddie Mac, reducing their role in the housing market, and providing an explicit, limited Federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers.

 

Page 75 (this part is in addition to the page 17 repeat)

This proposal would reorganize the way the Federal Government delivers mortgage assistance and go beyond restructuring Federal agencies and programs by transitioning Fannie Mae and Freddie Mac to fully private entities.

 

Looks like the document was created on June 6th of this year if you right click and look at document properties.

 

These were notes I kept back in June on this...

 

They are giving a major hint, possibly.  Mentioning that they are private companies repeatedly is encouraging.

 

Explicitly stating that they are privately-owned, and then completely wiping out shareholders (instead of just massive dilution to common), would seem to set the White House up for lawsuits that could come back to hurt them.  I think they are smarter than that.

 

It reads to me that they are making a concerted effort to mention that they are privately-owned companies.

 

"However, this system is challenged by the operation of two privately-owned Government sponsored-enterprises (GSEs), Fannie Mae and Freddie Mac..." (page 75)

 

"Competition to the duopolistic role played by the two privately-owned GSEs

would be an essential element..." (page 75)

 

"In order to propose changes in the Federal Government’s role in housing finance, this proposal outlines policies related to the privately-owned GSEs and ending their conservatorship." (page 75)

 

"Under the current system, Fannie Mae and Freddie Mac, two privately-owned GSEs, buy and guarantee..." (page 76)

[orthopa]

What has the White house said about this entire thing? Nothing from what I an remember or have read?

 

https://www.politico.com/f/?id=00000164-2324-dbdc-a96d-373e4e2a0000

 

Page 17 (and repeated on page 75 nearly word-for-word)

Transform the way the Federal Government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of tax payer-funded bailouts, while maintaining responsible and sustainable support for homeowners.  Proposed changes, which would require broader policy and legislative reforms beyond restructuring Federal agencies and programs, include ending the conservatorship of Fannie Mae and Freddie Mac, reducing their role in the housing market, and providing an explicit, limited Federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers.

 

Page 75 (this part is in addition to the page 17 repeat)

This proposal would reorganize the way the Federal Government delivers mortgage assistance and go beyond restructuring Federal agencies and programs by transitioning Fannie Mae and Freddie Mac to fully private entities.

 

Looks like the document was created on June 6th of this year if you right click and look at document properties.

 

These were notes I kept back in June on this...

 

They are giving a major hint, possibly.  Mentioning that they are private companies repeatedly is encouraging.

 

Explicitly stating that they are privately-owned, and then completely wiping out shareholders (instead of just massive dilution to common), would seem to set the White House up for lawsuits that could come back to hurt them.  I think they are smarter than that.

 

It reads to me that they are making a concerted effort to mention that they are privately-owned companies.

 

"However, this system is challenged by the operation of two privately-owned Government sponsored-enterprises (GSEs), Fannie Mae and Freddie Mac..." (page 75)

 

"Competition to the duopolistic role played by the two privately-owned GSEs

would be an essential element..." (page 75)

 

"In order to propose changes in the Federal Government’s role in housing finance, this proposal outlines policies related to the privately-owned GSEs and ending their conservatorship." (page 75)

 

"Under the current system, Fannie Mae and Freddie Mac, two privately-owned GSEs, buy and guarantee..." (page 76)

 

I agree and just read rros link. I caught the emphasis on privately owned also. Looks we have at this point privately owned companies out of conservatorship cross referencing ottings comments, WH, Mnuchin etc.  :) That being said I added more preferred.

[DRValue]

I'm buying more today. Probably 50/50 common and preferred. Recap mechanics and how much, if any, competition are the only uncertainty now.

[SnarkyPuppy]

I've always hated the term privately owned given ambiguity.  Why not publicly owned?  Shareholder owned? 

 

You wouldn't call Berkshire a publicly owned company in common parlance. 

[orthopa]

I've always hated the term privately owned given ambiguity.  Why not publicly owned?  Shareholder owned? 

 

You wouldn't call Berkshire a publicly owned company in common parlance.

 

I guess relative to the the gov? Ie private capital in FNMA and not govt sponsored capital.

[DocSnowball]

Otting's statement is the third, after OMB document and Craig Phillips comments back in the fall. With the highlights already mentioned in this thread - the common themes among Treasury, WH and FHFA players are starting to emerge - and the new language "return to private ownership" by Phillips and "release" by Otting is notable. Status quo seems very unlikely now, and restructuring in some form is coming. I'm still risk averse to the commons because receivership and release in the form of New Cos is still not off the table.

 

@allnatural

 

I re-viewed the Craig Phillips video on twitter after reading your comments to avoid bias from all the interpretations - "The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership. Their charters should be removed from statute and their operations should be overseen by the primary regulator who has the authority to approve additional guarantors to introduce competition into the secondary mortgage market"

 

This would count as progress not activity - 1) it is very consistent with the OMB document, 2) with the additional words "returning them to private ownership".

[ftp=ftp://www.performance.gov/GovReform/Reform-and-Reorg-Plan-Final.pdf]https://www.performance.gov/GovReform/Reform-and-Reorg-Plan-Final.pdf[/ftp]

Excerpts from Page 75-76

 

"WHAT WE’RE PROPOSING AND WHY IT’S THE RIGHT THING TO DO

Under the current system, Fannie Mae and Freddie Mac, two privately-owned GSEs, buy and guarantee mortgages from lenders and sell them to investors as MBS. Although they are private companies, they are congressionally chartered, a unique status that has been viewed as conveying an implicit Federal backstop that has in turn lowered their cost of capital relative to similarly-sized institutions. In 2008, Fannie Mae and Freddie Mac were taken into conservatorship and received (and continue to receive) an explicit but limited backing from the Treasury under a Preferred Stock Purchase Agreement (PSPA), which gives access to capital funding that covers any loss the enterprises may incur. In their Federal charters and by action of their primary regulator, the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac have goals of providing a certain amount of financing to low- and moderate-income borrowers. However, these a ffordable housing activities are not clearly accounted for on the Federal balance sheet.

In addition to the GSEs, other Federal programs provide mortgage support, contributing to a large Federal footprint in the housing market. The Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA) provides mortgage insurance intended to aid borrowers traditionally underserved by the conventional mortgage market, including lower-wealth households, minorities, and first-time homebuyers. The Departments of Veterans A ffairs (VA) and Agriculture (USDA) also administer mortgage insurance programs targeted to veterans and lower-income rural households, respectively. The loans guaranteed by FHA, VA, and USDA are in turn packaged into MBS that are guaranteed by Ginnie Mae, a Federal entity operated by HUD. Together, loans backed by the GSEs and Ginnie Mae comprised about 70 percent of mortgages originated in 2017.

All these entities, taken as a whole, form a complex and overlapping network of cross-subsidization, without clear accountability as to who is paying for, and who is receiving, housing subsidies. Although the Federal role in the housing market has helped to facilitate the availability of the 30-year fixed-rate mortgage, the current system has structural flaws that have also created distortions in home pricing that may actually hinder the goal of homeownership. This reorganization proposal, which includes broad policy and legislative reforms beyond restructuring Federal agencies and programs, would:

• Increase competition. The proposal would remove the Federal charter from statute and fully privatize the GSEs. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs, ensuring they would all be adequately capitalized and competing on a level playing field. If the GSEs lost some of the benefits that have led them to dominate the market, this would enable other private companies to begin competing in this space. The regulator would also ensure fair access to the secondary market for all market participants, including community financial institutions and small lenders...."

[Luke 532]

Does anyone have a creative downside scenario which is consistent with all of these data points we now have?

 

The major downside I see for prefs:

(1) If I accidentally enter a market sell order instead of limit.

(2) The capital gains tax is going to be painful.

:)

[undervalued]

Does anyone have a creative downside scenario which is consistent with all of these data points we now have?

 

The major downside I see for prefs:

(1) If I accidentally enter a market sell order instead of limit.

(2) The capital gains tax is going to be painful.

:)

 

How many % of your asset do you put into this?

[Luke 532]

Does anyone have a creative downside scenario which is consistent with all of these data points we now have?

 

The major downside I see for prefs:

(1) If I accidentally enter a market sell order instead of limit.

(2) The capital gains tax is going to be painful.

:)

 

How many % of your asset do you put into this?

 

I don't want to offer a specific percentage, but I will say the preferred shares collectively are by far my largest investment.  Of course, this shouldn't sway anybody one way or another because I am a random guy on a message board.

[allnatural]

But if we can't trust random guys on a message board on the internet, who can we trust?

 

I don't want to offer a specific percentage, but I will say the preferred shares collectively are by far my largest investment.  Of course, this shouldn't sway anybody one way or another because I am a random guy on a message board.

[undervalued]

But if we can't trust random guys on a message board on the internet, who can we trust?

 

I don't want to offer a specific percentage, but I will say the preferred shares collectively are by far my largest investment.  Of course, this shouldn't sway anybody one way or another because I am a random guy on a message board.

 

Maybe our president?

[Guest cherzeca]

there is a lot that could go wrong.

 

you would think that, with MI now adopting a stop to NWS divs (albeit only as a step to motivate congress to act) and bright seeing the light and leaving gnma, those who have a good opportunity to know a lot more about admin plans than we do are  not pleased with what they are seeing.  that's good, but this admin (and truly any admin) is not likely to move quickly.  for example, we don't know whether admin thinks that doing things under otting and before Calabria is confirmed is a good idea

 

even if things go "right" and admin reform is really rolled out that seeks to release GSEs from conservatorship, it may take a whole lot longer than one would hope.

 

my next signpost is the collins en banc oral arg 1/23.