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

[SnarkyPuppy]

I guess my initial reaction is admin recap/release is not inconsistent with privatizing per this plan. 

 

-But why does this not address the fact that an implicit guarantee will remain?  Resolution plans and CCAR/DFAST stress testing does not remove any implicit guarantee.  Unless I'm misunderstanding Ginnie's role versus guarantor role in this model

-It seems like Michael Bright would've liked this.  Why would he leave Ginnie abruptly less than a month ago?  https://www.politico.com/story/2019/01/09/michael-bright-ginnie-mae-1071645

[rros]

Crapo's outline: https://www.banking.senate.gov/imo/media/doc/Housing%20Reform%20Outline.pdf

Thanks.

The multifamily businesses of Fannie Mae and Freddie Mac will be sold and operated as independent guarantors.

Will that money count as part of their recap? No multi-family should help with their risk-weighted capital levels, no?

Insured depository institutions will not be permitted to be guarantors.

Does that leave all commercial banks out?

Technology and infrastructure being developed as part of the Common Securitization Platform may be sold or transferred to Ginnie Mae

. If sold, those funds will also go to the companies and add to recap.

 

So this breaks up the duopoly, shrinks size of Fannie/Freddie and makes them private guarantors. If Ginnie Mae ends up w/ CSP those securities may get the explicit, paid-for gov guarantee. Perhaps.

[SnarkyPuppy]

rros- that's what I'm thinking the linkage to explicit paid for is as well.  All securities issued on CSP = guaranteed at security level

 

Unclear to me why Michael Bright wouldn't like this -> not confident that this is Otting/Muchin/Mulvaney/(Paulson) plan

[rros]

rros- that's what I'm thinking the linkage to explicit paid for is as well.  All securities issued on CSP = guaranteed at security level

 

Unclear to me why Michael Bright wouldn't like this -> not confident that this is Otting/Muchin/Mulvaney/(Paulson) plan

Bright was Corker's man. Maybe he did not just leave but was asked to. Ackman, in the past, floated the idea of selling parts of FF to fund their recapitalization. Given the shrinkage and breakup of the duopoly, this seems to be the result of some backdoor conversations with many participants including private investors. I see Calabria, Mnuchin, Powell, and even oponents liking this. And this would be inline with the original idea of Jim Millstein, Berkowitz. I can't see any desire to hurt the Jrs. under this plan even though nothing was said about legacy shareholders. Is it implied that legacy owners will own the guarantors? If recapitalized by selling multi-family and the CSP, how much money that will bring in? Could be that the Srs. can be let go then. Warrants too?

 

The Housing Trust Fund, Capital Magnet Fund, and Market Access Fund will collectively be funded through an annual assessment of 10.0 basis points of the total annual loan volume guaranteed by each guarantor.

There is a little bit for everybody here and Democrats will surely like this. This outline is very concise and to the point. Looks like TH believes this is DOA. Is it?

[SnarkyPuppy]

My concern from the past remains to be a possibility under this framework.  Mutually owned co-ops where the equity is completely new.

[muscleman]

My concern from the past remains to be a possibility under this framework.  Mutually owned co-ops where the equity is completely new.

 

That could be possible, but the takings claim would be validated right? That's the real danger for common but not for preferreds. However, with 79% warrant for common, I just don't see how Mnuchin can be that stupid to wipe out the common that way.

 

And the courts for Lamberth, 5th circuit are looking promising.

[SnarkyPuppy]

My concern from the past remains to be a possibility under this framework.  Mutually owned co-ops where the equity is completely new.

 

That could be possible, but the takings claim would be validated right? That's the real danger for common but not for preferreds. However, with 79% warrant for common, I just don't see how Mnuchin can be that stupid to wipe out the common that way.

 

And the courts for Lamberth, 5th circuit are looking promising.

 

I personally apply $0 value to the legal thesis but that's only due to my circle of competence.  My confidence in the situation stems purely from a variant perspective in finance theory and incentives specific to this situation. 

[Guest cherzeca]

this from that mortgage rag:

 

By Paul Muolo

pmuolo@imfpubs.com

Craig Phillips is the Treasury Department’s “ax” on GSE reform. Without him, it doesn’t happen. From what we understand, a Treasury team led by (former MBS trader) Phillips has been working on a proposal for several months now that would end the Fannie Mae/Freddie Mac conservatorships and “free” the two from the burdens of government control. One contemporary of Phillips, who claims to have knowledge of what he’s working on, said the plan is “very well scripted” at this point…

As for the details, let’s put it this way: Junior preferred shareholders in Fannie/Freddie stock might do well. The commons, not so much… 

 

fwiw, I find that the Crapo "plan" is just a rehash of what hasn't gotten out of senate banking committee before...

[SnarkyPuppy]

Going through older articles to try to piece together likely outcomes.  Writing on the wall. 

 

Calabria/Pollock 2015:

https://thehill.com/blogs/congress-blog/economy-budget/240014-making-a-fannie-and-freddie-we-could-live-with

 

What is required are practical steps forward, rather than designing the ideal but politically unachievable solution.  We offer Congress the following suggestion as something that can be done now: simply take away all Fannie and Freddie’s special privileges.  They could be allowed out of conservatorship when all of the following actions have been taken:

 

1. Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size.  Equity of at least 5 percent of total assets should be their required leverage capital ratio.

2. End all their securities law exemptions.

3. End all their preferences in banking law and regulation.  Banks aren’t allowed to hold corporate equity, but as a mistaken exception were allowed to make large equity investments in Fannie and Freddie, on a highly leveraged basis.

4. End their exemption from state and local income taxes. 

5. Open up their charters to competition just like banking charters.  End their exclusive duopoly privileges.

6. End all their exemptions from consumer protection rules.

7. Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are.

 

Implementing these steps would go a long way towards making Fannie and Freddie less distortive and far less dangerous, rendering them a Fannie and Freddie we could live with as two competitors among others.  Such a de-fanged, de-privileged Fannie and Freddie could safely be brought out of eternal conservatorship.  If they again get themselves into insolvency, they could be placed into receivership.  In the meantime, debates about the ideal housing finance system can continue.

 

Mulvaney 2016:

https://www.valuewalk.com/2016/02/fannie-mae-fincher-mulvaney-press-fhfa-treasury-on-risks-of-sweep/

 

It is extremely troubling that these massive agencies – deeply imbedded in our financial system with over $5 trillion in securities outstanding – are being specifically directed to deplete their capital reserves.  According to the 2013 FHFA report, four out of five mortgages are now backed by Fannie Mae and Freddie Mac, which is a level higher than before the crisis. Should a sudden shock to the system or even a normal downturn occur, it is American taxpayers that will have to fit the bill.

 

The letter also echoed an idea that housing policy experts from across the political spectrum have backed: Treat Fannie Mae and Freddie Mac like systemically-important financial institutions, or SIFIs.

 

Mulvaney 2016

The Housing Finance Restructuring Act of 2016

https://www.congress.gov/bill/114th-congress/house-bill/4913/text

 

Key sections:

"(1) DEEMED REPAYMENT IN FULL.—Effective on the date of the date of the enactment of this Act, the liquidation preference on the Variable Liquidation Preference Senior Preferred Stocks of each enterprise is reduced to zero."

 

© Exercise Of Warrants For Common Stock.—Notwithstanding subsection (a)(2)© of this section, upon the enactment of this Act, the Department of the Treasury shall exercise the warrants for the purchase of common stock of the enterprises provided to the Department under the Senior Preferred Stock Purchase Agreements.

 

(d) Capital Restoration Plan.—(1) REQUIREMENT.—Not later than the expiration of the 45-day period beginning on the date of the enactment of this Act, the Director shall prepare and submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate a capital restoration plan for each enterprise that complies with section 1369C(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4622(a)).

 

(e) Termination Of Conservatorships.—The Director shall terminate the conservatorship of an enterprise under section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) at such time that the enterprise attains, as determined by the Director, an amount of capital that is equal to or exceeds 5 percent of the risk-weighted assets of the enterprise.

 

Pollock 2017:

https://www.americanbanker.com/opinion/time-to-reform-fannie-and-freddie-is-now

"The answer is easily determined. Take all the cash flows between Fannie and Freddie and the Treasury, and calculate the Treasury’s internal rate of return on its investment. When the IRR reaches 10%, Fannie and Freddie have sent in cash economically equivalent to paying the 10% dividend plus retiring 100% of the principal. This I call the “10% Moment.

 

Freddie reached its 10% Moment in the second quarter of 2017. With the $3 billion dividend Fannie was previously planning to pay on December 31, the Treasury’s IRR on Fannie would have reached 10.06%.

 

The new Treasury-FHFA deal will postpone Fannie’s 10% Moment a bit, but it will come. As it approaches, Treasury should exercise its warrants and become the actual owner of the shares to which it and the taxpayers are entitled. When added to that, Fannie reaches its 10% Moment, then payment in full of the original bailout deal will have been achieved, economically speaking.

 

Any real reform must address two essential factors. First, Fannie and Freddie are and will continue to be absolutely dependent on the de facto guarantee of their obligations by the U.S. Treasury, thus the taxpayers. They could not function even for a minute without that. The guarantee needs to be fairly paid for, as nothing is more distortive than a free government guarantee. A good way to set the necessary fee would be to mirror what the Federal Deposit Insurance Corp. would charge for deposit insurance of a huge bank with 0.1% capital and a 100% concentration in real estate risk. Treasury and Congress should ask the FDIC what this price would be.

 

Second, Fannie and Freddie have demonstrated their ability to put the entire financial system at risk. They are with no doubt whatsoever systemically important financial institutions. Indeed, if anyone at all is a SIFI, then it is the GSEs. If Fannie and Freddie are not SIFIs, then no one is a SIFI. They should be formally designated as such in the first quarter of 2018, by the Financial Stability Oversight Council —and that FSOC has not already so designated them is an egregious and arguably reckless failure.

 

When Fannie and Freddie are making a fair payment for their de facto government guarantee, have become formally designated and regulated as SIFIs, and have reached the 10% Moment,  Treasury should agree that its senior preferred stock has been fully retired.

 

Then Fannie and Freddie would begin to accumulate additional retained earnings in a sound framework. Of course, 79.9% of those would belong to the Treasury as 79.9% owner of their common stock. Fannie and Freddie would still be woefully undercapitalized, but progress toward building the capital appropriate for a SIFI would begin"

 

Mnuchin 2017

https://www.bloomberg.com/news/articles/2017-01-28/mnuchin-dims-banks-hopes-he-will-allow-a-prop-trading-revival

 

Additionally, Mnuchin offered further details on his thoughts regarding housing finance reform, including the role of GSEs. Mnuchin wrote in response to questions from Senator Sherrod Brown that "any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers."

 

Mnuchin 2017

https://www.wsj.com/articles/trump-administration-could-support-government-backstop-for-fannie-and-freddie-mnuchin-says-1495137047

"If we end up with a scenario where we need some type of explicit guarantee, I would expect that it would be paid for and I would expect that it would hopefully never be hit,” he said. The Treasury secretary said such a system would be no different than insurance programs operated by the Federal Deposit Insurance Corp. and the Federal Housing Administration.

 

 

OMB Budget 2018 - Mulvaney

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

 

"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.  Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities (MBS) that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for

 

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.

 

Under this proposal, which would also involve entities outside the Executive Branch of the Federal  Government, guarantors would have access to an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances. Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors ... The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure.

 

Phillips 2018

https://www.housingwire.com/articles/47122-mnuchins-top-housing-advisor-says-gse-charters-should-be-removed

 

“The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said Monday. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market 

 

“Guarantors should have access to an explicit federal guarantee for MBS (mortgage-backed securities) that they issue which is on budget and fully paid for, designed for use only in exigent circumstances and designed and overseen in a manner that protects the interests of taxpayers by their primary regulator,” Phillips continued..”

 

Mnuchin 2018

"Watt's term ends in early 2019. That will be an opportunity to “make sure we have someone in that job that supports the agenda,” Mnuchin said."

 

Otting 2019

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

 

“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.

 

“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.”

 

Extending this trail of "related" items with another Pollock op-ed which came out this morning.  I believe the answer we are all looking for is in plain sight.

 

https://www.americanbanker.com/opinion/changes-to-capital-rules-should-be-part-of-gse-overhaul?utm_campaign=amerbanker-tw&utm_medium=social&utm_content=socialflow&utm_source=twitter

 

A consistent stream of thoughts have been clearly outlined from those who are about to decide the end game.  Not sure why this isn't being commented on more.

 

 

[DRValue]

this from that mortgage rag:

 

By Paul Muolo

pmuolo@imfpubs.com

Craig Phillips is the Treasury Department’s “ax” on GSE reform. Without him, it doesn’t happen. From what we understand, a Treasury team led by (former MBS trader) Phillips has been working on a proposal for several months now that would end the Fannie Mae/Freddie Mac conservatorships and “free” the two from the burdens of government control. One contemporary of Phillips, who claims to have knowledge of what he’s working on, said the plan is “very well scripted” at this point…

As for the details, let’s put it this way: Junior preferred shareholders in Fannie/Freddie stock might do well. The commons, not so much… 

 

fwiw, I find that the Crapo "plan" is just a rehash of what hasn't gotten out of senate banking committee before...

 

I don't understand this commons not so much meme. There's no receivership so common will exist. Aig common were diluted 92%. I don't know the ratio under moelis but I expect it to be very close if I work it out. That would be bad for shareholders from 2008 but not those whose average cost of $1.50. I guess it's possible for shareholders to be screwed and rewarded lol.

[Guest cherzeca]

depends on what Muolo thinks "well" is.  could be just snark given the source

[orthopa]

this from that mortgage rag:

 

By Paul Muolo

pmuolo@imfpubs.com

Craig Phillips is the Treasury Department’s “ax” on GSE reform. Without him, it doesn’t happen. From what we understand, a Treasury team led by (former MBS trader) Phillips has been working on a proposal for several months now that would end the Fannie Mae/Freddie Mac conservatorships and “free” the two from the burdens of government control. One contemporary of Phillips, who claims to have knowledge of what he’s working on, said the plan is “very well scripted” at this point…

As for the details, let’s put it this way: Junior preferred shareholders in Fannie/Freddie stock might do well. The commons, not so much… 

 

fwiw, I find that the Crapo "plan" is just a rehash of what hasn't gotten out of senate banking committee before...

 

I don't understand this commons not so much meme. There's no receivership so common will exist. Aig common were diluted 92%. I don't know the ratio under moelis but I expect it to be very close if I work it out. That would be bad for shareholders from 2008 but not those whose average cost of $1.50. I guess it's possible for shareholders to be screwed and rewarded lol.

 

As you mention there will be heavy dilution, and yet another clue even from Muolo . Is ~300% on the preferred at these prices not enough?  Not referencing you specifically but the prospects of a lotto payout is too much for some to resist, even if it means missing out on a more likely 3x return and losing money or breaking even on a 10 year trade.

 

In the article he also mentions that the administration may hire a banking firm with a Washington specialty also.

[orthopa]

This slow deliberate leak of information and insight by all involved has done a great job of numbing many who have invested. This has been a great way to temper any outrage or knee jerk reaction. No one seems upset publicly at any of this news!

[allnatural]

https://pbs.twimg.com/media/DyV4p4dXcAED93G.jpg:large

[DRValue]

https://investorsunite.org/top-ten-takeaways-from-5th-circuit-hearing-in-collins-v-mnuchin/

 

Thoughts on point 8 if the nws is ended administratively before ruling?

[Luke 532]

https://pbs.twimg.com/media/DyV4p4dXcAED93G.jpg:large

 

^^ Mnuchin comments on Crapo ^^

 

Thanks for posting, allnatural.

[allnatural]

If the choice is between marking down ur snr pfds as fully paid w/o paying shareholders a penny or writing a ~$150b check to fannie and freddie... i think choice is obvious if youre the government.

 

https://investorsunite.org/top-ten-takeaways-from-5th-circuit-hearing-in-collins-v-mnuchin/

 

Thoughts on point 8 if the nws is ended administratively before ruling?

[Guest cherzeca]

it occurs to me that  recent "plans" out of senate banking committee included Warner as co-sponsor, with corker. I wonder if Warner's interest has moved on now that corker has departed, so that Crapo is the cheese stands alone on GSE in that committee.  not saying Warner doesnt have a view, but that I am somewhat surprised that he didn't want his name on what Crapo put out

 

edit:  I guess that brown has taken warner's place: 

 

"Senator Sherrod Brown of Ohio, the Banking Committee’s top Democrat, called for hearings on the housing market in a statement on Crapo’s plan.

 

“Too often Congress and the White House have put Wall Street ahead of working people, and we cannot let that happen when it comes to the stability of our housing market,” he said."

 

[Luke 532]

Not sure what to think of this (if it's a real Craig Phillips account).  He seems pretty motivated to finish this thing...

 

Challenge accepted. Time to get reform done!!!!

[hardincap]

Not sure what to think of this (if it's a real Craig Phillips account).  He seems pretty motivated to finish this thing...

 

Challenge accepted. Time to get reform done!!!!

 

Uhh this is bizarre

[SnarkyPuppy]

Not sure what to think of this (if it's a real Craig Phillips account).  He seems pretty motivated to finish this thing...

 

Challenge accepted. Time to get reform done!!!!

 

This isn't him lol

[hardincap]

Yep looks like fake account to me

[Luke 532]

Not sure what to think of this (if it's a real Craig Phillips account).  He seems pretty motivated to finish this thing...

 

Challenge accepted. Time to get reform done!!!!

 

This isn't him lol

 

I'd imagine so, hence my "if it's a real Craig Phillips account."

[rros]

Tim Howard’s take on Crap by Crapo

 

“This is a hybrid of the MBA’s and the Milken Institute’s plans, with all of the major elements the large banks have been asking for: multiple credit guarantors (including a privatized Fannie and Freddie), an explicit government guaranty on the securities backed by these private guarantors, which would be issued by Ginnie Mae, and the guarantors’ affordable housing goals replaced by a “Market Access Fund,” funded by a 10 basis point fee on loans financed in the secondary market (which allows banks to charge this fee to all homebuyers, but pocket it if they keep the loans in portfolio).

The banks couldn’t get their secondary market “reform” legislation through the last Congress, and there are much higher hurdles to getting the Crapo plan passed in the current one.”

 

https://howardonmortgagefinance.com/2018/12/03/the-interested-parties-respond/#comments

I am not sure what hurdles he is referring to. A Democrat House? The MAF can surely be an area of negotiation where Democrats may find relief or ask for what they want. Note the outline validates the Trust Fund and the Capital Magnet Fund from the get go. As for the rest, the explicit guarantee and the added competition are also in line with Mnuchin. Are they not?

 

In my view, if this pacifies the spirits we move forward from here and continue to be money good (Jrs.). This year.

[rros]

There is almost unanimous agreement that a legislative solution is impossible. So what are they waiting for? Jan 6th came and gone. 

In one of the last hearings, Corker mentioned that it was his understanding admin action will be taken and few things will be left for congress to tackle in future. I don't have a link for it. I guess he had knowledge of what is coming. He didn't say what an admin action won't accomplish but likely the explicit guarantee issue? So they can go ahead and do the rest as the explicit guarantee issue can take decades and as i read explicit guarantee will never happen in a lifetime.

I think the value of Crapo's outline, for us, is that it may help keep any opposition laying low. Not the purpose of his proposed reform bill but one of its consequences. Under this outline, there may be less resistance if Otting/Mnuchin move aggressively to recapitalize the companies as long as there is the belief that Crapo's is in line with the WH or vice versa.