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

[Midas79]

price formations only reflect behavior patterns of participants.

 

My view on technical analysis has always been that it only works if enough other people think that it works.

 

Buffett gave up on technical analysis when he realised he could turn the chart upside down and get the same result.

 

That's priceless.

[rros]

price formations only reflect behavior patterns of participants.

 

My view on technical analysis has always been that it only works if enough other people think that it works.

 

Enough people and enough algos.

 

And for this reason ignoring it might be a mistake. (Sorry, messed up the quote thing)

[Luke 532]

Ah... some of us may just be in the ignore list. Don't worry.

 

I'm certainly not going to put you or anybody else in this discussion on the ignore list!  I don't believe in TA, but I do believe in the value you provide to this board.

[Midas79]

Enough people and enough algos.

 

And for this reason ignoring it might be a mistake. (Sorry, messed up the quote thing)

 

I ignore it mainly because it's (well) outside my circle of competence. I can't wrap my head around why it should work.

 

That's not to say that it can't, just that my lack of understanding leads me to focus my efforts elsewhere.

 

I echo Luke's statement: I am not at all trying to chase you off or stop you from posting anything. You provide great value to the board.

[rros]

Thank you.

 

I admit, I know less than many here on Buffett, value, legal issues and even real estate/mortgages. I am happy I can read/learn from all here.

[Midas79]

Just a wild thought, and apologies if it has been posted before and I missed it.

 

What if Trump is willing to recap and release FnF, and add good money to affordable housing funds and such, in return for getting funding for a border wall, as well as things like new charters from competitors and a security-level MBS guarantee? He could threaten to gut FnF otherwise if he wants to play hardball. Is there any amount of affordable housing goals that Trump could give ground on to get the border wall funding, or is that the Democrats' line in the sand?

[muscleman]

I continue to see weakness in FNMAS through technical analysis. I am really bullish about the fundamentals, but it is not confirming with my technical analysis, so I am still staying away from it.

I am really curious what will happen next.

Technical analysis doesn't work in certain cases like MBIA's settlement with BAC back in 2013, but I think for FNMAS, technical will take a lead in giving us a clue, because the reform talk is wide spread among many people. The court ruling may be a surprise, but anything coming out of the admin announcement should not be a technical surprise.

 

hey MM, for me TA seems to be good at measuring sentiment about earnings/business prospects, but with fnmas it seems sentiment about en banc court ruling and what admin plan looks like and how it will be received and whether ms. waters wants to play ball is not something TA is particularly useful at. comments?

 

edit:  I do agree that fnmas price has been weak, but that could be TA just showing confusion about prospects which in this name is a given

 

I think the primary difference between FA and TA is:

FA: Analysts believe he is smarter than anyone else in the world, and can uncover hidden value that most people don't realize yet.

TA: Analysts believe there are smart people who may also be trading on insider info that he is unable to compete with by FA, so he watches the chart for clues of such possible footprint.

 

Therefore, I think for admin reform, given the wide spread discussion between Mnuchin, FHFA, a large number of congress members, it is very likely that the detailed admin plan is already known by guys like Steve Cohen that we don't know, and they will show their hands on the chart. But for the court ruling, I agree it may come as a surprise because there are only a few judges who know the results in advance.

 

 

[muscleman]

I continue to see weakness in FNMAS through technical analysis. I am really bullish about the fundamentals, but it is not confirming with my technical analysis, so I am still staying away from it.

I am really curious what will happen next.

Technical analysis doesn't work in certain cases like MBIA's settlement with BAC back in 2013, but I think for FNMAS, technical will take a lead in giving us a clue, because the reform talk is wide spread among many people. The court ruling may be a surprise, but anything coming out of the admin announcement should not be a technical surprise.

You are out. Might be negatively biased. I am in. Maybe positively biased. So I see a high level bull flag, a top level triangle forming like the one formed from 11/16 through 02/17 after which prices broke to the upside. Which may mean another 4 weeks to go before we see any direction.

 

My reading is different. I am curious to see what happens next.  :)

I am pretty puzzled right now because fundamentally this is very bullish.  ::)

[no_free_lunch]

I am trying to get a sense of the numbers in a recap / release scenario.  I know there are a many variables but even just some kind of baseline would help.

 

I think we should look at pre gfc as a basis.  Looking at 2007 data, I think that fnma was valued at around $60B vs $40B in equity, or a p/b of 1.5.

 

Today they are talking $180B equity, how much of this would be for fnma vs freddie?

 

What kind of p/b premium would there be?  If there are new competitors entering the market and given the large amount of equity buffer they have to hold, would this not trade just a touch over book?

 

Given that there is basically no capital it seems that after the capital raise all that would be left for shareholders, preferreds and senior preferreds would be to divvy up that premium over book.      When I do some quick math it doesn't seem like the pot is big enough for the preferreds to be made whole.

 

I know this has been discussed already, but I haven't seen the assumptions and input numbers, just the target prices.

 

 

Regarding my bias, I am still in.  It seems I am not comfortable being in or out of the preferreds.

 

[Guest cherzeca]

I am trying to get a sense of the numbers in a recap / release scenario.  I know there are a many variables but even just some kind of baseline would help.

 

I think we should look at pre gfc as a basis.  Looking at 2007 data, I think that fnma was valued at around $60B vs $40B in equity, or a p/b of 1.5.

 

Today they are talking $180B equity, how much of this would be for fnma vs freddie?

 

What kind of p/b premium would there be?  If there are new competitors entering the market and given the large amount of equity buffer they have to hold, would this not trade just a touch over book?

 

Given that there is basically no capital it seems that after the capital raise all that would be left for shareholders, preferreds and senior preferreds would be to divvy up that premium over book.      When I do some quick math it doesn't seem like the pot is big enough for the preferreds to be made whole.

 

I know this has been discussed already, but I haven't seen the assumptions and input numbers, just the target prices.

 

 

Regarding my bias, I am still in.  It seems I am not comfortable being in or out of the preferreds.

 

you need to read the moelis blueprint:  http://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf

 

best work anyone has done on GSEs plus I expect the administrative plan to bear resemblance to it

[Luke 532]

We had Mnuchin give hope 2 years ago. This time Otting said 2-4 weeks, and tommorrow is 4 weeks. When would they announce? This week? Next?

 

He said it on January 17th.  Next Friday, February 15th, is 4 weeks.

[rros]

OT

 

Did Sen. Elizabeth Warren really stand up and applaud when Trump said the US will never be a socialist country? I need new prescription glasses.

[muscleman]

Technical Analysis at COB&F?  Guys...

Ah... some of us may just be in the ignore list. Don't worry.

 

But seriously, to give credit to TA... price formations only reflect behavior patterns of participants. The ones above show indecision. Which we as well seem to have. One day we are bullish, the next we can't take it anymore.

 

Yeah. I've seen countless TAs who behave like that. They always give two alternative scenarios. One is bullish and one is bearish. They never give an exact answer. I can guarantee that these people will never make a dime in the stock market using their own analysis.

[allnatural]

Mnuchin on housing reform (minute 16): https://www.cnbc.com/video/2019/02/06/watch-cnbcs-full-interview-with-treasury-secretary-steve-mnuchin.html

[Guest cherzeca]

Mnuchin on housing reform (minute 16): https://www.cnbc.com/video/2019/02/06/watch-cnbcs-full-interview-with-treasury-secretary-steve-mnuchin.html

 

Mnuchin has often talked about "global" housing reform, and in this clip (thanks allnatural) he reiterates this, alluding to increased risk re HUD and HFA insured mortgages.  now this aspect can only be handled by legislation, so if admin is basically saying to congress, look if you want to work with us on GSE reform and HFA/HUD/GNMA reform, fine...which means its even more unlikely congress does anything, since congress has shown that it hasn't been able to do anything on "just" GSE reform.  in effect, we can "fix" GSEs on our own and fine with your support, but if you want to get involved don't just focus on GSEs

 

so my takeaway from this short response is that it seems even more highly unlikely that Crapo's "plan" gets any serious attention, and that the admin will take lead, with or without congress 

[Guest cherzeca]

from that mortgage rag:

 

Civil Rights Groups Up in Arms Over Crapo’s GSE Reform Plan

 

By Paul Muolo

pmuolo@imfpubs.com

Several high-profile civil rights groups have thrown cold water on Sen. Mike Crapo’s plan to reform Fannie Mae and Freddie Mac, saying it would weaken GSE regulation and increase the cost of homeownership.

In a prepared statement, the Center for Responsible Lending, The Leadership Conference on Civil and Human Rights, the NAACP, the National Urban League and other organizations said, “At the start of Black History Month, it is disappointing to see a proposal that weakens the regulatory authority over the GSEs and returns the Federal Housing Finance Agency … to the same frail status the regulator was in leading to the housing crash of 2008…”

The organizations noted that while they do not question the Idaho Republican’s “sincere attempt to improve the complex and difficult secondary mortgage market system, his outline offers an untested model that would introduce anxiety and high cost projections that will increase the cost of homeownership for all borrowers, and that would provide less access and affordability for America’s working families.”

As one observer noted: “The Crapo plan has been flatly rejected by groups Democrats care about.”

Released last Friday, a three-page draft from Crapo calls for multiple private guarantors overseen by the FHFA. Fannie and Freddie would be returned to private ownership. Ginnie Mae would back securities issued by the guarantors and oversee a common securitization platform.

Crapo is chairman of the Senate Banking Committee.

[DRValue]

Hurry up otting ffs.

[SnarkyPuppy]

Aside from a mutually owned private structure w prior equity wiped, my only other concern (and not mutually exclusive w the mutual model) is that mnuchins administrative option = Declaring w FHFA rhat the companies are critically undercapitalized and as such will be placed into receivership (per HERA).  While unlikely because of TINA and the takings claims becoming ripe - how is this inconsistent with anything these guys have said?  There's a video of Calabria on youtube in 2014 (post NWS) adamantly stating that the companies can go into receivership.  nothing has changed from 2014 which would change Calabrias view that receivership can occur

[allnatural]

Pay attention to ~15:00 in the Mnuchin clip. He mentions how there are many ways to pay for infrastructure and there are ways to leverage other money.

[Wiggins]

Aside from a mutually owned private structure w prior equity wiped, my only other concern (and not mutually exclusive w the mutual model) is that mnuchins administrative option = Declaring w FHFA rhat the companies are critically undercapitalized and as such will be placed into receivership (per HERA).  While unlikely because of TINA and the takings claims becoming ripe - how is this inconsistent with anything these guys have said?  There's a video of Calabria on youtube in 2014 (post NWS) adamantly stating that the companies can go into receivership.  nothing has changed from 2014 which would change Calabrias view that receivership can occur

 

I've been wondering this myself for a while.

I think receivership immediately blows a hole in the "death spiral" narrative and all other narratives the government has spun with regard to the NWS being beneficial to the GSEs. Suddenly, the nearly $200 billion "siphoned" out of the GSEs would be a taking, UNLESS, the government can successfully argue that the secession clause allows them to "take" all value from the securities and that due to the secession clause the private shareholders' interests in the securities became immediately worthless in 2008. The government would argue that the statute of limitations -or laches- precludes those wishing to litigate HERA's secession clause. This line of argument actually was brought up by Judge Jones in the negative, that is "the secession clause has never been used" to siphon capital out of a company in conservatorship, or something to that effect.

I do not think the government will use this argument in the first place, because it would forever destroy any notion of a "conservator" and more importantly IF they did use it they would lose. But I thought it worth mentioning here especially given the reference in the en banc oral argument.

So if they did invoke receivership and they do not use this argument, then how could they accomplish receivership? The only viable way I see this is if they pay par value (or negotiate some other amount) with JPS owners. Viewed this way, the government is allowed massive theft with little downside: they would be able to sell the remnants and pieces of the GSEs for far more money than is required to pay of JPS holders, and they'd keep most or all of the loot they've already stolen. If you want to take this logic further and include common shareholders' claims and any future "takings" liability, then just look at AIG where common shareholders "won" in name only; the judge determined that their shares had no value at the time of the taking. One could opine a similar outcome for the GSEs, or at least the government would argue it that way and in all likelihood pay pennies on the dollar to any successful common shareholder claim.

 

Of course, there are many other practical arguments against receivership and/or the scenario depicted above (eg disruption of the market, negating the value of the warrants, the government being viewed as lying criminal bastards, etc). But for me this is an exercise trying to leave no possible negative thesis stone unturned. Would love to hear any failure in my logic above... And thanks for all the comments here.

 

[rros]

Aside from a mutually owned private structure w prior equity wiped, my only other concern (and not mutually exclusive w the mutual model) is that mnuchins administrative option = Declaring w FHFA rhat the companies are critically undercapitalized and as such will be placed into receivership (per HERA).  While unlikely because of TINA and the takings claims becoming ripe - how is this inconsistent with anything these guys have said?  There's a video of Calabria on youtube in 2014 (post NWS) adamantly stating that the companies can go into receivership.  nothing has changed from 2014 which would change Calabrias view that receivership can occur

I don't even know if this is technically possible anymore. With 3 billion of net worth each, critically undercapitalized may not apply anymore. Instead, severely undercapitalized might apply which may require corrective measures as opposed to a straight receivership. Granted, I am guessing. I do not know the exact math only that the regulation that was suspended establishes different capital levels matching different levels of severity.

 

Receivership would come into play in a legislative scenario, perhaps.

[Guest cherzeca]

receivership is not a realistic invert imo, that is all

[SnarkyPuppy]

I guess to further my point:

 

Calabria at 18:00 starts with "im going to start with what might be a radical notion here in washington... why dont we follow the law?" and then begins to talk about why following the law = receivership in 2014.    18:40 "what we should do today and what we shouldve done in 2008 is place these companies into receivership..."  Talks about how current limited commitment by treasury is not perpetual/not core capital and therefore by definition they are undercapitalized and should be taken into receivership.  Also says "receivership is time limited.  congress does not act and the 5 year time limit under receivership would light a fuse under congress to force them to do something which they otherwise wont"

 

link: 

 

As a follow-up question:  Could they not reverse NWS and then say $13bn = undercapitalized against FHFA capital requirements -> receivership?

 

 

[Eye4Valu]

I wish I could place some of the commentators on this thread in receivership.

[SnarkyPuppy]

As an additional video:  calabria talking about shareholders and turning fannie/freddie into bank holding companies -> if they can survive capital requirements and have value then shareholders will do well.  if they cant,  they lose value.  let market decide.  this is more consistent w/ recent signaling

 

33:20 mark