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

[muscleman]

“Treasury plan will disappoint”. Are you 51% confident or 90%?

 

Without putting some rough odds isn’t your statement basically useless?

 

Why is it useless? I already said I moved from 50/50 to 70% bearish. Could this come from disappointing treasury plan or could this come from Collins or could this come from something else that we have not even account for? I won't know.

 

[Luke 532]

" Have the shareholders been robbed off more than $25 in dividends for a $25 stock? Yes

 

Have they looted over 270 billion from two of the companies that control 15% of economy and left them with just 3 billion in capital and making them completely vulnerable to downturns and recession? Yes

 

Have they lost credibility of  crap  talk on camera by not stopping  NWS immediately ? Yes

 

Have the public been lied over and over again on timing of recap : Jan 6, March, June, July, Aug and goes on. Yes

 

Have they applied double standard on constitutionality when compared with CFPB so that loot can keep going on? Yes

 

Have they  been able to reach out to courts as well to meddle into  our justice system? "

 

"The best and most legitimate quotes are those that offer no source or reference."

[DRValue]

" Have the shareholders been robbed off more than $25 in dividends for a $25 stock? Yes

 

Have they looted over 270 billion from two of the companies that control 15% of economy and left them with just 3 billion in capital and making them completely vulnerable to downturns and recession? Yes

 

Have they lost credibility of  crap  talk on camera by not stopping  NWS immediately ? Yes

 

Have the public been lied over and over again on timing of recap : Jan 6, March, June, July, Aug and goes on. Yes

 

Have they applied double standard on constitutionality when compared with CFPB so that loot can keep going on? Yes

 

Have they  been able to reach out to courts as well to meddle into  our justice system? "

 

"The best and most legitimate quotes are those that offer no source or reference."

 

"Lol" said people familiar with the matter.

[Luke 532]

The GSE stress test results were all out by now in previous years.

 

Came out today: https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Results-of-Fannie-and-Freddie-Dodd-Frank-Act-Stress-Tests-8-2019.aspx

 

Possibly lower capital requirements than previously thought.  Very interesting. 

[DRValue]

The GSE stress test results were all out by now in previous years.

 

Came out today: https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Results-of-Fannie-and-Freddie-Dodd-Frank-Act-Stress-Tests-8-2019.aspx

 

Possibly lower capital requirements than previously thought.  Very interesting.

 

Thanks for this. Just read through the results and I find it hard to make a good case for 180 billion of capital based on the results.

[WB_fan82]

Easier scenario this year with a 25% decline in home prices rather than a 30% decline in home prices.

 

Does anyone understand the difference between the credit provisions and "Credit losses" line near the bottom?

 

 

[Midas79]

The GSE stress test results were all out by now in previous years.

 

Came out today: https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Results-of-Fannie-and-Freddie-Dodd-Frank-Act-Stress-Tests-8-2019.aspx

 

Possibly lower capital requirements than previously thought.  Very interesting.

 

I don't know if there's a direct relationship between these results and capital requirements. That's especially true of minimum capital requirements, which are defined as

 

(a) EnterprisesFor purposes of this subchapter, the minimum capital level for each enterprise shall be the sum of—

(1) 2.50 percent of the aggregate on-balance sheet assets of the enterprise, as determined in accordance with generally accepted accounting principles;

(2) 0.45 percent of the unpaid principal balance of outstanding mortgage-backed securities and substantially equivalent instruments issued or guaranteed by the enterprise that are not included in paragraph (1); and

(3) 0.45 percent of other off-balance sheet obligations of the enterprise not included in paragraph (2) (excluding commitments in excess of 50 percent of the average dollar amount of the commitments outstanding each quarter over the preceding 4 quarters), except that the Director shall adjust such percentage to reflect differences in the credit risk of such obligations in relation to the instruments included in paragraph (2).

 

I asked Tim Howard about this in the past and he said that FnF's minimum capital requirements were rather low before conservatorship because most of the MBS were off-balance sheet (classified as trusts, I think) and thus only had the 0.45% multiplier. Watt's proposed rule had two minimum capital alternatives, and the higher ($139.5B combined) was based on 2.5% of all on-balance sheet assets. However, I don't see how Calabria can get around category (1) because in 2010 FnF added all the MBS to the balance sheets. Now that all the MBS are on the official balance sheets, is it even possible to set the minimum capital requirement lower than $139.5B? Watt must have thought so because he had an alternative lower number of $103.5B, but I'm not seeing how to square that with the statute.

 

I wish I could find that post by Tim but I think he deleted it. It ended with "there's no mystery if you know the history" and searching that phrase, or even just the term "0.45%", in all comments on his posts did not yield the comment I'm referring to.

 

If FnF really have to get to $139.5B in core capital it will take a massive equity raise because only retained earnings, common equity, and non-cumulative preferred equity count towards that. No mitigation from CRTs and such. It would be pretty hard to issue a metric ton of non-cumulative preferred shares because they each jeopardize the dividends of the others, and they would be limited in price appreciation if sold at par. I would expect, then, that there will be a crazy number of commons being issued if Calabria and Mnuchin really want to finish recap and release before the end of 2020.

[Midas79]

Followup to my last post. A friend pointed me to the comment, I had just neglected to click "Older Comments" before searching. Oops!

 

https://howardonmortgagefinance.com/2019/02/07/a-three-year-retrospective/comment-page-1/#comment-9463

 

Fannie and Freddie’s MBS are technically trusts, and they fell within the category of variable interest entities. So as of January 1, 2010 both companies began accounting for their MBS as on-balance sheet assets. But because their risk hadn’t changed, FHFA made the explicit exception to the companies’ statutory minimum capital requirements you noted, allowing assets that were “underlying Fannie Mae [and Freddie Mac] MBS held by third parties” to continue to be capitalized using a minimum ratio of 0.45 percent, not the 2.50 percent that applied to other on-balance sheet assets.

 

It appears that FHFA was technically violating HERA here. Category (1) in the definition is quite clear. If Calabria, as he has said, really is going to follow the letter of HERA every time he makes a decision, I don't know if he can come to any conclusion other than setting the minimum capital requirement at $139.5B (2.5% of all on-balance sheet assets), if not higher as is his prerogative.

[investorG]

Easier scenario this year with a 25% decline in home prices rather than a 30% decline in home prices.

 

Does anyone understand the difference between the credit provisions and "Credit losses" line near the bottom?

 

maybe this helps?  credit provisions are anticipatory, flow through the P&L and fund the loan loss reserve (the pool of money on the balance sheet set aside to cover future credit losses).  when times look bleak, like the stress exam tests, financial companies materially increase the credit provision cost to build a higher loan loss reserve - this reduces or eliminates profits during that time.  credit losses are the actual real time losses, they do not flow through the P&L but rather come out of the loan loss reserve that has been previously built up during the credit provision process.

[Guest cherzeca]

Easier scenario this year with a 25% decline in home prices rather than a 30% decline in home prices.

 

Does anyone understand the difference between the credit provisions and "Credit losses" line near the bottom?

 

maybe this helps?  credit provisions are anticipatory, flow through the P&L and fund the loan loss reserve (the pool of money on the balance sheet set aside to cover future credit losses).  when times look bleak, like the stress exam tests, financial companies materially increase the credit provision cost to build a higher loan loss reserve - this reduces or eliminates profits during that time.  credit losses are the actual real time losses, they do not flow through the P&L but rather come out of the loan loss reserve that has been previously built up during the credit provision process.

 

thanks for that.  so do you add both together? so that the stress period shows both anticipated losses plus actual losses.  or do you subtract credit losses from the provisions that set up the reserve against which the actual losses are charged? or something else?

[Cigarbutt]

^Concerning the above:     

1-the loan loss reserve account is a contra-asset account (asset being the loan held), so recognized net charge-offs will, by definition, decrease the value of the contra-asset account.

2-From a regulatory perspective, in times of stress, even if more loans transition to being charged-off, financial institutions typically increase the loan loss provision reserve because of changed expectations about future transitions along the spectrum of delinquency. The realization is typically delayed and even counter-cyclical to some degree but, for a while, the true underlying trend is unknown, so the idea of a capital buffer.

3-I just checked their specific methodology and "Change in the allowance for loan and lease losses + net charge-offs = provisions". See page 11 (page 19 pdf) of the document, figure 11.

https://www.federalreserve.gov/publications/files/2019-dfast-results-20190621.pdf

 

             

[investorG]

Easier scenario this year with a 25% decline in home prices rather than a 30% decline in home prices.

 

Does anyone understand the difference between the credit provisions and "Credit losses" line near the bottom?

 

maybe this helps?  credit provisions are anticipatory, flow through the P&L and fund the loan loss reserve (the pool of money on the balance sheet set aside to cover future credit losses).  when times look bleak, like the stress exam tests, financial companies materially increase the credit provision cost to build a higher loan loss reserve - this reduces or eliminates profits during that time.  credit losses are the actual real time losses, they do not flow through the P&L but rather come out of the loan loss reserve that has been previously built up during the credit provision process.

 

thanks for that.  so do you add both together? so that the stress period shows both anticipated losses plus actual losses.  or do you subtract credit losses from the provisions that set up the reserve against which the actual losses are charged? or something else?

 

keep them separate, don't add them together.    credit provisions flow through the P&L and build up the Loan loss reserve on the balance sheet.  credit losses do not flow through the P&L and subtract from the loan loss reserve on the balance sheet.

when times start getting bad, provisons > losses because you want to start building up the loan loss reserve ratio (llr/loans) for safety.

 

 

[Guest cherzeca]

@cigar and @IG

 

thanks for that.

 

I am not focusing on P/L or B/S impact for the moment.  I guess my question still is would it be a correct takeaway from this two year stress period to say there was $43B in provisioning (setting up contra-accounts to  assets) and $13B in credit losses (actual asset write downs), so was there a total of $56B in asset degradation (taken and expected to be taken)?

 

I am trying to see what a senator would say (briefed of course by the staff who unlike the senator understands this stuff) as to how "dangerous" etc the GSEs are.  TIA

[WB_fan82]

A couple thoughts on the stress test and midas note:

 

I wonder if the stress tests are over such a short period that the total credit provisions may not have hit maximum.  It takes time for borrowers to go seriously delinquent, not cure, go into foreclosure, etc.  The credit losses are only a fraction of the credit provisions, so it's hard to know what would happen with another year, and therefore I wonder if the capital requirements would need to be higher than indicated.

 

Also the accounting change starting in January books expected total credit provisions over the life of a loan upon guaranteeing the loan.  Does this also apply to changes in total credit provisions on the entire book as expectations change?  That might make their provisioning much more volatile in a stress period as they end up predicting the defaults rather than reacting to the evidence of defaults.

 

Finally, on Midas' point on the minimum capital levels being 2.5% on all balance sheet assets including the now-consolidated trusts.  This is one reason I think Calabria wrote in his letter to Congress that he wants power to determine things that count as capital.  There are some large liability accounts that perhaps should be thought of as "capital" - like the liabilities associated with the cash from upfront G-fees received.  But by the letter of the law, I don't think he has that power... 

[Cigarbutt]

I plan to disappear from the scene here because the investment thesis is way above my limited analytical capacity but the cycle management aspect is sooo interesting.

 

Concerning the above,

-It seems to me the message is: 43=30+13.

-@WB_fan82 (who are the other 81 fans?)---) The Fed is trying to technically incorporate the roll rate mechanism and evolving standards while, at the same time, improving accuracy and smoothing their supervisory capital role. But cycles are cycles and the best 'improvements' always come after the fact because today's posture relies on forward-looking estimates.

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181221b1.pdf

 

[investorG]

@cigar and @IG

 

thanks for that.

 

I am not focusing on P/L or B/S impact for the moment.  I guess my question still is would it be a correct takeaway from this two year stress period to say there was $43B in provisioning (setting up contra-accounts to  assets) and $13B in credit losses (actual asset write downs), so was there a total of $56B in asset degradation (taken and expected to be taken)?

 

I am trying to see what a senator would say (briefed of course by the staff who unlike the senator understands this stuff) as to how "dangerous" etc the GSEs are.  TIA

 

no, do not add.  43bn in comprehensive losses is the relevant #. 

[investorG]

A couple thoughts on the stress test and midas note:

 

I wonder if the stress tests are over such a short period that the total credit provisions may not have hit maximum.  It takes time for borrowers to go seriously delinquent, not cure, go into foreclosure, etc.  The credit losses are only a fraction of the credit provisions, so it's hard to know what would happen with another year, and therefore I wonder if the capital requirements would need to be higher than indicated.

 

Also the accounting change starting in January books expected total credit provisions over the life of a loan upon guaranteeing the loan.  Does this also apply to changes in total credit provisions on the entire book as expectations change?  That might make their provisioning much more volatile in a stress period as they end up predicting the defaults rather than reacting to the evidence of defaults.

 

Finally, on Midas' point on the minimum capital levels being 2.5% on all balance sheet assets including the now-consolidated trusts.  This is one reason I think Calabria wrote in his letter to Congress that he wants power to determine things that count as capital.  There are some large liability accounts that perhaps should be thought of as "capital" - like the liabilities associated with the cash from upfront G-fees received.  But by the letter of the law, I don't think he has that power...

 

the capital requirements, if ever announced, will obviously be more than the 43bn in 2 year stress losses. 

 

however, imo, the continued drop in stress test losses each year (was 77bn in 18 and 100bn or higher in prior years) is - in isolation - helpful in terms of the pending capital requirement levels (once again, all things equal).   

 

apart from methodology changes, the lower stress amounts likely suggests that the quality of the companies' books are better on paper and also perhaps that the CRT are meaningful risk reducers.

[Guest cherzeca]

A couple thoughts on the stress test and midas note:

 

I wonder if the stress tests are over such a short period that the total credit provisions may not have hit maximum.  It takes time for borrowers to go seriously delinquent, not cure, go into foreclosure, etc.  The credit losses are only a fraction of the credit provisions, so it's hard to know what would happen with another year, and therefore I wonder if the capital requirements would need to be higher than indicated.

 

Also the accounting change starting in January books expected total credit provisions over the life of a loan upon guaranteeing the loan.  Does this also apply to changes in total credit provisions on the entire book as expectations change?  That might make their provisioning much more volatile in a stress period as they end up predicting the defaults rather than reacting to the evidence of defaults.

 

Finally, on Midas' point on the minimum capital levels being 2.5% on all balance sheet assets including the now-consolidated trusts.  This is one reason I think Calabria wrote in his letter to Congress that he wants power to determine things that count as capital.  There are some large liability accounts that perhaps should be thought of as "capital" - like the liabilities associated with the cash from upfront G-fees received.  But by the letter of the law, I don't think he has that power...

 

the capital requirements, if ever announced, will obviously be more than the 43bn in 2 year stress losses. 

 

however, imo, the continued drop in stress test losses each year (was 77bn in 18 and 100bn or higher in prior years) is - in isolation - helpful in terms of the pending capital requirement levels (once again, all things equal).   

 

apart from methodology changes, the lower stress amounts likely suggests that the quality of the companies' books are better on paper and also perhaps that the CRT are meaningful risk reducers.

 

@IG

 

thanks for the history.  mortgage credit quality is not stagnant, and the reduction from $100B to $43B is impressive, albeit with a slight reduction in assumed stress.

[Guest cherzeca]

compare 2018: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2018_DFAST_Severely-Adverse-Scenario.pdf

where there is a projected draw on the treasury commitment (p. 6), with

2019: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf

with no projected draw (p. 6)

 

wonder why the commitment draw line item not set forth in 2019? 

[Midas79]

compare 2018: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2018_DFAST_Severely-Adverse-Scenario.pdf

where there is a projected draw on the treasury commitment (p. 6), with

2019: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf

with no projected draw (p. 6)

 

wonder why the commitment draw line item not set forth in 2019?

 

Because they will have more capital than that by then!!!  ;)

 

But in all seriousness that is a good catch. What I just said was not really facetious, just optimistic.

[muscleman]

compare 2018: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2018_DFAST_Severely-Adverse-Scenario.pdf

where there is a projected draw on the treasury commitment (p. 6), with

2019: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf

with no projected draw (p. 6)

 

wonder why the commitment draw line item not set forth in 2019?

 

Because they will have more capital than that by then!!!  ;)

 

But in all seriousness that is a good catch. What I just said was not really facetious, just optimistic.

 

Good catch! That's really interesting! It seems like a stop from treasury draw by NWS is already expected by everyone

[Midas79]

In the past I have said that I believe FHFA has been violating HERA by refusing to issue capital standards while FnF are in conservatorship. I found the part of the CFR that is supposed to authorize this.

 

https://www.law.cornell.edu/cfr/text/12/1237.3

 

©Powers as conservator or receiver. The Agency, as conservator or receiver, shall have all powers and authorities specifically provided by section 1367 of the Safety and Soundness Act and paragraph (a) of this section, including incidental powers, which include the authority to suspend capital classifications under section 1364(e)(1) of the Safety and Soundness Act during the duration of the conservatorship or receivership of that regulated entity.

 

I'm still not 100% convinced of this because trying to read 1364(e)(1) of the Safety and Soundness Act leads me in a circle without finding what I'm looking for. Does anyone have a way to find what I'm missing?

[Luke 532]

Looks like Moelis was active today and ACG Analytics was there..

https://twitter.com/ACGAnalytics/status/1097911134236102656

 

Any answers on NWS continuing vs ending, and the timing of such action, if any?

 

Bedtime in DC. #NWS to end as part of new negotiated Amendment in 4th quarter

 

Question on GSE's... are you hearing the plan being released Labor Day week is positive, negative, or neutral for preferred shareholders?

 

#Presidentisl #Mortgage Memo has two parts. #FHA and #GSEa.  They wll have answers to publicly disclosed questions based on what can Admin do alone and do they need Congress for. All positive.

 

ACG video from earlier this year if you haven't seen it already: https://www.realvision.com/tv/shows/trade-ideas/videos/a-new-fannie-mae-play

[DRValue]

Looks like Moelis was active today and ACG Analytics was there..

https://twitter.com/ACGAnalytics/status/1097911134236102656

 

Any answers on NWS continuing vs ending, and the timing of such action, if any?

 

Bedtime in DC. #NWS to end as part of new negotiated Amendment in 4th quarter

 

Question on GSE's... are you hearing the plan being released Labor Day week is positive, negative, or neutral for preferred shareholders?

 

#Presidentisl #Mortgage Memo has two parts. #FHA and #GSEa.  They wll have answers to publicly disclosed questions based on what can Admin do alone and do they need Congress for. All positive.

 

ACG video from earlier this year if you haven't seen it already: https://www.realvision.com/tv/shows/trade-ideas/videos/a-new-fannie-mae-play

 

Is it just me or are these guys tweeting old news?

[DRValue]

Do we have a time frame on the release of the final capital rule?