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

[orthopa]

Does anyone have any text/video of what Calabria said a couple of days ago to the effect that "Fannie and Freddie are doing what they are supposed to do during hard times" in regard to reform?

 

Thanks

[Guest cherzeca]

Well, first return the stolen NWS money as a start. Second, stop fighting the wrong in the court.

 

https://www.bloomberg.com/news/articles/2020-03-26/mnuchin-forms-task-force-to-confront-mortgage-firms-liquidity?srnd=premium

 

is it not too late to make FnF the stabilizing force?  Perhaps exercise warrants to bring in MBS / Tsy spread for refinancing.  Govt inject $50bn from Mnuchin fund to pay for those warrants (reinvesting a portion of the $100bn plus profits from sr pref).  Retire Sr pref.  Raise additional Jr pref from private equity.  FnF absorbs some targeted losses, calms mortgage system to a degree.

@IG

 

"Govt inject $50bn from Mnuchin fund to pay for those warrants (reinvesting a portion of the $100bn plus profits from sr pref)"

 

what your theory here?  exercise price of warrants are $100

[Midas79]

is it not too late to make FnF the stabilizing force?  Perhaps exercise warrants to bring in MBS / Tsy spread for refinancing.  Govt inject $50bn from Mnuchin fund to pay for those warrants (reinvesting a portion of the $100bn plus profits from sr pref).  Retire Sr pref.  Raise additional Jr pref from private equity.  FnF absorbs some targeted losses, calms mortgage system to a degree.

 

This just reads like a common shareholder wishlist.

 

1) Paying $50B for the warrants defeats the entire purpose of exercising them, especially in conjunction with retiring the seniors

2) Raising capital with mostly or all common shares makes far more sense than using more prefs:

  2a) Both Calabria and Sheila Bair have said in the past that common equity is the best measure of a financial institution's financial health (this is another argument for why there will be a conversion, incidentally)

  2b) Too many prefs in the capital structure (there are already $33B there!) seriously devalues the commons anyway

  2c) If FnF need to raise capital in pieces at later dates, as capital requirements change, it is much easier to do it with pref issuances (FnF are no strangers to pref issuances, as evidenced by the many different series in existence); doing piecemeal common raises is hard because each one makes prior holders worse off, lowering the offering price. That means issuing commons now and prefs later as needed

3) Reinvesting the $100B of profits means another equity stake (that's what "investment" means), but that runs counter to retiring the seniors

[Luke 532]

CECL delay included in bill. see attached.

 

For banks only?  Read this thread.  Thoughts?

[beaufort]

https://www.theglobeandmail.com/business/international-business/us-business/article-mnuchin-says-us-not-bailing-out-airlines-boeing-not-using-federal/

 

Mnuchin said Boeing said it does not intend to participate in the federal programme. “Boeing has said that they have no intention of using a programme that may change in the future,” Mnuchin said. “These are things that the companies need to come and ask us for. ... Right now Boeing’s saying they don’t need it.”

 

Boeing is undoubtedly aware of the NWS.

[Luke 532]

CECL delay included in bill. see attached.

 

For banks only?  Read this thread.  Thoughts?

 

I just found Tim Howard's response.  He thinks FHFA will do it: https://howardonmortgagefinance.com/2020/01/16/how-we-got-to-where-we-are/#comment-14815

The Federal Reserve, FDIC and Comptroller of the Currency issued a joint press release today that among other things said, “Banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years.” I’m assuming that FHFA will grant similar flexibility to Fannie and Freddie, although to my knowledge it has not yet done so.

[Cox022]

marketwatch: Fannie Mae, Freddie Mac to roll out new mortgage-payment deferral option for homeowners facing financial trouble

 

https://www.marketwatch.com/story/fannie-mae-freddie-mac-to-roll-out-new-mortgage-payment-deferral-option-for-homeowners-facing-financial-trouble-2020-03-27?siteid=yhoof2&yptr=yahoo

 

At the direction of the Federal Housing Finance Agency, the two mortgage companies are rolling out payment deferrals, which will serve as an alternative to forbearance and loan modifications for borrowers who are struggling to remain current on their home loans.

 

Borrowers who are granted a payment deferral will see their delinquent principal and interest payments deferred. That balance will come due either on the mortgage maturity date, the pay-off date or upon the sale of the property, whichever comes first. The term of the loan and payment schedule will remain the same.

 

Under a traditional repayment plan, borrowers are required to spread out their past-due amount over several months in addition to their normal monthly payments. With a forbearance plan, a borrower can suspend or lower payments for a specified time period, but must make full or partial payments for the amount owed during that time when the forbearance period ends.

 

Servicers, which are the companies who collect monthly mortgage payments from borrowers, will be able to start evaluating borrowers to see if they are eligible for payment deferrals beginning on July 1.

 

To qualify, borrowers must have encountered a financial hardship that has been resolved, and they must have the capacity to make existing monthly mortgage payments based on their contract and not require a payment reduction unlike a loan modification or forbearance.

 

Additionally, the mortgage must have been originated at least 12 months prior to the evaluation date. Borrowers must be between 30 and 60 days delinquent and have not received a previous deferral nor failed a non-disaster related loan modification.

 

The new deferred payment service would benefitted both borrowers and mortgage investors, said Mike Fratantoni, chief economist for the Mortgage Bankers Association, a trade group that represents lenders.

 

“Payments are then tacked on to the end of the mortgage loan, so the investors are made whole through this but it gives the borrowers a chance to get back on their feet,” he said.

 

Sorry for all the text but I thought it was good, clear info.

[investorG]

Well, first return the stolen NWS money as a start. Second, stop fighting the wrong in the court.

 

https://www.bloomberg.com/news/articles/2020-03-26/mnuchin-forms-task-force-to-confront-mortgage-firms-liquidity?srnd=premium

 

is it not too late to make FnF the stabilizing force?  Perhaps exercise warrants to bring in MBS / Tsy spread for refinancing.  Govt inject $50bn from Mnuchin fund to pay for those warrants (reinvesting a portion of the $100bn plus profits from sr pref).  Retire Sr pref.  Raise additional Jr pref from private equity.  FnF absorbs some targeted losses, calms mortgage system to a degree.

@IG

 

"Govt inject $50bn from Mnuchin fund to pay for those warrants (reinvesting a portion of the $100bn plus profits from sr pref)"

 

what your theory here?  exercise price os warrants are $100

 

Either reset the prior agreement to include a warrant exercise price of ~$6 (~$50bn) or wind down the old deal -- where the govt made > $100bn profits -- and start a new deal in the $500bn mnuchin fund where a chunk of $ goes in for warrants (with a long term profit motive as well).   

 

We have been beaten down over many years but Emily's general view of the situation isn't wrong, the comprehensive treatment of FnF and its minority shareholders for 12 years has been a national travesty.  The offset is, though, going forward, a FnF flush with capital would need to help the system and be willing to eat into some of that capital in doing so.

 

Midas, I don't want to argue because this is just a suggestion rather than a likely scenario but imo it's time to move quickly in something that is reasonable and can help all interested parties rather than insist on something pure.

[beaufort]

@midas

 

With the C preferred conversion, was the deal take the twenty day average closing price for common and then convert the prefs on that basis with a discount to par value applied across the board to all prefs, regardless of yield?

 

If yes, do you have a memory of whether there was any indication it was coming?

[Luke 532]

Latest from Tim Pagliara:

[orthopa]

CECL delay included in bill. see attached.

 

For banks only?  Read this thread.  Thoughts?

 

I just found Tim Howard's response.  He thinks FHFA will do it: https://howardonmortgagefinance.com/2020/01/16/how-we-got-to-where-we-are/#comment-14815

The Federal Reserve, FDIC and Comptroller of the Currency issued a joint press release today that among other things said, “Banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years.” I’m assuming that FHFA will grant similar flexibility to Fannie and Freddie, although to my knowledge it has not yet done so.

 

Its my understanding at this point FnF are included in the CECL delay as long as this is still declared an emergency correct? I believe that was the language in the bill.  The Difference now with the banks is a definitive 2 year time period?

 

With the Fed stepping up and helping the servicers the $$$ that would be originally be coming from mortgage payments will just be coming from the the fed through the services to FnF right?

[Midas79]

@midas

 

With the C preferred conversion, was the deal take the twenty day average closing price for common and then convert the prefs on that basis with a discount to par value applied across the board to all prefs, regardless of yield?

 

If yes, do you have a memory of whether there was any indication it was coming?

 

Here is the post that I analyzed the C conversion deal. It should answer your questions.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg382592/#msg382592

 

Short version: yield somewhat mattered (the 6.5% series got 85% of par, the >8% ones got 95%) and the market clearly didn't see it coming.

[beaufort]

@midas

Much appreciated. 

[orthopa]

@midas

 

With the C preferred conversion, was the deal take the twenty day average closing price for common and then convert the prefs on that basis with a discount to par value applied across the board to all prefs, regardless of yield?

 

If yes, do you have a memory of whether there was any indication it was coming?

 

Here is the post that I analyzed the C conversion deal. It should answer your questions.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg382592/#msg382592

 

Short version: yield somewhat mattered (the 6.5% series got 85% of par, the >8% ones got 95%) and the market clearly didn't see it coming.

 

This and the liquidity seems to explain the premium that FNMAS has had most of the time over the other issues. Although now with volatility there is a much wider gap compared to the lower dividend issues.

[Luke 532]

Latest from Tim Pagliara:

 

Some notes from the Pagliara call. Grant (don't know last name) was also on call.  He works with Tim and interestingly worked at Fairholme for >9 years and was intimately involved in litigation between Treasury and Fairholme, as well as working on the GSE purchase proposal that Fairholme and others offered back in 2013-2014.

 

-All can be done very quickly and provides Fed additional relief.

-Could be done in 60-90 days or less, just make the calls and put in place with the help of Houlihan Lokey

-I know the BOD's at F&F are chomping at the bit to get back to work

-We've had decisions in place for awhile, just this is the threshold moment that forces those actions.

-We can respond to the issue because the plans and work for many years has been done, so not panic to try to plan it, work has already been done.  Just hit the button.

-Election impact the urgency "no," basically enough incentive to get this done for both political parties

-We have all the info we need to get this done now.

-Virus impact: beyond 90 days, beyond 180 days, what it does to all aspects of economy... book of biz will offset losses they'll have to help refinance homes.  They are in good positions, but need capital from the private sector.

-Longer the virus crisis goes the more and more important GSE's become.  (my thought: so maybe odds of getting this done quickly increase the longer the virus economic crisis continues).

-I think it could happen very quickly.  Biggest challenge in this situation is inertia.

-This is a glass more than half full situation, not glass half empty.

-We and dozens of other stakeholders ready to provide capital and support.

-The solution is more impactful and helpful now than ever before.

-At 12:15 of video, Tim also mentioned everybody taking a haircut.  Prefs 10-15% haircut from stated value (par), so that's 85%-90% of par.

[TonyG]

Thanks for posting Luke

[Guest cherzeca]

I think the context of the reform process has definitely changed.  treasury may still be pinching pennies with GSEs, but it is hard to see how they can justify that with the need to get GSEs fully capitalized, and this crisis has established this for certain.  so exactly how this crisis affects the process is still opaque to me, but the whole adversarial process with MBA types lobbying for status quo (or nationalization as per bloomie) seems to me to be tone deaf at this point.  there may be a greater receptivity to federal backing of mbs guaranty, but this kumbaya period in congress will dissipate soon enough and I dont see that getting passed in this congress.  so nothing will be done of GSE substance until this crisis dissipates but I do expect a greater willingness to recapitalize GSEs later this year.

[Guest Covid-19_Survivor]

@midas

 

With the C preferred conversion, was the deal take the twenty day average closing price for common and then convert the prefs on that basis with a discount to par value applied across the board to all prefs, regardless of yield?

 

If yes, do you have a memory of whether there was any indication it was coming?

 

Here is the post that I analyzed the C conversion deal. It should answer your questions.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg382592/#msg382592

 

Short version: yield somewhat mattered (the 6.5% series got 85% of par, the >8% ones got 95%) and the market clearly didn't see it coming.

 

This and the liquidity seems to explain the premium that FNMAS has had most of the time over the other issues. Although now with volatility there is a much wider gap compared to the lower dividend issues.

 

I always laughed at the premium folks were willing to pay for FNMAS and FMCKJ, thinking there was no way divi's would ever be restored. Personally, when I went seeking to buy (like I did 2 days ago w/ FMCCM), I just grab the lowest trader. Midas research sheds a new light on things.

[orthopa]

Latest from Tim Pagliara:

 

Some notes from the Pagliara call. Grant (don't know last name) was also on call.  He works with Tim and interestingly worked at Fairholme for >9 years and was intimately involved in litigation between Treasury and Fairholme, as well as working on the GSE purchase proposal that Fairholme and others offered back in 2013-2014.

 

-All can be done very quickly and provides Fed additional relief.

-Could be done in 60-90 days or less, just make the calls and put in place with the help of Houlihan Lokey

-I know the BOD's at F&F are chomping at the bit to get back to work

-We've had decisions in place for awhile, just this is the threshold moment that forces those actions.

-We can respond to the issue because the plans and work for many years has been done, so not panic to try to plan it, work has already been done.  Just hit the button.

-Election impact the urgency "no," basically enough incentive to get this done for both political parties

-We have all the info we need to get this done now.

-Virus impact: beyond 90 days, beyond 180 days, what it does to all aspects of economy... book of biz will offset losses they'll have to help refinance homes.  They are in good positions, but need capital from the private sector.

-Longer the virus crisis goes the more and more important GSE's become.  (my thought: so maybe odds of getting this done quickly increase the longer the virus economic crisis continues).

-I think it could happen very quickly.  Biggest challenge in this situation is inertia.

-This is a glass more than half full situation, not glass half empty.

-We and dozens of other stakeholders ready to provide capital and support.

-The solution is more impactful and helpful now than ever before.

-At 12:15 of video, Tim also mentioned everybody taking a haircut.  Prefs 10-15% haircut from stated value (par), so that's 85%-90% of par.

 

Thanks, it seems with investing just the opposite of what you expect to happen, happens. I do see the angle of the GSEs needing to be recapped as an urgent matter but this soon? Maybe its because its been pounded into our heads but I expect just the opposite. Looking at it now I say, wait we still need the capital rule, the recap plans, a PSPA amendement.

 

At what point does Mnuchin have to say uncle? Is he really just waiting on a palatable political climate due to the election? I would love this to be a sooner then later thing but what makes him give in? Isnt the fed backstopping all of this and letting everything run as is?

 

I guess another way to look at it is what has made this so damn difficult to do and why has it taken so long? Has that changed in the last couple of weeks? If we are to believe the this really was a priority for this administration, and they were going to act without legislation then any avenue to get this done should be taken if it opens.

[DRValue]

 

Tim P. seems to think preferred conversion adds 26 to 28 billion in capital. This appears to be the same mistake acg made, and Tim H. says conversion is capital neutral, which I agree with. Has Tim P. missed something? Seems pretty clear cut if preferred are classified as equity.

[investorG]

IMO release from conservatorship, consent decrees, capital rules, IPOs, jr pref conversions are probably unrealistic for at least 2020 and perhaps longer.    Just like Calabria says.  These exercises could interfere with other more pressing matters.

 

To accomplish the government's objectives, it would have helped if FnF was in a strong position.  Since they are not, what's the best they could do right now:  exercise warrants.  inject some of mnuchin's $$$ pot.  retire sr pref which would settle lawsuits and remove distractions / wasted DOJ efforts.  raise incremental pref later this year.    what would this do a) calm nerves  b) tighten MBS - Tsy spreads  and c) allow FnF to take on losses to help out borrowers and/or other market participants.

[Guest cherzeca]

exchange of jrs for common is capital neutral.  and the term is exchange not conversion, since juniors are not convertible.

 

extinguishing seniors should eliminate capital, but over $300B has already ridden out of dodge through these instruments.  wonder if in connection with their elimination there can be an amendment to the senior terms which apply those NWS dividends to a reduction in principal balance to avoid a capital hit.  after all cancelling the seniors is exactly recharacterizing former dividends as principal reductions

 

Midas knows this stuff better than i

[Midas79]

Yes, an exchange (thanks cherzeca, I will start using that term instead of conversion) is core capital neutral. Core capital = non-cumulative preferred stock par value + common stock par value + additional paid-in capital + retained earnings, by statute. The exchange just moves the $33B of junior pref par value from the first category to the third because common stock par value is zero for FnF.

 

As for how FnF's capital stands now, core capital, the only one that matters for us imo, was -$170B at the end of 2019. Cancelling or converting the seniors to common adds $193B; the amount on the senior pref line on the balance sheet (doesn't count towards core capital) would move to retained earnings (does count). This gives the $23B total equity you see on the balance sheets. That still leaves us around $100B short of what I expect Calabria to require (the midpoint of Watt's two alternatives of $103.5B and $139.5B).

 

There are still plenty of reasons for exchanging the prefs for commons:

1) It removes $33B of liquidation preference and $2B of dividend preference from in front of the re-IPO commons. That is a huge, huge deal imo. If I were a big-money investor interested in participating in the re-IPO, I would insist on this, and I wouldn't care about the exchange ratio because it wouldn't affect me. It is also $33B cheaper than redeeming the prefs (which accomplishes the same goal).

2) It allows FnF to tailor the weight preferred shares have in the post-release capital structure. $33B might already be too much for Calabria's liking, and given the rather high dividend rates on many series, it would make sense to convert at least those. Perhaps it would leave the really low-div series in place, though.

3) In times of stress FnF might need to raise additional capital. It will be much easier to do this with prefs than commons (using commons means open-ended dilution fears forever), so having fewer prefs in the capital structure to begin with makes this more feasible. This is also why I think the equity raise will be either all or mostly commons.

4) It's a way to placate junior pref plaintiffs in the lawsuits.

5) Both Calabria and Sheila Bair, albeit several years ago, defined a financial institution's safety and soundness in terms of its common equity. While an exchange is neutral from the perspective of statutory core capital, it does add $33B to common equity.

 

https://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

Page 44: "the safety and soundness of institutions, which is defined as common equity"

 

Bair's comments about common equity were about banks and Basel III, not FnF, but she has long been outspoken about wanting big banks to specifically have lots of common equity. Calabria choosing her as one of the directors was very telling to me. The directors will be in charge of the capital restoration plans, and if Bair holds true to form, she will both recommend a junior for common exchange and an equity raise involving all or mostly common shares.

[Guest cherzeca]

+1 midas

[Luke 532]

+1 midas

+1