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

[Guest Covid-19_Survivor]

Someone/something is slowly accumulating the preferred on a weekly basis. Each day there seems to be some huge volume in a single issue compared to normal volume. 5 million share block in FNMAT today. Dividend wise when compared to FNMAS its trading pretty cheap.

 

If the same person is buying all of these large blocks and buying them from various sellers, then someone is accumulating. If one person is selling all of these large blocks to various buyers, then someone is liquidating. I'm not sure how you would be able to tell the difference by looking at the charts. It's also possible it's some combination of the two.

 

Accumulation/Distribution indicator shows that FNMAT transaction as a single 5m sold block. Not that it matters. We'll know we're getting close when Mr. Market's deeper knowledge starts narrowing spread between the higher and lower (and literally non-existent) divi issues. If you believe as I do, insta-25% by flipping FNMAT for FNMAP yesterday.

[Luke 532]

We'll know we're getting close when Mr. Market's deeper knowledge starts narrowing spread between the higher and lower (and literally non-existent) divi issues. If you believe as I do, insta-25% by flipping FNMAT for FNMAP yesterday.

 

Be careful, Survivor.  If scenario 1 below plays out things like FNMAP will be awful.  Not as bad with scenario 2, but won't do as well as higher div prefs. 

 

With that said, gun to my head I bet all prefs convert at same percentage of par (probably 85-100%).  I used to own a large chunk of FMCCL but currently I have zero interest in owning the super-low dividend issues due to the reasons below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

[orthopa]

Latest forbearance data shows less people in forbearance programs and as the unemployment rate continues to decrease hopefully that trend continues. If FnF were to release reserves my assumption would be that wouldn't happen till the end of the year to see how things play out with the first 6 month period. Good news none the less as FnF reserved for 15% of loans in forbearance  and it looks like it may have peaked in the single digits.

 

https://www.cnbc.com/2020/06/05/governments-mortgage-bailout-shrinks.html

[orthopa]

We'll know we're getting close when Mr. Market's deeper knowledge starts narrowing spread between the higher and lower (and literally non-existent) divi issues. If you believe as I do, insta-25% by flipping FNMAT for FNMAP yesterday.

 

Be careful, Survivor.  If scenario 1 below plays out things like FNMAP will be awful.  Not as bad with scenario 2, but won't do as well as higher div prefs. 

 

With that said, gun to my head I bet all prefs convert at same percentage of par (probably 85-100%).  I used to own a large chunk of FMCCL but currently I have zero interest in owning the super-low dividend issues due to the reasons below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

 

There is still some good debate on whether the dividend rate will matter.  With the recent FHFA presentation it appears as if FHFA really likes CET1 capital and the only way the preferred get there is by conversion. As a result I think there is no doubt that all preferred are converted to common.

 

I hold both FNMAH and FNMAJ as a way to hedge on the dividend and have bought over time when FNMAH was cheaper relative to others.

 

Luke where have you heard/read of your example number 2?

[Guest cherzeca]

"With the recent FHFA presentation it appears as if FHFA really likes CET1 capital and the only way the preferred get there is by conversion."

 

good point. 

[investorG]

While I've given up predicting anything FHFA may do re the capital rule. I can't help but think that there is a possibility that Calabria can lower required capital by saying that the G-Fees would need to be so high to hold that level of capital, that it would hurt home buyers. I'd expect Democrats would accept that but I'm sure they'll find some way of objecting.

 

$135b with some tweaks to the rule and paid for backstop seems fair. I'd like to know what the terms of payback would be on the backstop but I'm sure that would come out.

 

Fingers crossed, but not confident.

 

Democrats are likely not eager to accept anything Calabria has to offer.  He's likely fully gone in 7 months.  He's screwing with ordinary citizens' lives by setting capital requirements 6x major stress test losses which will dramatically harm mortgage availability for less-advantaged Americans.    It's especially tone-deaf in the current environment.    I'm surprised some of the participants in the call didn't resign out of protest rather than go along with this program.  What a shame, he could have been a hero.

[Luke 532]

 

I hold both FNMAH and FNMAJ as a way to hedge on the dividend and have bought over time when FNMAH was cheaper relative to others.

 

Luke where have you heard/read of your example number 2?

 

Interesting. FNMAH and FNMAJ are 2 of the 3 series I own (FNMFN being the 3rd).

 

Combination of a lawyer (I think it was David Thompson) suggesting possibility of being paid dividends for previous years, Tim Pagliara suggesting a haircut, and Wiggins (I think it was him) alluding to possibility of 60% + 6 years. 

[Guest cherzeca]

I think everyone is overthinking the pref--->common exchange.  we may not know what the GSEs are going to do until they file their re-IPO S-1.  I think if you own very high div rate pref, you will likely get an acceptable exchange offer.  and yes, you will pay up in the market for this relative assurance.  any more than this is pure speculation. 

[COBFInfinity]

I really don't understand why someone would choose FNMAP or the other low variable rate issues at this point. FNMAP's coupon, if turned on, would be 0.06% right now! You can buy a wide variety of Fannie and Freddie preferreds with coupons of at least 4.5% for a similar price as FNMAP. Until recently, there was at least a noticeable discount for those low coupon issues, but that's mostly gone right now.

 

It would clearly be counterproductive in the long run for these preferred issues to be converted to common at anything close to par. I guess we'll eventually see whether the urgency to meet the capital requirements outweighs what is favorable for long-term company finances.

[Guest Covid-19_Survivor]

We'll know we're getting close when Mr. Market's deeper knowledge starts narrowing spread between the higher and lower (and literally non-existent) divi issues. If you believe as I do, insta-25% by flipping FNMAT for FNMAP yesterday.

 

Be careful, Survivor.  If scenario 1 below plays out things like FNMAP will be awful.  Not as bad with scenario 2, but won't do as well as higher div prefs. 

 

With that said, gun to my head I bet all prefs convert at same percentage of par (probably 85-100%).  I used to own a large chunk of FMCCL but currently I have zero interest in owning the super-low dividend issues due to the reasons below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

 

(2) is silly. They're non-cumulative, dividends will be ignored, imo. And what would they do with FNMAP and FNMAO which are negative yielding? They gonna screw those holders and make them pay FnF? 12 years. It's such a clusterfuck that they really have no choice, all will be treated equally.

 

But just in case, I do own a bunch of FMCKM and FNMFM.

[Guest Covid-19_Survivor]

While I've given up predicting anything FHFA may do re the capital rule. I can't help but think that there is a possibility that Calabria can lower required capital by saying that the G-Fees would need to be so high to hold that level of capital, that it would hurt home buyers. I'd expect Democrats would accept that but I'm sure they'll find some way of objecting.

 

$135b with some tweaks to the rule and paid for backstop seems fair. I'd like to know what the terms of payback would be on the backstop but I'm sure that would come out.

 

Fingers crossed, but not confident.

 

" A top regulator’s plan for boosting Fannie Mae and Freddie Mac’s ability to withstand losses could mean higher costs for many mortgage borrowers, with the burden falling most heavily on those with less wealth and lower incomes, according to economists and housing-finance experts"

https://finance.yahoo.com/news/fannie-freddie-capital-rule-seen-100000805.html

 

Democrats are likely not eager to accept anything Calabria has to offer.  He's likely fully gone in 7 months.  He's screwing with ordinary citizens' lives by setting capital requirements 6x major stress test losses which will dramatically harm mortgage availability for less-advantaged Americans.    It's especially tone-deaf in the current environment.    I'm surprised some of the participants in the call didn't resign out of protest rather than go along with this program.  What a shame, he could have been a hero.

[sholland]

I believe Luke is referring to this:

 

http://www.fairholmefundsinc.com/Documents/PublicConferenceCall20161118.pdf

Fairholme Capital Management Public Conference Call

November 18, 2016

 

 

David Thompson: Yes, there are three standard remedies for a breach of contract.

One is expectancy damages, which puts us in the position that we would have been in if there had been no breach of contract. Two is reliance, which is to give us our out-of-pocket costs. The third is restitution. We’re entitled to present evidence of all three and pick the highest.

But, I want to focus on restitution, because I think that is really the concept that is the most relevant here, and it’s pretty simple. You look at the benefits that the breaching party received – and here the breaching party would be Fannie Mae and Freddie Mac – and the benefit they received was par value, $25 a share. From that, you would potentially subtract any benefits as they would probably argue for an offset of any dividends that the preferred shareholders received. Now as we know, two thirds of this float was issued in 2007 and 2008. So, for those series the offset from par value would be somewhere between zero and five dollars a share. Thus, we could be looking at damages of $20 a share if we are successful on our breach of contract claim and the court agrees with us about restitution.

 

[Guest Covid-19_Survivor]

That doesn't make any sense. Why would Fairholme consider dividend compensation as a remedy when their suit just addresses nws? When nws was instituted jps and common distributions were not allowed nor was the ability to draw down the seniors. That's the equity Fairholme's case is based on, so a favorable ruling should reimburse legal costs and nws overage, but leave the same non-distributing preferreds. Now, I can see Washington fed considering such a remedy and doing so would be valid, as long a shot that case is. But maybe that case is what Fairholme is addressing here?

[Guest cherzeca]

welcome to the thread sholland! and thanks for that snippet on the potential for a restitution remedy for breach of contract.

 

@covid:  you will not contribute much to this thread if you are attacking David Thompson on a matter of law.

[Luke 532]

welcome to the thread sholland! and thanks for that snippet on the potential for a restitution remedy for breach of contract.

 

@covid:  you will not contribute much to this thread if you are attacking David Thompson on a matter of law.

 

+1 to both comments above

[Guest Covid-19_Survivor]

welcome to the thread sholland! and thanks for that snippet on the potential for a restitution remedy for breach of contract.

 

@covid:  you will not contribute much to this thread if you are attacking David Thompson on a matter of law.

 

Excuse me but 1) I didn't attack him 2) I suggested that he may have been addressing another case, and 3) my argument is logical. Care to explain why you don't think it is?

[Guest cherzeca]

welcome to the thread sholland! and thanks for that snippet on the potential for a restitution remedy for breach of contract.

 

@covid:  you will not contribute much to this thread if you are attacking David Thompson on a matter of law.

 

Excuse me but 1) I didn't attack him 2) I suggested that he may have been addressing another case, and 3) my argument is logical. Care to explain why you don't think it is?

 

you addressed a description of what Thompson said and you said it doesnt make any sense.  Thompson was talking about the breach of contract claim and a restitution remedy, which as the way things have shaken out is currently being litigated as an implied obligation of fair dealing claim by Hamish Hume before Lamberth, currently in discovery. 

 

but to the larger point, I believe that none of the cases will reach final judgment, there will be a negotiation and settlement, and all of the cases and claims and their relative strengths will bear on how this settlement will turn out.  I for one dont believe that a claim for past dividends is strong or will appreciably affect the negotiation.  it is the obligation to pay future dividends on the prefs, if one is to be able to pay divs on common, that will be more concerning

[Guest Covid-19_Survivor]

Ok, but why would fair dealing address dividends at all when referring to Fairholme's case? Unless I'm mistaken Fairholme's case is about nws, which occurred 3+ years after common and jps divi's were disallowed, and not about the unfair conservatorship or prior amendments. Why would Thompson even bring them up? I can't see how they're relevant in his case.

 

I did not make it clear but I was addressing this:

 

"Now as we know, two thirds of this float was issued in 2007 and 2008. So, for those series the offset from par value would be somewhere between zero and five dollars a share. Thus, we could be looking at damages of $20 a share if we are successful on our breach of contract claim and the court agrees with us about restitution"

 

Thompson's addressing 2007 and 2008 is why I thought he was referring to another case.

 

I agree with your 2nd paragraph.

[Guest Covid-19_Survivor]

"The first quarter price jumps mostly reflect conditions prior to the coronavirus outbreak and show the strength of the housing demand prior to the pandemic. Even now, due to very limited listings, home prices are showing no signs of buckling,” NAR Chief Economist Lawrence Yun said"

 

https://www.ibtimes.com/real-estate-news-home-prices-increase-first-quarter-despite-coronavirus-impact-2978441

[Guest Covid-19_Survivor]

Ok, but why would fair dealing address dividends at all when referring to Fairholme's case? Unless I'm mistaken Fairholme's case is about nws, which occurred 3+ years after common and jps divi's were disallowed, and not about the unfair conservatorship or prior amendments. Why would Thompson even bring them up? I can't see how they're relevant in his case.

 

I did not make it clear but I was addressing this:

 

"Now as we know, two thirds of this float was issued in 2007 and 2008. So, for those series the offset from par value would be somewhere between zero and five dollars a share. Thus, we could be looking at damages of $20 a share if we are successful on our breach of contract claim and the court agrees with us about restitution"

 

Thompson's addressing 2007 and 2008 is why I thought he was referring to another case.

 

I agree with your 2nd paragraph.

era]s

As I thought. thanks for the win. It's one thing sticking up for your peers, quite another sticking up for their nonsensical pumping.

[Midas79]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

[DRValue]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

 

Wow that is delicious! I take back everything, well most, of what i said about him! I'll enjoy watching that replay :-)

[Midas79]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

 

Wow that is delicious! I take back everything, well most, of what i said about him! I'll enjoy watching that replay :-)

 

Start at 1:42:40 for the exchange. Calabria also defends the capital rule.

https://www.banking.senate.gov/hearings/oversight-of-housing-regulators

 

There's also some about the senior prefs from Warner at 1:59:00. Warner wants Calabria to commit to not wiping out the seniors with no compensation, but Calabria wisely and correctly said that that decision is not his to make but instead Treasury's.

[investorG]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

 

Calabria can talk tough now but in reality -- and we'll know in the next 1 month and 5 months -- Zandi might very have more official impact on FnF's future than Calabria.  I wonder why most politicians and reporters avoid the elephant in the room regarding Calabria's likely shortened tenure.  It doesn't take a lot creativity to see how this will likely go.

[orthopa]

I have to admit, this was delicious. Calabria isn't being swaying by Zandi's BS.

 

Here's the quote: "I would disagree with [Zandi's] analysis and certainly note that Mr. Zandi is on the board of a mortgage insurer that has a strong economic interest in not seeing us do this rule, so I certainly would not put him forward as an unbiased expert in this."

https://twitter.com/midas79_/status/1270381139673432065

 

Calabria can talk tough now but in reality -- and we'll know in the next 1 month and 5 months -- Zandi might very have more official impact on FnF's future than Calabria.  I wonder why most politicians and reporters avoid the elephant in the room regarding Calabria's likely shortened tenure.  It doesn't take a lot creativity to see how this will likely go.

 

If Calabria tenure is shortened measures will be taken to make sure that what is done is irreversable. One other tidbit I thought about was we look to inauguration as a deadline if Trump is not re elected but its likely the March, April time frame if not longer that a new FHFA director is sworn in.

 

The point he made about banks making jumbo mortgages and holding way more capital and their ability to still make money was worth listening to also. I think he will bend some on the capital rule but I don't see him breaking.