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

[Midas79]

squares perfectly.  ask yourself some questions. 

 

is Collins 5thC decision in effect now? YES.

 

(snip)

 

ok.  i went off track in your first question - I thought the Collins 5th Circuit en banc decision goes on 'hold' when the SC decides to review the case.  no?

 

I went off track on the first question too. I didn't know whether or not the en banc decision would still be in effect if Collins was settled or dropped. I was under the impression that it had already been vacated by SCOTUS's granting of cert, but it appears I was wrong. Thanks for the explanation, Chris.

[Guest cherzeca]

to belabor the point, say collins is settled before SCOTUS rules. then Biden sends C a removal at will notice, and C says pound sand. then Biden seeks to enforce removal in court. which court?  likely not a DC district court as a 5thC holding is not binding on it.  again, C would be smart to preempt this by filing himself in DC fed district court. that would really gum up the works, time wise. if C doesn't do this, then Biden files in a fed district court in 5thC, where collins en banc is binding, which will follow Collins unless it can be persuaded by C that fhfa post Seila is not subject to Seila.  same thing in 5thC. the case goes up to 5thC which likely says nothing in Seila changes our opinion, and then C files for cert before SCOTUS, which either takes case or leaves it alone, at which point Biden wins.  takes time

[Guest cherzeca]

now an interesting question might be, would any of C's actions, after receipt of Biden removal letter and before final judicial action finding fhfa unconstitutionally structured, be subject to invalidation (backward relief for Biden administration)?  and I think the answer is yes.  which is why C has to do everything he needs to do to set recap/release in motion before Biden inauguration, so that it is just the GSEs that take action pursuing recap thereafter. anything C does before attempted removal would be insulated from attack, and anything GSEs do pursuant to that would likewise.

[Midas79]

I am listening to Richard Baris's show from this morning, and he said something interesting. A little after the 1:59:00 mark, he said that the DOJ has been "totally dominated by liberals", as an explanation for why Barr isn't doing more.

 

Is it possible that this is (at least part of) why the DOJ has been fighting back so much in the NWS lawsuits? How much control over them does Mnuchin have in those cases?

 

Though I suppose this doesn't explain why FHFA has also been fighting back, at least during the tenures of Otting and Calabria, because they use private law firms.

[COBFInfinity]

to belabor the point, say collins is settled before SCOTUS rules. then Biden sends C a removal at will notice, and C says pound sand. then Biden seeks to enforce removal in court. which court?  likely not a DC district court as a 5thC holding is not binding on it.  again, C would be smart to preempt this by filing himself in DC fed district court. that would really gum up the works, time wise. if C doesn't do this, then Biden files in a fed district court in 5thC, where collins en banc is binding, which will follow Collins unless it can be persuaded by C that fhfa post Seila is not subject to Seila.  same thing in 5thC. the case goes up to 5thC which likely says nothing in Seila changes our opinion, and then C files for cert before SCOTUS, which either takes case or leaves it alone, at which point Biden wins.  takes time

 

When you talk of settlement, are you just talking of Collins plaintiffs or are we still looking at a global settlement which was the expectation all along? Is it realistic to get a global settlement before December 9 just based on how many parties are involved and the time needed to hammer that, not even accounting for the possibility that some plaintiffs might be willing to gamble on the courts at this point?

[Guest cherzeca]

to belabor the point, say collins is settled before SCOTUS rules. then Biden sends C a removal at will notice, and C says pound sand. then Biden seeks to enforce removal in court. which court?  likely not a DC district court as a 5thC holding is not binding on it.  again, C would be smart to preempt this by filing himself in DC fed district court. that would really gum up the works, time wise. if C doesn't do this, then Biden files in a fed district court in 5thC, where collins en banc is binding, which will follow Collins unless it can be persuaded by C that fhfa post Seila is not subject to Seila.  same thing in 5thC. the case goes up to 5thC which likely says nothing in Seila changes our opinion, and then C files for cert before SCOTUS, which either takes case or leaves it alone, at which point Biden wins.  takes time

 

When you talk of settlement, are you just talking of Collins plaintiffs or are we still looking at a global settlement which was the expectation all along? Is it realistic to get a global settlement before December 9 just based on how many parties are involved and the time needed to hammer that, not even accounting for the possibility that some plaintiffs might be willing to gamble on the courts at this point?

 

if you get a satisfactory settlement no reason to gamble on courts.  the major Ps are repped by same law firm, so those Ps will be part of settlement.  this has been discussed above, only Ps likely to hold out are set for trial 2022, so they can wait their turn

 

[allnatural]

Bloomberg article titled "Fannie-Freddie Plan Could Face Race to Finish After Biden’s Win" this morning reported that a 4th amendment has been in the works for months now.

 

"To avoid that outcome, shareholders’ fervent hope is that Mnuchin and Calabria before Jan. 20 come to terms on an amendment to Fannie’s and Freddie’s bailout agreements that Biden can’t unwind. Such an amendment could reduce the government’s massive stake in the companies, making it easier for shareholders to see a higher value on their own stock.

 

Officials at the FHFA and Treasury Department have been working on such an amendment for months, said a person familiar with the matter, and long have been in agreement on some of the issues that such an amendment would contain."

[orthopa]

Bloomberg article titled "Fannie-Freddie Plan Could Face Race to Finish After Biden’s Win" this morning reported that a 4th amendment has been in the works for months now.

 

"To avoid that outcome, shareholders’ fervent hope is that Mnuchin and Calabria before Jan. 20 come to terms on an amendment to Fannie’s and Freddie’s bailout agreements that Biden can’t unwind. Such an amendment could reduce the government’s massive stake in the companies, making it easier for shareholders to see a higher value on their own stock.

 

Officials at the FHFA and Treasury Department have been working on such an amendment for months, said a person familiar with the matter, and long have been in agreement on some of the issues that such an amendment would contain."

 

This plays into the delaying after election thesis from last summer. Mark and Steve have been "working" on an amendment for 14 months. Nice to finally see in print some understanding that it has long been known what the contents of such amendment would be. They just needed to know when they would "come to the agreement".

 

Any guesses on what has long been in agreement?

 

Mine are retirement of Sr. Preferred and pre paid faith and credit fee based on overages of 10% moment paid. No idea on what % that is. In my mind any conversion of Sr Preferred to common would come with capital plan but I guess the agreement could come with some consideration otherwise? The agreement has to be final in language though.

[allnatural]

Assuming the final PSPA is similar to what Phillips had in mind and discussed earlier in the year.

[Luke 532]

Assuming the final PSPA is similar to what Phillips had in mind and discussed earlier in the year.

 

+1

[Luke 532]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

[Guest cherzeca]

Bloomberg article titled "Fannie-Freddie Plan Could Face Race to Finish After Biden’s Win" this morning reported that a 4th amendment has been in the works for months now.

 

"To avoid that outcome, shareholders’ fervent hope is that Mnuchin and Calabria before Jan. 20 come to terms on an amendment to Fannie’s and Freddie’s bailout agreements that Biden can’t unwind. Such an amendment could reduce the government’s massive stake in the companies, making it easier for shareholders to see a higher value on their own stock.

 

Officials at the FHFA and Treasury Department have been working on such an amendment for months, said a person familiar with the matter, and long have been in agreement on some of the issues that such an amendment would contain."

 

This plays into the delaying after election thesis from last summer. Mark and Steve have been "working" on an amendment for 14 months. Nice to finally see in print some understanding that it has long been known what the contents of such amendment would be. They just needed to know when they would "come to the agreement".

 

Any guesses on what has long been in agreement?

 

Mine are retirement of Sr. Preferred and pre paid faith and credit fee based on overages of 10% moment paid. No idea on what % that is. In my mind any conversion of Sr Preferred to common would come with capital plan but I guess the agreement could come with some consideration otherwise? The agreement has to be final in language though.

 

I dont see 4thA dealing with capital structure (meaning status of junior preferred).  I do think it is crucial that Calabria also release into consent decrees, and he is such a wild card that I dont know if he will do it even if he sees it as furthering his effort

[investorG]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

 

While that would be nice and just, the Jr pref @ 30-35% of par with sellers everywhere is a clear signal that nothing is likely to happen and we're on a hold course until the June SC ruling. 

 

We were likely abandoned by the Trumpers who narrowly lost the EC by ~50k votes due imo in part to their repeated punting of this issue and the inability for FnF to support the economy in a more robust manner this year.

 

[orthopa]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

 

While that would be nice and just, the Jr pref @ 30-35% of par with sellers everywhere is a clear signal that nothing is likely to happen and we're on a hold course until the June SC ruling. 

 

We were likely abandoned by the Trumpers who narrowly lost the EC by ~50k votes due imo in part to their repeated punting of this issue and the inability for FnF to support the economy in a more robust manner this year.

 

Market is certainly in wait and see mode. Capital rule being released may see a bump but the PSPA will be the big one. Probably wont see a ton of sellers on that day if price still significantly before par. In mnuchin and calabria we trust. If capital rule is released soon my belief and % of certainty the PSPA follows before Dec 9th goes up. If its Dec 8th and capital rule isnt out yet I think most will become frustrated and re default back to wait and see mode, ie 20-30% of par. This is all based on rumor of course but once the ball gets set in motion and inertia is gone my bet it continues on.

[Wiggins]

On Nov 9th Tim Howard wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

[COBFInfinity]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

I don't know who MTH is, but he/she is counting on SCOTUS a lot more than I am. I would much rather have a decent settlement now than shoot for the moon with SCOTUS and risk coming away with nothing.

[Jcmeg35]

I think he is referring to Tim Howard.

 

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

I don't know who MTH is, but he/she is counting on SCOTUS a lot more than I am. I would much rather have a decent settlement now than shoot for the moon with SCOTUS and risk coming away with nothing.

 

[investorG]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

This likely reflects Mr. Tim Howard's political views.  Also IMO his primary objective is advancing FnF's homeownership mission over the shareholder / NWS issues.   

[Wiggins]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

I don't know who MTH is, but he/she is counting on SCOTUS a lot more than I am. I would much rather have a decent settlement now than shoot for the moon with SCOTUS and risk coming away with nothing.

 

Tim Howard.

 

I am focusing on what I see as most likely, which is that the lame duck session doesn't accomplish anything significant. I don't know that for sure so I could be wrong. But the administration can't even decide they're in a lame duck session yet. It's chaos. Unlike most folks here I have no faith in Mnuchin.

 

My point is not what Tim Howard's preference is, it's that he sees this as a good thing, and so should we.

[orthopa]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

This likely reflects Mr. Tim Howard's political views.  Also IMO his primary objective is advancing FnF's homeownership mission over the shareholder / NWS issues. 

 

I think the cat bird seat would be PSPA, settlement, consent decree and eventual lower cap requirements for investors. Once converted to common preferred holders can pine for lower cap requirements.

 

Why would they wait for after the election to do reform if they were not going to anyway? Why not extend the comment period if they were not going to do anything in the lame duck period? Why pre announce another amendment to the PSPA if they were not going to do anything? Why mention consent decree if they were not going to do anything? Why is it reported there has long been agreements on parts of the PSPA for months? Why put out a Treasury Plan if they were going to do nothing. Why does Calabria say he has to follow the law if they were going to do nothing?

 

I would have to have good answers to the above before I would believe they would do nothing.

[onyx1]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

This likely reflects Mr. Tim Howard's political views.  Also IMO his primary objective is advancing FnF's homeownership mission over the shareholder / NWS issues. 

 

I think the cat bird seat would be PSPA, settlement, consent decree and eventual lower cap requirements for investors. Once converted to common preferred holders can pine for lower cap requirements.

 

Why would they wait for after the election to do reform if they were not going to anyway? Why not extend the comment period if they were not going to do anything in the lame duck period? Why pre announce another amendment to the PSPA if they were not going to do anything? Why mention consent decree if they were not going to do anything? Why is it reported there has long been agreements on parts of the PSPA for months? Why put out a Treasury Plan if they were going to do nothing. Why does Calabria say he has to follow the law if they were going to do nothing?

 

I would have to have good answers to the above before I would believe they would do nothing.

 

More questions that would need good answers:

 

Why would UST Reform Plan label ending the conservatorship timeline "as promptly as practicable"?

Why would MC say on September 14, 2020, there is an "Urgent need to build capital at the enterprises and advance housing reform".

[Wiggins]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

This likely reflects Mr. Tim Howard's political views.  Also IMO his primary objective is advancing FnF's homeownership mission over the shareholder / NWS issues. 

 

I think the cat bird seat would be PSPA, settlement, consent decree and eventual lower cap requirements for investors. Once converted to common preferred holders can pine for lower cap requirements.

 

Why would they wait for after the election to do reform if they were not going to anyway? Why not extend the comment period if they were not going to do anything in the lame duck period? Why pre announce another amendment to the PSPA if they were not going to do anything? Why mention consent decree if they were not going to do anything? Why is it reported there has long been agreements on parts of the PSPA for months? Why put out a Treasury Plan if they were going to do nothing. Why does Calabria say he has to follow the law if they were going to do nothing?

 

I would have to have good answers to the above before I would believe they would do nothing.

 

More questions that would need good answers:

 

Why would UST Reform Plan label ending the conservatorship timeline "as promptly as practicable"?

Why would MC say on September 14, 2020, there is an "Urgent need to build capital at the enterprises and advance housing reform".

 

@orthopa @onyx

I sincerely hope you guys are correct but I don't invest on hope.

The capital plan was a big lie, and that big lie was endorsed by FSOC (Mnuchin). You honestly think they're too stupid to realize the GSEs are not banks? Further, Calabria and Mnuchin have both gone on to say the GSEs "failed." That was a lie also. Further, Mnuchin said in 2016 they will get the GSEs out of Government control "relatively soon." How many more times does the boy need to cry wolf? These are demonstrably verifiable falsehoods, and Tim Howard has cut them to shreds (i.e. bank-like capital, the "failure" of the GSEs). So with all that as history, you think they're telling the truth about ending the conservatorship soon and in a chaotic lame duck session? That's a heavy lift. You may be correct, but...

 

 

[Wiggins]

In my humble opinion, the major mistake made by a lot of GSE investors here and elsewhere is the failure to realize the continuity between the Democratic and Republican administrations toward GSE policy. Remember both parties are bankrolled by the same paymasters, which includes the large banks. Both parties have inexorably held to the demonstrably false view that the GSEs failed and/or caused the financial crisis. When I started commenting here in 2016 I was focused on the lawsuits while most others were focused on the politics of the administration. So far, those banking on the latter have been disappointed, while those depending on the former have been pleased. This administration has a few months left; we shall see.

 

Banking on politics is akin to emotional investing. The rule of law is far sturdier ground.

[SnarkyPuppy]

In my humble opinion, the major mistake made by a lot of GSE investors here and elsewhere is the failure to realize the continuity between the Democratic and Republican administrations toward GSE policy. Remember both parties are bankrolled by the same paymasters, which includes the large banks. Both parties have inexorably held to the demonstrably false view that the GSEs failed and/or caused the financial crisis. When I started commenting here in 2016 I was focused on the lawsuits while most others were focused on the politics of the administration. So far, those banking on the latter have been disappointed, while those depending on the former have been pleased. This administration has a few months left; we shall see.

 

Banking on politics is akin to emotional investing. The rule of law is far sturdier ground.

 

Sure but there is also the counter-incentives for the banks (JPM/MS) executing the largest IPOs of all time. 

 

The reason I've been comfortable in this investment is that there are certain conditions which must eventually be resolved.  One such condition is that an IPO cannot occur without certainty of the capital structure going forward including restructuring of the governments senior preferred position at the top of the capital stack, as well as a reasonable basis for expected common equity returns at the bottom of the capital stack.  This is extremely important - and I think part of what people who have avoided this investment miss. 

 

Additionally, as capital continues to build each quarter, the doomsday risk (receivership) becomes less and less possible (if it was ever practical at all).

 

For these reasons, I've always viewed this as a low-downside (i.e. dead money with some MTM volatility) and high-upside outcome.  It's just a matter of when the upside occurs.  But even at today's prices (3x to par), it can take 10 years from now to achieve an upside outcome and still have a respectable IRR (~11.6% annualized through 10 years).  If the slow passage of time has proved anything, it's proven that through multiple administrations that there is no alternative to the general current GSE model - and congress will not make wholesale changes because they cannot. 

 

There continues to be multiple paths of margin of safety anchoring the true downside:

- There is no alternative

- Litigation

- As capital builds, downside risk is further reduced

[onyx1]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

This likely reflects Mr. Tim Howard's political views.  Also IMO his primary objective is advancing FnF's homeownership mission over the shareholder / NWS issues. 

 

I think the cat bird seat would be PSPA, settlement, consent decree and eventual lower cap requirements for investors. Once converted to common preferred holders can pine for lower cap requirements.

 

Why would they wait for after the election to do reform if they were not going to anyway? Why not extend the comment period if they were not going to do anything in the lame duck period? Why pre announce another amendment to the PSPA if they were not going to do anything? Why mention consent decree if they were not going to do anything? Why is it reported there has long been agreements on parts of the PSPA for months? Why put out a Treasury Plan if they were going to do nothing. Why does Calabria say he has to follow the law if they were going to do nothing?

 

I would have to have good answers to the above before I would believe they would do nothing.

 

More questions that would need good answers:

 

Why would UST Reform Plan label ending the conservatorship timeline "as promptly as practicable"?

Why would MC say on September 14, 2020, there is an "Urgent need to build capital at the enterprises and advance housing reform".

 

@orthopa @onyx

I sincerely hope you guys are correct but I don't invest on hope.

The capital plan was a big lie, and that big lie was endorsed by FSOC (Mnuchin). You honestly think they're too stupid to realize the GSEs are not banks? Further, Calabria and Mnuchin have both gone on to say the GSEs "failed." That was a lie also. Further, Mnuchin said in 2016 they will get the GSEs out of Government control "relatively soon." How many more times does the boy need to cry wolf? These are demonstrably verifiable falsehoods, and Tim Howard has cut them to shreds (i.e. bank-like capital, the "failure" of the GSEs). So with all that as history, you think they're telling the truth about ending the conservatorship soon and in a chaotic lame duck session? That's a heavy lift. You may be correct, but...

 

That's a reasonable way to look at our situation.  On the other hand, maybe SM underestimated the time it would take to end the conservatorships.  As a business person new to DC, I can understand. 

 

Trump's order didn't come out until March 2019, and the UST Reform Plan appeared in September 2019.  The Plan strongly suggests that a new Capital Rule was needed to replace the Watt rule from 2018.  Add months to formulate a new plan, COVID-19, comment period, and a desire (I presume) to avoid political risk until after November 3, and here we are.  To me, none of that signals a change in direction as much as confirmation that DC runs on a different schedule. 

 

Will that schedule push us past the point of no return?  I don't think so, but we'll find out soon.  Signaling from MC is full speed ahead: "The Federal Housing Finance Agency will continue its mission to release the GSEs Fannie Mae and Freddie Mac from conservatorship, even under a Biden presidency, a spokesperson from FHFA said."  Although nothing from SM, I am somewhat comforted by the fact that when UST decided the PSPA needed to be post-election, they signaled it to the press.  As of today, I haven't seen any such signal that would likely accompany a delay or a reversal of the published UST Housing Reform Plan.