Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3156167 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11030 on: December 13, 2018, 07:16:07 AM »
well, thanks for the support guys!  you do realize don't you that I have been consistently wrong regarding predicting court outcomes.  but maybe collins 5th circuit en banc may improve the score.  here is the P supplemental brief filed yesterday:  https://www.dropbox.com/s/jheuxxz7v16bd4m/collins%205th%20cir%20en%20banc%20brief.pdf?dl=0

when a lot of Calabria's Cato writing was done, the GSEs were very different from now...some $trillion of whole loans inventory, non_QMs, fighting a competitive battle with PLS that were gaining market share.  none of that is relevant anymore...indeed, imo, most of the important GSE reforms everyone talks about as being so necessary have already been implemented by FHFA.  now when you hear a congressperson talk about GSE reform, it is hard to understand what they mean with any specificity except political speak for improving tbtf presence in mortgage finance.  so understanding that the great poobahs of policy in congress are extremely unlikely to agree on a bill, it is up to the administration to engineer a return to soundness so that the taxpayer is not on the line via the treasury line of credit.  this is Calabria's task...not to implement some half-baked policy like the fellow travelers in 2012 by trying to achieve what congress couldn't agree on, but simply return to a safe and highly functioning mortgage finance market...and I think he gets it.


cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11031 on: December 13, 2018, 07:25:23 AM »
I would also like to say thank you to @Chereza as well as everyone else for your comments/thoughts over the years - as I have not made any contribution to date (mea culpa!).

While my view is that recap is the most likely scenario in 2019 and beyond, I have also been trying to figure out other outcomes. To @rros and others, I am not sure I fully follow the basis for receivership and the "good bank/bad bank" idea. What "bad assets" would be separated in this scenario and what "good assets" would remain. Under that view what would be liquidated and what would be the rational for this? 

Further to that point, as I think others have mentioned, given how messy that process is, one would have to imagine it would create disruption to the ongoing operations that currently write new business, potentially creating big issues in the US housing market.

as to your point re "messiness", Mnuchin is a banker, and so is Otting if he gets the FHFA directorship as acting director until Calabria is confirmed.  these guys didn't get paid unless a deal closed, or while running OneWest, unless the profits were booked.  there is plenty of GSE fatigue in congress (among those still there, understanding that the two biggest blowhards on issue are out the door), and I just don't think there is appetite in the administration for the implementation of anything dramatic that doesn't have a reasonably high likelihood of success...which is the thesis point of the moelis blueprint.  I would be surprised if Calabria wants to go rogue once installed.

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11032 on: December 13, 2018, 07:58:33 AM »
well, thanks for the support guys!  you do realize don't you that I have been consistently wrong regarding predicting court outcomes.  but maybe collins 5th circuit en banc may improve the score.  here is the P supplemental brief filed yesterday:  https://www.dropbox.com/s/jheuxxz7v16bd4m/collins%205th%20cir%20en%20banc%20brief.pdf?dl=0

when a lot of Calabria's Cato writing was done, the GSEs were very different from now...some $trillion of whole loans inventory, non_QMs, fighting a competitive battle with PLS that were gaining market share.  none of that is relevant anymore...indeed, imo, most of the important GSE reforms everyone talks about as being so necessary have already been implemented by FHFA.  now when you hear a congressperson talk about GSE reform, it is hard to understand what they mean with any specificity except political speak for improving tbtf presence in mortgage finance.  so understanding that the great poobahs of policy in congress are extremely unlikely to agree on a bill, it is up to the administration to engineer a return to soundness so that the taxpayer is not on the line via the treasury line of credit.  this is Calabria's task...not to implement some half-baked policy like the fellow travelers in 2012 by trying to achieve what congress couldn't agree on, but simply return to a safe and highly functioning mortgage finance market...and I think he gets it.

Any legal opinion form someone qualified is better than my ramblings. In any case, we're still right, its just that the deck is stacked against us. I think our investment thesis will be vindicated, but we won't get the legal ruling we should. I just hope we don't set precedent with it.
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DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11033 on: December 13, 2018, 08:07:11 AM »
https://www.barrons.com/articles/podcast-a-13-billion-miss-on-big-tobacco-stocks-51544695274

"In fact, a recent study from CoreLogic found that jumbo mortgages now have lower interest rates than conventional mortgages even after adjusting for the superior characteristics—higher credit scores, higher incomes, and lower loan-to-value ratios—of jumbo borrowers. The reason seems to be an increase in guarantee fees charged by Fannie and Freddie, which offloads risk from taxpayers to borrowers."

G-fees too high? Is this going to be a tool to reduce market share after all? or ae they 'artificially' high as there's no capital in the companies?
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DocSnowball

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11034 on: December 13, 2018, 11:00:15 AM »
Thanks to all of you, the discussion has helped me as an investor no matter what happens here.

FWIW The Barron's article today on Calabria's views mentions prior writings from him on the way out for the GSEs. These lines are interesting on his views where there is some discussion on current shareholders and Government's shares.

First article 2015
https://www.cato.org/blog/we-decide-keep-fannie-mae-around
If We Decide to Keep Fannie Mae Around…
"Break ‘em up.  This might be the most controversial, but simply allowing other institutions to enter the market is unlikely to guarantee sufficient competition.  We broke up Ma Bell.  Under any antitrust standard, Fannie and Freddie are a duopoly.  Unless we are repealing the Sherman Act, the two companies should be broken into at least 6 pieces each and barred from merging.  Existing shareholders would get shares in the off-spring companies"

Second article 2016
https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-reform-incubator/mark-calabria-coming-full-circle-mortgage-finance
"...the goodwill and human capital within the GSEs would remain. Shareholders would also benefit to the extent that the companies had value. This would require the GSEs to meet bank capital levels. Selling off the government’s preferred shares would assist in this regard..."

TwoCitiesCapital

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11035 on: December 13, 2018, 01:11:03 PM »
I can’t find one good reason to be optimistic about Calabria

-   Wrote HERA
-   Repeatedly talks about receivership on two profitable companies
-   Repeatedly talks about ending 30 year mortgage
-   Repeatedly talks about winding them down

Was he not paid by large banks as consultant in the past? I can’t see him survive even one hearing in Senate or Congress with his type of thinking that will bring down housing.

Not that I'm an expert, but his being  a writer of of HERA might actually be a good thing because it's clear that the courts' interpretation goes far beyond anything that was intended by the writers.

I'd also think a wind down scenario would be positive for preferred which would be owed par.

I don't feel strongly one which way or another with the appointment, but it's not a clear negative or positive to me.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11036 on: December 13, 2018, 07:21:33 PM »
here is the P supplemental brief filed yesterday:  https://www.dropbox.com/s/jheuxxz7v16bd4m/collins%205th%20cir%20en%20banc%20brief.pdf?dl=0

Perhaps I am overreacting here, but there might be a hidden bombshell in the footnote on page 8.

Quote
But Treasury cannot lawfully “modify existing contracts...or...waive contract rights vested in the government” absent “a compensatory benefit to the United States.”

This is to refute the prospect that Treasury could just refuse to take a NWS dividend. If this holds, it would mean that Treasury actually cannot just deem the seniors repaid. It would take a court recharacterizing the past NWS payments to get rid of them cleanly like that.

Instead, it appears that Treasury would have to be allowed to convert the seniors into another type of share to fulfill the requirement for a compensatory benefit. If that ends up being commons, and the seniors are converted in their full par amount of $193B, that essentially brings the current commons to zero (a fraction of a penny).

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11037 on: December 13, 2018, 08:04:07 PM »
here is the P supplemental brief filed yesterday:  https://www.dropbox.com/s/jheuxxz7v16bd4m/collins%205th%20cir%20en%20banc%20brief.pdf?dl=0

Perhaps I am overreacting here, but there might be a hidden bombshell in the footnote on page 8.

Quote
But Treasury cannot lawfully “modify existing contracts...or...waive contract rights vested in the government” absent “a compensatory benefit to the United States.”

This is to refute the prospect that Treasury could just refuse to take a NWS dividend. If this holds, it would mean that Treasury actually cannot just deem the seniors repaid. It would take a court recharacterizing the past NWS payments to get rid of them cleanly like that.

Instead, it appears that Treasury would have to be allowed to convert the seniors into another type of share to fulfill the requirement for a compensatory benefit. If that ends up being commons, and the seniors are converted in their full par amount of $193B, that essentially brings the current commons to zero (a fraction of a penny).
What about making that compensatory benefit jump-starting the commitment fee which, so far, has been waived. Briefly, they let go off the 187 bill part of the commitment while they institute a new benefit, unclaimed to this day, in the form of a fee for the 250 +/- bill remaining.

This modification would not contradict that ruling, will eliminate the Srs. and will allow for retaining full earnings. Keeping the value of the warrants fully. In addition, Treasury could claim that as part of the "compensation" for modifying the agreement, their warrants will become immensely valuable.
« Last Edit: December 13, 2018, 08:09:34 PM by rros »

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11038 on: December 13, 2018, 08:59:48 PM »
@midas. I don't think this language prevents a '4th amendment' consensually.  if there is a recap, there is plenty of quid pro quo on all sides, to resolve all claims, promote the resolution of the conservatorship etc. 

the more interesting footnote imo is fn 5.  theoretically with 16 judges and two claims for the same relief, P argues that you could get a majority for relief over the two claims whether or not a majority vote for either claim (hypo: 8 vote for relief on const claim, other 8 vote for relief on APA claim) unique situation

this was an excellent brief...and remember, when a court agrees to hear en banc, that means that a majority of the circuit thinks that the merits panel opinion needs review...which augers well for P
« Last Edit: December 13, 2018, 09:01:26 PM by cherzeca »

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11039 on: December 14, 2018, 06:16:04 AM »
I don't believe its impossible for government to maximize warrant value without screwing commons over w/ dilution. It's all about sequencing. Government can easily arrange it so their 80% comes into play post the dilution/capital raise. So they retain full 80% value w/o any dilution.

He is consistent and it's crystal clear what he believes.

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out.

As an aside I would just make a couple of observations: his point that housing prices would fall under his policies is correct, but his implication that housing would be more affordable is not (actually he doesn't make this point so much, more that there will be less risk, which likely IS correct); because prospective buyers would have less incentives/subsidies to buy a home..so they would be able to AFFORD less. So really this just moves prices; it doesn't necessarily make housing more affordable. And the other observation about Calabria's views (#2) is that since they will take a lot of time, they become subjected to the vagaries of political winds and changing administrations over time, which softens their impact. Thus, in my view the recap is coming, and there's no guarantee the GSEs WON'T remain dominant in housing for years to come. Commons could do quite well.

I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership.

I do agree with Calabria that increasing the housing supply is the best way to promote home ownership.

I don't share your optimism about the commons, though, for many reasons.

  • Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering.
  • Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic.
  • You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario.

Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

That has been my hesitation with owning common too but I dont seem to have a good rebuttal when someone says that a common shareholders interest is aligned with govt warrants so in turn high capital levels would dilute gov stake, unless they somehow get out first. If Sr Preferred declared paid how else does gov extract their pound of flesh besides maximizing warrant value?

Apparently as I go over this in my head Im obtuse and cant sequence this myself. Anyone mind providing a hypothetical example? that being that the common is heavily diluted first and gov retains relative value via warrants?
« Last Edit: December 14, 2018, 06:25:06 AM by orthopa »