Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3861917 times)

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10660 on: October 17, 2018, 11:32:28 AM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.





blackcoffee

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10661 on: October 17, 2018, 12:26:42 PM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.

Oh you disagree? Interesting.

So I know how the accounting works for MBS and I know how impairment works and I know how impairment testing by auditors works. I know how modeling MBS works and CMBS as well. Also corporate CLOs if you want to go there but I don't. I've always been more focused in real estate. I know accountants like to think no one could possibly understand this. I can. I also know how to make those losses look better or worse depending on the desired outcome using modeling software - take your pick but there is Intex, Bloomberg or Trepp.

Have you read this? https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

It's pure financial obfuscation. Sure maybe some big MMs have phds doing econometric gymnastics into their models but at the end of the day, you're still trying to predict the future and whatever assumptions go into the model will sway the results.

Cut out all the noise and the only thing that matters is cap rates. Cap rate composition is the risk free rate and a spread. When the risk free rate is sustained at 0 for a long time then you will eventually see capitulation and cap rates will drop - and when you have systemic depress of rates for a long time the thirst for yield will drive cap rates ever lower, meaning the risk premium shrinks and puts ever more downward pressure on cap rates and upward pressure on property prices. Couple that with global ZIRP and undoubtedly, you're going to see rampant asset price appreciation - if you look to Moody's/REAL CPPI you'll have seen that post 08 basically unabated.

All that is to say - that the losses projected on the MBS holdings at the GSEs in 2008 were so severe to cause such huge impairment that it didn't come to fruition or ever have come close in the entire history of lending on real estate, so you like accounting so what does that tell you? It tells me that whomever implemented those loss assumptions knew that they'd have to pressure their auditors to accept such an amazing outside of the norm assumption on the fair value of those positions. And did you know that the same audit firm in this case recently settled shareholder lawsuits over this very issue? Meaning that they knew they were going to lose and lose face on what they signed off on. Yay accountants! nailed it.

Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED, but that is beside the point. All of those projected losses was subsequently reversed, is not something that you seem to be contemplating in your disagreement. Further they were used as the justification to force HERA down the throats of Congress and the unrepayable loans onto the books of the GSEs.

So feel free to disagree all you want. I would say you're dead wrong. I don't understand the hubris of thinking that you would know better than the former CFO of these companies. Read his book - he's not lying. 

Also the banks don't give a flying f about the yields on the bonds, they want the market to generate the fees on the originations to then put the risk of said originated collateral to the gov't. Meaning when their crap loans default the taxpayers would then again be on the hook.

So I think I might have this pegged closer to truth here but feel free to refute points above.

Eye4Valu

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10662 on: October 17, 2018, 03:02:06 PM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.

Oh you disagree? Interesting.

So I know how the accounting works for MBS and I know how impairment works and I know how impairment testing by auditors works. I know how modeling MBS works and CMBS as well. Also corporate CLOs if you want to go there but I don't. I've always been more focused in real estate. I know accountants like to think no one could possibly understand this. I can. I also know how to make those losses look better or worse depending on the desired outcome using modeling software - take your pick but there is Intex, Bloomberg or Trepp.

Have you read this? https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

It's pure financial obfuscation. Sure maybe some big MMs have phds doing econometric gymnastics into their models but at the end of the day, you're still trying to predict the future and whatever assumptions go into the model will sway the results.

Cut out all the noise and the only thing that matters is cap rates. Cap rate composition is the risk free rate and a spread. When the risk free rate is sustained at 0 for a long time then you will eventually see capitulation and cap rates will drop - and when you have systemic depress of rates for a long time the thirst for yield will drive cap rates ever lower, meaning the risk premium shrinks and puts ever more downward pressure on cap rates and upward pressure on property prices. Couple that with global ZIRP and undoubtedly, you're going to see rampant asset price appreciation - if you look to Moody's/REAL CPPI you'll have seen that post 08 basically unabated.

All that is to say - that the losses projected on the MBS holdings at the GSEs in 2008 were so severe to cause such huge impairment that it didn't come to fruition or ever have come close in the entire history of lending on real estate, so you like accounting so what does that tell you? It tells me that whomever implemented those loss assumptions knew that they'd have to pressure their auditors to accept such an amazing outside of the norm assumption on the fair value of those positions. And did you know that the same audit firm in this case recently settled shareholder lawsuits over this very issue? Meaning that they knew they were going to lose and lose face on what they signed off on. Yay accountants! nailed it.

Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED, but that is beside the point. All of those projected losses was subsequently reversed, is not something that you seem to be contemplating in your disagreement. Further they were used as the justification to force HERA down the throats of Congress and the unrepayable loans onto the books of the GSEs.

So feel free to disagree all you want. I would say you're dead wrong. I don't understand the hubris of thinking that you would know better than the former CFO of these companies. Read his book - he's not lying. 

Also the banks don't give a flying f about the yields on the bonds, they want the market to generate the fees on the originations to then put the risk of said originated collateral to the gov't. Meaning when their crap loans default the taxpayers would then again be on the hook.

So I think I might have this pegged closer to truth here but feel free to refute points above.

Interesting, thanks blackcoffee

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10663 on: October 17, 2018, 03:20:13 PM »
Josh Rosners take on Phillips comments (FWIW):

@JoshRosner
People are reading too much into @CraigPhillipsDC's comment. They aligned w/ OMB's statements re legislative goals. He didn't suggest they would sit on their hands pending legislation. I expect administrative reform is a separate track & UST may begin work with a post Watt @FHFA.

@JoshRosner
Watt has not proactive & was willing to sit & wait for legislation for which there are no votes. I suspect they decided, given it is so close to the end of his term, it would be easier to coordinate policy goals when they have a counterparty who shares their staging & priorities.

@JoshRosner
Until recently, GSE & mortgage market reform were not near the top of the priority list. Given it has now moved up the list there isnít much need to rush rather than wait until after Jan 6th. I believe they are engaged in planning but I donít think they see a reason rush today.


lazy commentary imo.  it seems clear now why watt's utility or Moelis (administratively) hasn't been acted on or advanced in 2018 even though jump start expired -- Mnuchin wants the MBA plan with the govt g'tee.  they tried to get going on it with corker about 10 months ago (see joe light articles and preferred stock pump) but they decided the landscape was too difficult with henserlang and the House right wingers in charge.  well that's possibly going to change in 2.5 months, and so now the repubs should be more aligned with toomey as the player and so its just convincing (bribing) Maxine waters.

beg to differ.  Warner was on board with MBA plan but corker insisted on breaking GSEs up in order to implement the plan...which is why the multiple drafts of the legislation never reached final copy

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10664 on: October 17, 2018, 03:24:26 PM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.

it turns out tax reform and sanctions were the 2 biggest things on mnuchin's plate. as someone said awhile ago, who the next fhfa director will be a very interesting tell

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10665 on: October 17, 2018, 03:32:45 PM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.

Oh you disagree? Interesting.

So I know how the accounting works for MBS and I know how impairment works and I know how impairment testing by auditors works. I know how modeling MBS works and CMBS as well. Also corporate CLOs if you want to go there but I don't. I've always been more focused in real estate. I know accountants like to think no one could possibly understand this. I can. I also know how to make those losses look better or worse depending on the desired outcome using modeling software - take your pick but there is Intex, Bloomberg or Trepp.

Have you read this? https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

It's pure financial obfuscation. Sure maybe some big MMs have phds doing econometric gymnastics into their models but at the end of the day, you're still trying to predict the future and whatever assumptions go into the model will sway the results.

Cut out all the noise and the only thing that matters is cap rates. Cap rate composition is the risk free rate and a spread. When the risk free rate is sustained at 0 for a long time then you will eventually see capitulation and cap rates will drop - and when you have systemic depress of rates for a long time the thirst for yield will drive cap rates ever lower, meaning the risk premium shrinks and puts ever more downward pressure on cap rates and upward pressure on property prices. Couple that with global ZIRP and undoubtedly, you're going to see rampant asset price appreciation - if you look to Moody's/REAL CPPI you'll have seen that post 08 basically unabated.

All that is to say - that the losses projected on the MBS holdings at the GSEs in 2008 were so severe to cause such huge impairment that it didn't come to fruition or ever have come close in the entire history of lending on real estate, so you like accounting so what does that tell you? It tells me that whomever implemented those loss assumptions knew that they'd have to pressure their auditors to accept such an amazing outside of the norm assumption on the fair value of those positions. And did you know that the same audit firm in this case recently settled shareholder lawsuits over this very issue? Meaning that they knew they were going to lose and lose face on what they signed off on. Yay accountants! nailed it.

Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED, but that is beside the point. All of those projected losses was subsequently reversed, is not something that you seem to be contemplating in your disagreement. Further they were used as the justification to force HERA down the throats of Congress and the unrepayable loans onto the books of the GSEs.

So feel free to disagree all you want. I would say you're dead wrong. I don't understand the hubris of thinking that you would know better than the former CFO of these companies. Read his book - he's not lying. 

Also the banks don't give a flying f about the yields on the bonds, they want the market to generate the fees on the originations to then put the risk of said originated collateral to the gov't. Meaning when their crap loans default the taxpayers would then again be on the hook.

So I think I might have this pegged closer to truth here but feel free to refute points above.

@blackcoffee
how do you see a cat fed guarantee on GSE (and other guarantor) mbs securities working?  I have done private label pool securitizations where there are support classes and the super senior is most creditworthy, but I am not aware that the GSEs guarantee tranched securities in this fashion (if they do then I guess feds would guarantee all or portion of super seniors).  or would the feds simply say hey you can put the mbs to us but get 3 cents on the dollar?  so the guarantee is triggered by an absence of alternative buyers in the presence of a cat event

blackcoffee

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10666 on: October 17, 2018, 03:51:04 PM »

right because that gives the banks the superfecta referenced previously - they not only want moral hazard on the entity level, which they already have and no one seems to notice,  they want it on the securities they create so they can get beneficial treatment for holding those debt instruments and also race to the bottom on the collateral quality in those vehicles because after all it's just another put to the gov't for them so who cares right?

While I understand you're attempting to be level headed about what's happening, you shouldn't discount the idea that this breaks something that is working to move the entire industry into an untested alternative. Currently the beneficiaries of the charters will likely not want to be primed and have a decently sized lobby themselves.

I would also add that it doesn't make sense to put the guarantee on the individual pools, because similar to CRTs, that takes away the ability to spread the risk premiums from an enterprise level and moves it to a security level, which means it will be too lumpy to be efficient and will serve to raise mortgage costs for every borrower.

So while your lamentations about what we want or whatever are noted, there are real structural issues that have yet to be addressed by the MBA proposals, because they don't really care about the details, they just want to kill the roadblocks and those are the GSEs. Read and understand Howard on CRTs. If you have good for you, if you haven't please do. Doing so makes clear that these are 1/2 baked ideas with 1 overarching goal - to get the market. I would also suggest reading Howard's book for background, it is pretty wild even if it's pretty wonkish.

ok, one more...since questions were raised.

i agree it's complicated.  but mnuchin was hired for 2 reasons imo: loyalty to trump and to do this. 

regarding CRTs, i believe you and Tim howard that they are not productive.  they were used mainly by the companies and Mel Watt to stand in front of congress and pretend to say that they were doing stuff that reduced taxpayer risk.  in fact, mnuchin doesnt appear to like CRTs -- when asked in a congressional hearing, he chose not to endorse them.

on other things, tim howard is biased imo as a legacy FnF homer.  for instance, I cringe when I read things (from others and maybe also tim - i'm not sure) like 'on a cash basis, FnF didnt need a bailout' and there were accounting issues that caused the 2008 takedown.  I disagree.  the way accounting works for financials is when things are bad you take loan loss provisions in advance of the actual losses coming through.  things were worse than bad then, who knew how large the eventual losses would be.  I also think the implicit guarantee structure was / is bad.   in addition, the securities, with the explicit govt backstop, could have lower yields than MBS pre-crisis when the govt gty was implicit, which rarely gets mentioned and is a potential negative for the big banks.  I think mel watt's utility concept is best but apparently mnuchin doesnt.

Oh you disagree? Interesting.

So I know how the accounting works for MBS and I know how impairment works and I know how impairment testing by auditors works. I know how modeling MBS works and CMBS as well. Also corporate CLOs if you want to go there but I don't. I've always been more focused in real estate. I know accountants like to think no one could possibly understand this. I can. I also know how to make those losses look better or worse depending on the desired outcome using modeling software - take your pick but there is Intex, Bloomberg or Trepp.

Have you read this? https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

It's pure financial obfuscation. Sure maybe some big MMs have phds doing econometric gymnastics into their models but at the end of the day, you're still trying to predict the future and whatever assumptions go into the model will sway the results.

Cut out all the noise and the only thing that matters is cap rates. Cap rate composition is the risk free rate and a spread. When the risk free rate is sustained at 0 for a long time then you will eventually see capitulation and cap rates will drop - and when you have systemic depress of rates for a long time the thirst for yield will drive cap rates ever lower, meaning the risk premium shrinks and puts ever more downward pressure on cap rates and upward pressure on property prices. Couple that with global ZIRP and undoubtedly, you're going to see rampant asset price appreciation - if you look to Moody's/REAL CPPI you'll have seen that post 08 basically unabated.

All that is to say - that the losses projected on the MBS holdings at the GSEs in 2008 were so severe to cause such huge impairment that it didn't come to fruition or ever have come close in the entire history of lending on real estate, so you like accounting so what does that tell you? It tells me that whomever implemented those loss assumptions knew that they'd have to pressure their auditors to accept such an amazing outside of the norm assumption on the fair value of those positions. And did you know that the same audit firm in this case recently settled shareholder lawsuits over this very issue? Meaning that they knew they were going to lose and lose face on what they signed off on. Yay accountants! nailed it.

Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED, but that is beside the point. All of those projected losses was subsequently reversed, is not something that you seem to be contemplating in your disagreement. Further they were used as the justification to force HERA down the throats of Congress and the unrepayable loans onto the books of the GSEs.

So feel free to disagree all you want. I would say you're dead wrong. I don't understand the hubris of thinking that you would know better than the former CFO of these companies. Read his book - he's not lying. 

Also the banks don't give a flying f about the yields on the bonds, they want the market to generate the fees on the originations to then put the risk of said originated collateral to the gov't. Meaning when their crap loans default the taxpayers would then again be on the hook.

So I think I might have this pegged closer to truth here but feel free to refute points above.

@blackcoffee
how do you see a cat fed guarantee on GSE (and other guarantor) mbs securities working?  I have done private label pool securitizations where there are support classes and the super senior is most creditworthy, but I am not aware that the GSEs guarantee tranched securities in this fashion (if they do then I guess feds would guarantee all or portion of super seniors).  or would the feds simply say hey you can put the mbs to us but get 3 cents on the dollar?  so the guarantee is triggered by an absence of alternative buyers in the presence of a cat event

the GSEs already issue deals with entity level guarantees backing the entire pool, however the structures of the pool cuts off at the Super senior level as you envisioned. The Freddie K program is one example of this - the GSEs sell the guaranteed tranches and non- guaranteed tranches below the supers, typically BBB rated if rated at all. The difference here is that the GSEs can kick out bad loans and more importantly set the standard of the collateral that goes into said pools. So they still control the 'quality' of the product.

The point of my screed above is that what the banks want, again referencing Howard's superfecta, is a pool by pool level (as opposed to entity level (read Fannie or Freddie)) guarantee.

So every time they make a loan they know if they can get it into ANY pool Private label included (which is critical) that will open them up to go even more aggressive because part of the superfecta is the way that they'd be required to reserve against holding those positions.

How it works today, is that banks can't afford to hold the riskiest portion because of the untenable reserves so they find 3rd party buyers to do it.

In this new scenario they would gladly hold the riskiest portions because it would all be backed by the taxpayer anyways - more structural moral hazard for them, more taxpayers lose, and it's all done in such a confusing way that no one really understands it. Hooray.

To your question about the mechanics of the cat guarantee in a downside scenario, what will matter more is how the structure is set up up front. There are a lot of unanswered problematic questions about how that would work. However the points about pooled vs CRT risk reserve structures are applicable here - the pooled is in every way better for a myriad of reasons not least of which is that you have to convince private investors to buy CRTs and because they're counter cyclical - no one will buy them when the music stops. If the pool level guarantee only covers 3 cents on the dollar then the market will price it as such and no one will believe that it's actually a backstop.

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10667 on: October 17, 2018, 04:51:18 PM »
I agree legislative reform will be difficult to pass / low probability event regardless of the makeup of congress (all gop, half gop/dems, all dems). The bigger question is what happens if they fail down this path that OMB/Whitehouse/Phillips discussed? Will they turn to administrative options or not?


yes, likely.  but not until the legislative route fails in either late 2019 or 2020. it's legislative or bust for the next 12+ months imo.  this is complex and really important stuff, in their view it needs to go through congress rather than a few figures building a (reversible) solution administratively. 

they should tweak/end the NWS now though.
Tweak only leads to comfort and more status quo. End, instead, plays out of the comfort zone.

Wiggins

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10668 on: October 18, 2018, 07:37:51 AM »
re: blackcoffee's statement: "Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED"
You cited Adam Spittler's forensic accounting. Well I wonder if you and others listened to his interview on Quoth the Raven's podcast recently? He doesn't just say that FnF didn't need the bailout; he takes it one step further that conservatorship actually hurt the companies because after conservatorship they were used as a vehicle to by toxic mortgages from the failing banks. It's tantamount to administering poison to cure the patient. And then, he goes even further than that. According to him, once the value of securities in FnF plummeted, the small banks holding preferred stock as tier 1 capital went under, largely because of the write-downs of this capital. When those banks failed they were taken over by the government and their assets -including the now virtually worthless FnF preferred shares- were auctioned off. And one of the major auction buyers was J. Paulson. So, it makes you wonder if this was all planned since if anyone was hooked into the economic and political chicanery it would be JP. I suspect that it was, and that the plan is to implement an MBA-type plan while paying off investors such as Paulson who bought preferred shares. The whole thing is disgusting, but it all seems to be playing out.

Howard speaks to what should happen if we had an honest dialogue, but I suspect the darker view of his politically savvy friend Maloni describes the future more accurately. Probably the only thing that could prevent this ultimate theft is proper discovery in the courts and subsequent media attention. And that fact would explain the bare-knuckle court tactics of Treasury. But the plaintiffs are likely more focused on getting paid rather than saving FnF, so ultimately when offered a deal they'll break off before trying to save the GSEs. It makes me wonder why they haven't just paid the preferred shareholders off and get on with the plan. I think that's where we are now, and that's what Mnuchin and Phillips have in store after the elections.

As far as the details of the MBA-type plan for FnF being economically unsound, as discussed here and by Howard in his blog and book, my dark view is that this is more of a long-term problem to be addressed when the next recession occurs. And these engineers will cross that bridge when they come to it with their new "tool kit."

blackcoffee

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #10669 on: October 18, 2018, 07:54:48 AM »
re: blackcoffee's statement: "Now to be fair, the reason those losses didn't materialize is mostly because of the massive intervention by the FED"
You cited Adam Spittler's forensic accounting. Well I wonder if you and others listened to his interview on Quoth the Raven's podcast recently? He doesn't just say that FnF didn't need the bailout; he takes it one step further that conservatorship actually hurt the companies because after conservatorship they were used as a vehicle to by toxic mortgages from the failing banks. It's tantamount to administering poison to cure the patient. And then, he goes even further than that. According to him, once the value of securities in FnF plummeted, the small banks holding preferred stock as tier 1 capital went under, largely because of the write-downs of this capital. When those banks failed they were taken over by the government and their assets -including the now virtually worthless FnF preferred shares- were auctioned off. And one of the major auction buyers was J. Paulson. So, it makes you wonder if this was all planned since if anyone was hooked into the economic and political chicanery it would be JP. I suspect that it was, and that the plan is to implement an MBA-type plan while paying off investors such as Paulson who bought preferred shares. The whole thing is disgusting, but it all seems to be playing out.

Howard speaks to what should happen if we had an honest dialogue, but I suspect the darker view of his politically savvy friend Maloni describes the future more accurately. Probably the only thing that could prevent this ultimate theft is proper discovery in the courts and subsequent media attention. And that fact would explain the bare-knuckle court tactics of Treasury. But the plaintiffs are likely more focused on getting paid rather than saving FnF, so ultimately when offered a deal they'll break off before trying to save the GSEs. It makes me wonder why they haven't just paid the preferred shareholders off and get on with the plan. I think that's where we are now, and that's what Mnuchin and Phillips have in store after the elections.

As far as the details of the MBA-type plan for FnF being economically unsound, as discussed here and by Howard in his blog and book, my dark view is that this is more of a long-term problem to be addressed when the next recession occurs. And these engineers will cross that bridge when they come to it with their new "tool kit."

I did listen to the QTR podcast and Howard's book seems me to have guided ASPIT and not the other way around but that is neither here nor there. I was a little disappointed by the podcast actually but that is on Chris more than ASPIT. Don't get me wrong it was fine, it just wasn't good enough.

Some people say that the HP's heads hitting the floor move on the GSEs is what sparked the entire crisis in the first place. As their regulator at the time said, the GSEs would have had enough capital to weather any storm and their exposures at the time were limited. However if you have a Goldman led consortium move in that controls the treasury... well they don't really care how many bodies they create - they want it all.. and to your point about small banks getting crushed because of their GSE pref holdings... well that's all the better for them now isn't it?

And yes it doesn't seem to matter what's best or right anymore - the courts have been an absolute disgrace in this regard. It really hammers home the fact that the US has fallen deeper and deeper into a financial corporatocracy wherein the banks are the ones really pulling all the strings, the corporations are simply herded in the right direction and if they get out of line... well guess who can pull their funding?

You'd have to be asleep to believe it.