Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4176012 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15000 on: March 30, 2020, 10:16:37 AM »
From a sell-side note today.

"Forbearance kicking the credit loss can down the road?
The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

I have been thinking about GSE loss reserve creation over the next couple of Qs.

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

CECL will be deferred by fhfa given that it is deferred for basically all other financial institutions.  should get clarity of this when GSEs report 1q.

GSEs absolutely have to pay to mbs pools forbearance amounts.  but this is a separate credit question to loss reserve creation.  I suppose GSEs could just be conservative and assume that anyone seeking forbearance is a credit risk.  but omitting a payment on one's own (default) is a lot different from a credit viewpoint than taking advantage of a statutory right to defer payment


investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15001 on: March 30, 2020, 10:25:01 AM »
From a sell-side note today.

"Forbearance kicking the credit loss can down the road?
The forbearance program announced by the FHFA essentially would allow the GSEs to defer the recognition of losses on mortgages guaranteed by the GSEs for the next 12 months if the borrowers can verbally confirm financial hardship or health-related impacts. We believe this program could significantly reduce the near-term loss recognition across all agency-backed mortgages, including potential losses on credit-risk transfer (CRT) investments that are widely owned by hybrid mortgage REITs facing significant MTM risk."

I have been thinking about GSE loss reserve creation over the next couple of Qs.

first, a big benefit is CECL "mitigation" (an overused term) for 2 years.  big plus for B/S optics.

second, how much of the "forbearance" amounts are reserved against? ie do the GSEs simply assume that the forbearance amount will be paid and the deferral is simply a restructuring of the mortgage terms, so no loss reserve creation?  rolg asked Tim Howard this and his reply was essentially a question of conservatism/judgment.  there is a big difference imo between nonpayment due to by a federally mandated forbearance, and an obligor's default in payment.  while GSEs do have to make payments to mbs pools in place of mortgagor payments, these are borrowed at extremely low interest rate cost, so not a big delta arising from that

The FhFa hasn't yet delayed cecl for the GSEs, unless I missed something. 

Also are you sure about your last sentence?  Do the GSEs have to pay before they are delinquent?  Aren't the mortgage servicers at risk here, and why they are asking for the [100?]bn facility?

CECL will be deferred by fhfa given that it is deferred for basically all other financial institutions.  should get clarity of this when GSEs report 1q.

GSEs absolutely have to pay to mbs pools forbearance amounts.  but this is a separate credit question to loss reserve creation.  I suppose GSEs could just be conservative and assume that anyone seeking forbearance is a credit risk.  but omitting a payment on one's own (default) is a lot different from a credit viewpoint than taking advantage of a statutory right to defer payment

Ok.   I assume then the full amount of the forebearance cash flow does not flow through the P&L / retained earnings?   the asset is written up on the b/s by the amount of the cash outlay since they will (in theory) receive those $ at later point, it's just a timing mismatch?

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15002 on: March 30, 2020, 11:51:59 AM »
interest expense for higher amount of borrowing does flow through income statement of course.

as for debit/credit of forbearance, there "should" be offsetting contra-accounts, crediting cash and debiting the forbearance amount receivable on the left side of B/S.  but it could go another way...lawyer not accountant here.

no one has mentioned this, but the added mbs principal amount should give rise to incremental G fee receipts

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15003 on: March 30, 2020, 01:18:43 PM »
while I am aware that tim pagliara has rendered an important service with IU and he certainly is in contact with P counsel, I have not been particularly impressed with his understanding of the litigation, or seen him as having given cogent analysis re possible outcomes.  I think you may be overbuying pagliara is you think any of his speculation is worth more than that of anyone on this thread.

I was assuming that Pagliara's speculation was based on said contact with the plaintiffs' counsel, i.e. he is sharing what their goals are. But perhaps his podcast was more of a "keep the faith" message than actual inside knowledge of just how things are going to happen.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15004 on: March 30, 2020, 01:42:35 PM »
as covid crisis continues, no one wants the perfect to be the enemy of the good.  and settlement is good.  but I sure want to see the Seila scotus opinion first!

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15005 on: March 30, 2020, 03:13:17 PM »
Word is American Airlines applying for 12B in aid with warrants.  Pretty soon our situation will look ridiculous and will hopefully be rectified.
"You are life, You are life, in You death has lost its sting.  I'm running to Your arms, I'm running to Your arms.  The riches of Your love will always be enough, nothing compares to Your embrace.  Light of the world, forever reign." Listen: https://www.youtube.com/watch?v=ADuWzd7x25c

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15006 on: March 30, 2020, 05:13:32 PM »
Word is American Airlines applying for 12B in aid with warrants.  Pretty soon our situation will look ridiculous and will hopefully be rectified.

"protect the taxpayer" admonition of GSE-haters loses some of its gravitas when you are putting through multi-trillion dollar stimulus plans on a bi-partisan basis

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15007 on: March 31, 2020, 09:48:08 AM »
but it should be lost on no one that the MBA-represented mortgage servicers are squealing while the GSEs are doing business as usual.

From "seysmont" https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/ePKPF6x8uCc
All I know is servicers did something that makes FHFA shun them and the FED shun them. They are not getting any help now and the only people talking about help and how it will happen is them. So they pissed off the FED and FHFA. That 3 months they are talking about forbearance is just them, the bill provides 12 months rolling into another 12 months. They did something that caused this treatment. Their funding is not in the bill with all the lobbying. I don't know what they did, but they did something unacceptable for the feds to provide timely help when everyone is getting help.

It's not an accident the bill provides for servicers to support 12-24 months forbearance with no funding. That was a decision that was made, and it was made for political reasons.
"You are life, You are life, in You death has lost its sting.  I'm running to Your arms, I'm running to Your arms.  The riches of Your love will always be enough, nothing compares to Your embrace.  Light of the world, forever reign." Listen: https://www.youtube.com/watch?v=ADuWzd7x25c

Wiggins

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15008 on: March 31, 2020, 02:37:04 PM »
https://www.insidemortgagefinance.com/articles/217526-the-feds-buying-spree?v=preview
Buying agency-backed MBSs helps the agencies.

Also, the forbearance is not "forgiveness" at this point. It's just deferring P&I and tacking on at the end. This is helpful to mortgage holders as it entails no lump sum payments. It doesn't hurt the GSEs.
https://www.fhfa.gov/Homeownersbuyer/MortgageAssistance/Pages/Coronavirus-Assistance-Information.aspx

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15009 on: March 31, 2020, 06:50:37 PM »
Thanks,  Do you have an opinion on whether or not the current environment changes for better or worse the expected path out of conservatorship? and if what Pagliara is suggesting could happen or likely? It sounds like all we need is a PSPA amendment this summer right?

1) Given the post just above mine, I don't think the current environment will affect the timeline much if at all. Calabria tweeted a link to his Bloomberg interview titled "Fannie, Freddie Conservatorship Exit Not Impacted by Virus"; I'm going to consider that a big tell.
https://twitter.com/MarkCalabria/status/1242953955447013376
2) Some clowns on iHub seem to think that Pagliara was not referring to a pref-for-common share exchange when he mentioned a 10-15% haircut, but that's really the only thing he could have been talking about; FnF don't have the capital to do a subpar redemption. I do believe an exchange is quite likely, for reasons outlined in the post you replied to. Or were you not referring to a share exchange?
3) I believe there are three things we must have before any share exchange and re-IPO: seniors gone (either cancelled or converted to commons; this also kills the NWS), remaining lawsuits where FnF are liable settled (I think this is only Perry, please correct me if I'm wrong; also, killing the NWS should moot many of the cases), and a finalized capital rule.

No I wasn't so much referring to the share exchange. I do think that will happen also. Was just more or less talking about the rapid resolution Pagliara was referring to via a PSPA to get rid of the seniors and an exchange before the finalization of the capital rule, capital plan, etc. Although that would be a nice surprise I still don't see that happening at this point. There obviously has been a plan and cadence to all of this ever since the president requested a plan for the GSEs a year ago. Although it certainly seems to have been delayed multiple times I still feel like all parties involved follow the path they have plotted out unless there is a highly unusual set of circumstances that arises(yes I know there is a worldwide pandemic going on LOL. )

That being said some preferred issues allowing 4-5xs returns at near par. I will continue adding.