Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4175383 times)

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15530 on: May 21, 2020, 02:42:05 PM »
So rough math for Fannie Mae (it's all I can do...)

Total capital requirement 81b
Current equity 14b
Treasury 'refund' 15b
Junior preferred par value 19b
One years 'covid' earnings 6b

Leaves a gap to total capital of 27b.

Right to assume that 27b may be the target common / preferred raise? I know junior preferred could be converted etc..

As this is a new capital paradigm and there are hints of flexibility, retained earnings low dividends and opportunistic capital raises, including debt for the buffers?

The $19B of junior par value is already included in the $14B. That is, everything else that contributes to the $14B adds up to a combined negative $5B.

Also, the refund from Treasury could come in the form of a tax credit. In that case, I believe that Fannie (and Freddie too, of course) would only add their tax savings to capital as they occur. It could very well take 5-6 years to earn all of that refund.

The upshot is that if a capital raise is needed to hit a particular number then the full amount of the refund won't count, only the taxes they would have paid. At best I can see Fannie getting $2.5B of it back per year, and that would be on earnings of around $13B. Also, I think Fannie will make more than $6B this year ($10B imo) but for now I'll use your number.

If the capital raise happens a year from now, adjusting your numbers for these things leaves a gap of $56B: your $27B plus the $19B of prefs and $10B of unearned tax credits.

Another thing to keep in mind is that $81B is Fannie's risk-based capital requirement. For some reason I can't explain, Calabria decided on a minimum capital standard (he calls it the Leverage Capital Requirement) that's higher than the risk-based one: $89B. Now the gap is $64B if that's the milestone.

Similar calculations give a gap of $42B between Freddie's current core capital (once the seniors are dealt with) and their minimum capital requirement of $63B: Freddie has $9B of current equity, $7B of earnings between now and the capital raise, and $5B of earned tax credits.

So I'm getting core capital shortfalls of $64B for Fannie and $42B for Freddie, or $106B combined. This would have to be the size of the capital raise if it occurs a year from now and is designed to hit the minimum capital standard.

Treasury returning the overpayments in cash instead of tax credits would lower each company's numbers by $10B, for a total capital raise size of $86B.
« Last Edit: May 21, 2020, 02:44:31 PM by Midas79 »


DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15531 on: May 21, 2020, 02:50:34 PM »
So rough math for Fannie Mae (it's all I can do...)

Total capital requirement 81b
Current equity 14b
Treasury 'refund' 15b
Junior preferred par value 19b
One years 'covid' earnings 6b

Leaves a gap to total capital of 27b.

Right to assume that 27b may be the target common / preferred raise? I know junior preferred could be converted etc..

As this is a new capital paradigm and there are hints of flexibility, retained earnings low dividends and opportunistic capital raises, including debt for the buffers?

The $19B of junior par value is already included in the $14B. That is, everything else that contributes to the $14B adds up to a combined negative $5B.

Also, the refund from Treasury could come in the form of a tax credit. In that case, I believe that Fannie (and Freddie too, of course) would only add their tax savings to capital as they occur. It could very well take 5-6 years to earn all of that refund.

The upshot is that if a capital raise is needed to hit a particular number then the full amount of the refund won't count, only the taxes they would have paid. At best I can see Fannie getting $2.5B of it back per year, and that would be on earnings of around $13B. Also, I think Fannie will make more than $6B this year ($10B imo) but for now I'll use your number.

If the capital raise happens a year from now, adjusting your numbers for these things leaves a gap of $56B: your $27B plus the $19B of prefs and $10B of unearned tax credits.

Another thing to keep in mind is that $81B is Fannie's risk-based capital requirement. For some reason I can't explain, Calabria decided on a minimum capital standard (he calls it the Leverage Capital Requirement) that's higher than the risk-based one: $89B. Now the gap is $64B if that's the milestone.

Similar calculations give a gap of $42B between Freddie's current core capital (once the seniors are dealt with) and their minimum capital requirement of $63B: Freddie has $9B of current equity, $7B of earnings between now and the capital raise, and $5B of earned tax credits.

Cheers midas. Double counted that 19b real quick! Mustn't skim read.
Close to taking my slim profits on the commons and moving them to prefs on the dip. Pspa amendment and the cap raise terms are the wildcard but that perfect world seems far away now.
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orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15532 on: May 21, 2020, 03:01:34 PM »
the mortgage finance business seems to be holding up very well...housing prices steady, interest rates low.  I understand there are millions of mortgages in forbearance, but congress said have at it...how many of these forborne mortgages become truly delinquent is where rubber meets road, but if you told me that something like 1/3 of the nation's businesses would be shut down and housing prices would remain stable, I would say that is crazy

One of the daily mailers IMF I think it was yesterday made a comment that 20-40% of those mortgages in forbearance were being paid on despite the status. Not sure if this was overall or per an individual servicer but encouraging regardless.  If that is truly the case that provides some upside to reserves that were taken.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15533 on: May 21, 2020, 03:22:48 PM »
I posted a bunch of thoughts after my first read-through of the fact sheet and (what I believe to be) the relevant parts of the full capital rule for us shareholders on Tim Howard's blog. While he does occasionally delete posts, and mine is rather verbose, it is entirely aprpros and should stay up.
https://howardonmortgagefinance.com/2020/05/05/first-quarter-takeaways/comment-page-1/#comment-15295

I'll post a link to that on Twitter too, but probably not until I'm sure that the post will stay up.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15534 on: May 21, 2020, 03:38:09 PM »
To show how crazy the market is last time alot of Fannie preferred traded to the upside at these levels was after Ottings comments in early 2019. Since that time we have had:

1. Calabria sworn in as FHFA head
2. Treasury plan
3. En Banc decision
4. Selia case argued
5. September capital cap PSPA amendment
6. FHFA hired a financial advisor
7. FHFA hired new council
8. FHFA releases capital rule
9. Freddie/Fannie announced RFP to underwrite/come up with recap plan.

Still at these levels market not believing FNMA will be recapped or Preferred get more then ~30% of par. Nuts.

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15535 on: May 21, 2020, 04:02:21 PM »
Very well stated, orthopa.

To show how crazy the market is last time alot of Fannie preferred traded to the upside at these levels was after Ottings comments in early 2019. Since that time we have had:

1. Calabria sworn in as FHFA head
2. Treasury plan
3. En Banc decision
4. Selia case argued
5. September capital cap PSPA amendment
6. FHFA hired a financial advisor
7. FHFA hired new council
8. FHFA releases capital rule
9. Freddie/Fannie announced RFP to underwrite/come up with recap plan.

Still at these levels market not believing FNMA will be recapped or Preferred get more then ~30% of par. Nuts.
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cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15536 on: May 21, 2020, 04:53:13 PM »
the mortgage finance business seems to be holding up very well...housing prices steady, interest rates low.  I understand there are millions of mortgages in forbearance, but congress said have at it...how many of these forborne mortgages become truly delinquent is where rubber meets road, but if you told me that something like 1/3 of the nation's businesses would be shut down and housing prices would remain stable, I would say that is crazy

http://www.mortgagenewsdaily.com/05202020_covid_19_forbearance.asp

5% of those seeking forbearance said they really needed it

"Five percent of homeowners who were approved for forbearance said they wouldn't have been able to make their mortgage payment without it and 26.2 percent said they could have paid their mortgages but would have needed to skip other essential bills. Almost 70 admitted they just wanted a break from their normal payments. That response was most prevalent among Millennials and Gen Xers, at 71 percent."

WB_fan82

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15537 on: May 21, 2020, 04:55:46 PM »
I posted a bunch of thoughts after my first read-through of the fact sheet and (what I believe to be) the relevant parts of the full capital rule for us shareholders on Tim Howard's blog. While he does occasionally delete posts, and mine is rather verbose, it is entirely aprpros and should stay up.
https://howardonmortgagefinance.com/2020/05/05/first-quarter-takeaways/comment-page-1/#comment-15295

I'll post a link to that on Twitter too, but probably not until I'm sure that the post will stay up.

Great post Midas.  The bigger capital deficiency is on the total leverage test, which they can meet with any amount of Tier 1 capital (prefs).  But probably the more difficult capital hole to fill is the smaller deficiency on the risk-weighted test since they still need to gin up tens and tens of billions of CET1 (no prefs).

It is somewhat helpful that the GSEs are organically retaining CET1 capital internally on a pre-tax basis, since the DTAs are used up and that asset is effectively replaced with cash (assuming the higher liquidation pref gets converted to CET1 in the future).

What do you make of this random thought...  Wouldn't the recap be a cinch if the government exercised its warrant for the 80% of common, then did a rights offering at the appropriate common share multiple (X shares for each share owned)?  The government buys its slug of common to maintain the 80% it already has, existing shareholders pump in the small minority of the common raised, the GSEs hit their thresholds (at least the minimum level), and the government can then sell its shares in the market over time?


Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15538 on: May 21, 2020, 06:44:33 PM »
Here is the rest of the post from Tim Howard's blog; he just kept the first 4 points for brevity. I also had forgotten to finish point 5 at the time.

5) I didn't realize that Freddie had so many more off-balance sheet assets than Fannie: $300M worth. Will this have any effect on the capital standards or raises?
6) Table 4 on page 28 is a mess. The numbers $25B, $42B, $209B, and $122B should be $27B, $32B, $145B, and $101B respectively. The first two are in Fannie Mae's 2017 10-K, and the latter two come from Table 3b on page 236 (I multiplied Adjusted Total Assets of $2.524.6T by 4% to get the $101B). Freddie's table (Table 5 on page 30) has similar problems.
7) Normally I would chalk this up to typos and human error, but it actually undermines Calabria's point that his capital standard would have been enough to avoid the peak "losses" that Fannie and Freddie would have sustained after the crisis in 2008. However, his simplistic method of just adding net worth, equity issuance in 2007, and total draws from Treasury ignores that a significant chunk of the Treasury draws were circular, i.e. only taken to pay Treasury its 10% dividend on the seniors. Backing that out might well cancel out the effect of accidentally overstating the capital requirements in Tables 4 and 5 on pages 28 and 30.
8 ) I think Calabria's mistake (or whoever drafted the report) was that they somehow added the PCCBA twice to the Total Capital Requirement in Tables 3a and 3b on pages 235-236. That gives the exact (erroneous) number of $209B for Fannie, and gives $124B for Freddie (close to the $128B shown in Table 5 on page 30).

Covid-19_Survivor

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15539 on: May 21, 2020, 08:18:11 PM »
Nice day of posts from the accountants and lawyers. Thank you.

I, who has neither of these degrees still has an opinion.

1) TH is wrong in thinking this deal sucks. The sizable capitals buffers mean no more treasury backstop, that's why they're so large. That ends, which is fantastic news. Enough of the intervention and control, kinda.

2) Isn't there a g-fee increase proposal with '21 budget?

2a) Money machines.

(minus any g-fee increases)3) 10x (non-covid) earnings is a $160b mc. PMI AGCL sells at 15x earnings which would value us instead at 250B. I suspect Calabria knows the actual value of FnF. Largest IPO in history? why not. Remove the govt and they're solid co's.

4) With FnF being such money makers and our treasury being so historically greedy, I still don't know about those seniors. From what I see it would be illogical to just cancel or equitize them, court actions withstanding. I suspect Mnuchin is knee deep on what he can get away with in support of taxpayers (and having his admin look good).
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