Good recap of GSE story

Posted on September 17, 2019 by Timeless Investor

here is a good recap of GSE storyinvestment in GSE common’s strategy

• common stock
  • buy common before recap (now) and sell them soon (and/or) buy put after re-ipo (relisting) because of the reference price history of AIG
  • right before or after completion of IPO, buy call of common
  • Should I buy OTC options? Options trading | Options liquidity and trading solutions | GAIN Capital  or this one Best Options Brokers for OTC Options. I have called Etrade and Gain Capital customer service, they do not offer OTC options.
• preferred
  • sell once start recap? do I need to wait for them to convert to common? or do I need to hold them for longer term?
  • Once reach 50%, sell some amount to make sure I do not lose the original investments?

• 09/21/2019 – great discussion on C pref to commons conversion rateRe: FNMA and FMCC preferreds. In search of the elusive 10 bagger.« Reply #13844 on: September 20, 2019, 01:00:13 PM »I finally got around to doing my analysis of the Citi conversion.Citi’s official announcement: https://www.citigroup.com/citi/news/2009/090227a.htm
  Citi’s summary of the terms: https://www.citigroup.com/citi/news/2009/090227a.pdf?ieNocache=262Series AA, E, F, and T were offered conversions. According to this link (https://preferredstockinvesting.blogspot.com/2009/09/citi-preferred-stock-conversion-rare.html) the conversion was voluntary, and it appears that each shareholder could choose which shares to convert. Another story I found (https://www.forbes.com/sites/dividendchannel/2014/10/30/citigroup-non-cumulative-preferred-stock-series-aa-ex-dividend-reminder/#666b206069c6) shows that C.PRP (Series AA) traded at $28.60 on 11/3/14 and was still paying dividends, so evidently it wasn’t called before then. This series pays 8.125% dividends, and given the low interest rate environments prevailing at the time and now, I would expect the high-div FnF series to similarly trade above par post-release.I misplaced the link that said this, but it said that series T (6.50% rate) was converted at 85% of par at $3.25, and the other three (AA 8.125%, E 8.4%, F 8.5%) were converted at 95% of par at $3.25. This link also calculated $3.25 as a 20-day average; the closest I could get was $3.24 as the average of the 20 closing prices up to and including Feb 25. But HoldenWalker on Twitter said that the 22 days up to and including Feb 26 average to $3.2495, so I think this is more accurate.That means that the market was not given a chance to react to the conversion at all. On Feb 27, the day of the announcement, the prefs spiked and the commons tanked. Of course that hurt the converted prefs, but the commons eventually got back to the $3.25 mark after a few months. Also, they still came out way ahead even in the immediate term as shown below.On Feb 26, Series AA ($25 par) closed at $5.48. Historical prices on these are really, really hard to find. The only source I found was this page (https://www.preferredstockchannel.com/symbol/c.prp/), and the only way to get Feb 26’s closing price was to put in 2/26/09 and 2/28/09 in the Performance part on the top right, and then click “Chart $10K invested in C.PRP”. Citi commons closed at $2.46 on Feb 26, for a ratio of 2.3:1 the day before the conversion. At 95% of par at $3.25, Series AA holders ended up with 7.31 commons for each $25 in par value, more than 3 times the previous day’s ratio.For Series T ($50 par, https://www.preferredstockchannel.com/symbol/c.pri/), the Feb 26 closing price was $10.54, for a ratio of 2.14:1 (normalized to $25-par). The conversion ratio was 85% of par at $3.25, or 6.54:1. This again represents a bit more than 3 times the previous day’s ratio.I couldn’t even find price data for Series E and F, but I would imagine that their conversion ratios were similar.This means that if Treasury and FHFA follow this playbook, current junior pref holders can expect to receive roughly 3 times as many commons in a conversion than they would by converting in the open market by selling the prefs and buying commons. And the commons wouldn’t necessarily have time to react to the possibility, given the relative price movement immediately following Citi’s conversion.I think Dick Bove has it exactly right, that owning the juniors now is a (potentially much) cheaper way to own commons in the future, compared to owning commons now.Of course the current litigation complicates things, but a payout to common shareholder plaintiffs plus a generous conversion (perhaps really generous) could get things done pretty fast. It appears that Treasury is no stranger to really generous pref-to-common conversions.
• 09/20/2019 – tweeters2019 September Glen@DoNotLosethe correct answer is: 1. letter agreement, 2. final capital rule, 3. pspa mod, 4. settlement 5. capital raise #fanniegate — so it appears that most of you still don’t know what’s going on…..
• 09/20/2019 – GSE Reform moves out of the starting gate

The GSE reform plan outlines four core objectives in conjunction with its recommendation to terminate the conservatorships. As detailed by CREFC, they include the following:

• Recapitalize the GSEs in the near term and set the stage for an orderly transition out of conservatorship to avoid unnecessary market disruptions and minimize systemic risk
• Shrink the overall size of the GSEs, with a heightened emphasis on mission-driven lending
• Require the GSEs to pay for their federal government guarantees
• Promote a more level playing field among the GSEs and the private marketplace

CREFC notes that in order to advance these four core (and inter-related) objectives, the GSE reform plan enumerates 49 separate recommendations that can be addressed variably through:
• Potentially immediate regulatory and other administrative actions
• Legislative proposals (that would require Congressional approval)
• Directives to study other issues to evaluate potential regulatory and legislative initiatives, such as a review of the benefits of Regulation AB II and the viability of requiring loan-level disclosures for GSE-issues

“Based on statements and actions made by Secretary Mnuchin and FHFA Director Calabria over the past week, the Administration has already begun to reform the GSEs on three fronts,” according to the CREFC report. “The ultimate goal of the Administration is to complete the following items by the end of first-quarter 2020:

• Reframing the GSE’s footprint by contemplating revisions to the multifamily caps and exemptions, including potentially minimizing green programs and lending in areas burdened by regulation such as rent control and strict zoning requirements
• Cessation of Treasury’s net sweep, effectively allowing the GSEs to build capital bases that now stand at a fraction of their pre-crisis levels
• A re-proposed or finalized rule framing out regulatory capital requirements similar to those applied to banks

As Connect Media has already reported, Calabria moved quickly on the caps for agency multifamily loan purchases. The FHFA eliminated all exclusions and set the cap at a total of $100 billion apiece for Fannie and Freddie over five quarters, compared with the previous $35 billion over a 12-month period for each GSE.

• 09/19/2019 – IMF newsFHFA: The End of the Net Worth Profit Sweep is Imminent
  dhollier@imfpubs.comThe Federal Housing Finance Agency and the Treasury Department are close to signing a letter agreement that will eliminate the net worth sweep by the end of September, FHFA Director Mark Calabria told Inside Mortgage Finance this week.The settlement will allow Fannie Mae and Freddie Mac to retain most of their earnings beginning with the third quarter.The letter agreement is not a complete replacement of the preferred stock purchase agreement, Calabria said. It’s a temporary expedient to end the sweep as quickly as possible.
• 09/18/2019 – tweetsHoldenWalker99@HoldenWalker99 Some #GSE common shareholders angry at the thought of JPS conversion. If it happens, $30-40b can be raised next year with new JPS issuance. If it doesn’t happen, that $30-40b would be raised with additional common equity in IPO. Same end result but less flexibility. $FNMA $FMCC

HoldenWalker99@HoldenWalker99Replying to @HoldenWalker99 Assuming recapitalization completed by the end of this administration’s term, January 2021.HoldenWalker99@HoldenWalker99Replying to @realKunalAShah @vascular08 Why not $50? Or $150? At some point, the remaining portion of the equity available to new investors doesn’t make it worth their $100b+ capital infusion. That point is below $10. For JPS conversion, what’s more fair than market price?HoldenWalker99@HoldenWalker99

Good point from @RuleofLawGuy1. How could it play out? Government wipes out SPS balance in SPSPA, convert JPS in restructuring (needed for more JPS in future @ lower rates) & JPS rights offering to reach minimum capital. That’s probably enough to end all lawsuits. $FNMA $FMCC https://twitter.com/DoNotLose/status/11742035681292288002019 September Glen @DoNotLoseIt would seem that Treasury’s plan after stealing and pillaging for 10+ years would be best served by settling these cases before it really loses them; not trying to make an example out of existing shareholders in direct contrast to the plans stated objectives.

HoldenWalker99@HoldenWalker99Replying to @1matthewfisher and 3 others

Cases challenging the NWS will be settled/dropped upon administrative action. The rest don’t have much of a chance in any court, but wait for SCOTUS victory in another 5 years if that’s what you want to do.HoldenWalker99@HoldenWalker99Replying to @blissavoc and 4 others

Conversion of existing JPS is a critical step in recapitalization in that it is core capital neutral & opens the capital structure to give GSEs flexibility to raise another $30-40b at lower market rates to help recapitalize or in downturn. $FNMA $FMCCHoldenWalker99@HoldenWalker99Replying to @sbsc8928 and 2 others

Without NWS, GSEs would have been able to recapitalize in 2013 when they returned to profitability (or, if you want to be conservative, after “10% moment”) and start paying dividends again. Damages of 2-5 years back dividends aren’t unreasonable and how JPS get par+. $FNMA $FMCCAlec Mazo@Alec_Mazo

Freddie’s Don Layton (ex-CEO) says 3 barriers create an insurmountable economic moat for the GSEs.
1. Scale
2. lender economics for Automated Underwriting Systems (AUS)
3. MBS investor preferences
Investors won’t fund competitors. Utility like g-fee regs way to go.$fnma $fmcc https://twitter.com/Harvard_JCHS/status/11743366863077212162019 September Glen@DoNotLose

As such, I am trying to understand how on earth preferred shareholders don’t get par plus. Why would they settle for less? They hold the keys to start the recapitalization engine. https://twitter.com/DoNotLose/status/1174295962178793473Rule of Law Guy@RuleofLawGuy1Replying to @ACGAnalytics @USTreasury

What he didn’t say: agreement essential to conducting public offerings since no new money will want to invest in conservatorship with HERA powers

• 09/18/2019 – great articles from Don Layton

HOW DEEP IS THE GSE ‘ECONOMIC MOAT’?
Wednesday, September 18, 2019 | Don Layton

full paper by Layton (GSEs_economic_moat_layton_2019)

WHY IS THE ADMINISTRATION NOT TALKING ABOUT UTILITY-STYLE REGULATION OF G-FEES?
Tuesday, July 16, 2019 | Don Layton

• 09/17/2019 – HOUSING FINANCE REFORM UPDATE from Boyle Capital

In order to accomplish the Administration’s stated goal of ending the conservatorships of Fannie and Freddie, the entities will need upwards of $125 billion in capital compared to the $3 billion they each have today.  An agreement between Treasury and the FHFA is likely to be reached by the end of September which will allow for the entities to retain additional capital, however; at a run rate of $20 billion a year it will take years to retain the required level, and that assumes there isn’t an economic downturn along the way.  As a result, the Treasury plan released last week instructed Treasury and FHFA to develop a recapitalization plan for each GSE “as promptly as practicable.”

The plan contemplates a number of approaches for recapitalizing the GSEs, but ultimately no institutional investor is putting new capital into these entities until the outstanding legal issues with the existing shareholders are resolved.  In addition to the net worth sweep ruling last week by the 5^th Circuit in which the plaintiffs are entitled to backward looking relief from Treasury, there are several other cases still pending before the courts, including the breach of implied covenant case (aka the Fairholme case) in which Fannie and Freddie (not Treasury) could be liable for tens of billions in damages. Thus, given legal rulings to date and the timing of future hearings/decisions, Treasury has little option but to eventually settle with current shareholders if it is going to end the conservatorships using outside third party capital as contemplated by the plan and reiterated by Treasury Secretary Mnuchin during his testimony in front of the Senate Banking Committee.

So, what’s next?  On the legal front, Treasury has up to 90 days to petition the Supreme Court of the United States to hear the Collins case.  Given that the 5^th Circuit ruling was not final, it is not certain if the Supreme Court would even take the case at this point in time.  If they did, it is unlikely there would be a ruling before June 2020.  If Treasury instead chooses to defend the remand in district court, it is likely to take up to two years for a final decision when considering the losing side would be likely to appeal.  Regardless of the path, the strongly worded majority opinion of the 5^th Circuit means it is highly likely that Treasury will eventually lose, and the net worth sweep will ultimately be overturned.

In the coming months, we expect Treasury and the FHFA to not only allow the entities to retain substantially more capital than the current $3 billion buffer, but also negotiate an amendment to the Treasury’s Senior Preferred Stock Purchase Agreement (SPSPA) that ends the net worth sweep and sets the stage for a capital raise in the second half of 2020. Prior to initiating a capital raise, however; Treasury must absolutely deal with the preferred shareholders or it can’t get off go. Last weeks court ruling gives Treasury the cover it needs to settle with shareholders. Given the 5th circuit ruling and directives of the Treasury plan to end the conservatorships by recapitalizing, shareholders have likely never been in a better position than they are today. Despite recent gains, preferred shares remain at roughly 50% of par value. Consequently, we expect further gains from our investments as Treasury and the FHFA continue to execute on their plan to recapitalize Fannie Mae and Freddie Mac.

• 09/16/2019 – Fannie Mae and Freddie Mac Won’t Go to Market Until End of 2020, FHFA Director Says

Takeaways:

1. Interim letter agreement w/@USTreasury to end NWS by end of month before a permanent agreement to end #conservatorship.
2. Retain earnings 6-12 months before equity offering as early as Q4 2020.
3. Modest footprint reductions focused on safety & soundness.

• 09/16/2019 – FHFA Director Mark Calabria (Audio)Host June Grasso features the best stories of the day from Bloomberg Radio, Bloomberg Television, and over 120 Bloomberg News bureaus around the world on Bloomberg Radio’s Bloomberg Best.Guests include: Michael O’Hanlon of the Brookings Institution. FHFA Director Mark Calabria. David Marcus, Evermore Global Advisors CEO and Evermore Global Value Fund Portfolio Manager. IBM Chair and CEO, Ginni Rometty.Hosts: June Grasso Producer: Karoline O’BrienRunning time 25:29
• 09/14/2019 – Citi to Exchange Preferred Securities for Common, Increasing Tangible Common Equity to as Much as $81 Billion – summarize the history of Citi to understand the common equity

• 09/13/2019 – How Once-Doomed Mortgage Giants Gained New Lease on Life
  Fannie Mae and Freddie Mac cranked out profits as housing recovered after the financial crisis, and Congress couldn’t come up with a very good alternative to them
• 09/13/2019 – BlackPacificCapital @BlackPacificCap

Calabria slipped up there and said “what this letter agreement going to be at the end of the month, should get us at least, hopefully the next couple of years give us some maneuvering room”

• 09/12/2019 – Katy O’Donnell @KatyODonnell_Calabria talked next steps in an all-staff mtg today — raising capital buffer in a limited way and having GSEs operate under a consent agreement at point where they have enough $ to leave conservatorship but not enough to fully comply w/ new capital rules https://subscriber.politicopro.com/financial-services/whiteboard/2019/09/calabria-details-next-steps-on-fannie-freddie-in-internal-staff-meeting-3832206Tim Rood @collingwoodllc 15hReplying to @KatyODonnell_Makes total sense. It’s a durable option that makes it difficult for other admins or Directors to reverse or revise terms of the release from conservatorship if the GSEs have been meeting the req’s of the consent order. Josh Rosner has been spot on this concept.
• 09/12/2019 – Fannie & Freddie regulator on next steps in mortgage market reform
• 09/12/2019 – A Full Short Week from Tim Howard
• 09/12/2019 – September 11, 2019: Investors Unite Collins vs. FHFA Legal Updates Teleconference
• 09/12/2019 – Fannie Mae: The Road to Recapitalization

Gaby Heffesse, CFA, chief operating officer at ACG Analytics, provides an update to her winning trades on Fannie Mae. In this interview with Alex Rosenberg, Heffesse breaks down the Treasury’s plan for recapitalization, highlights the significance of the recent court rulings, and reviews how much upside she sees for both common and preferred shares. Filmed on September 10, 2019. Please find Gaby’s previous two interviews here:

During the interview, Gaby thinks common will go to $6~$14, and might dip when IPO starts; preferred will go to par or a bit higher.

To have a settlement through the court is very important because it is irreversible. Can not be changed by the next administration.

• 09/12/2019 – U.S. Treasury eyes action on Fannie Mae, Freddie Mac by month’s end: Mnuchin

WASHINGTON (Reuters) – U.S. housing regulators and the Treasury Department were actively negotiating a profit sweep of mortgage giants Fannie Mae and Freddie Mac, U.S. Treasury Secretary Steven Mnuchin said on Thursday.

“That’s something that the FHFA (Federal Housing Finance Agency) and we are working on. We are actively negotiating an amendment, and I think our objective is to try to get it done by the end of the month,” Mnuchin told CNBC in an interview.

• 09/12/2019 – Treasury Secretary Mnuchin says Trump has approved reform plan for Fannie Mae and Freddie Mac

“We are actively negotiating an amendment try to get it done by the end of the month,”

Congress is working on the legislation for the next 90 days.

• 09/11/2019 – Todd’s tweet

Todd Sullivan @ToddSullivan
Bove: $FNMA “Senate hearing inconclusive, common may be overpriced, preferred still good long term buy”

@vascular08
5h5 hours ago
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Replying to @ToddSullivan
I wonder if he still thinks preferreds fetch only 75-90% par after En Banc?

@ToddSullivan
5h5 hours ago
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I do t think he’s said anything post decision. Prior to it he said “slight discount” which I read more like 90% par. He had recap raise at $2.50 share common

@vascular08
4h4 hours ago
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If common goes higher, say $10, there would be absolutely no reason to not convert at 100% par, right?

@ToddSullivan
4h4 hours ago
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Don’t think the two are related. I have not seen conversions scenarios where conversion happens >$4. I think huge upside to common post cap raise and conversion which current preferred holders will participate in. I think common a roller coaster until then.

@ToddSullivan
3h3 hours ago
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A win in Lambreth court would be huge as it would provide for par plus interest “from date of injury”. That typically runs 6% and courts are divided whether simple or compound.

@ToddSullivan
3h3 hours ago
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Even in just a simple interest scenario, we are talking 6% annually for 7 years or 42%. But who knows if we even get that far and this settles before then

@HoldenWalker99
5h5 hours ago
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Replying to @ToddSullivan
Bove among the cynics who believe that the @USTreasury will monetize both their senior preferred shares and warrants. $FNMA $FMCC

@SleipnirPerkins
4h4 hours ago
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Replying to @ToddSullivan
Pre 5th circuit ruling he was correct. Common is in a better seat now that NWS is illegal.

@llamas_78
5h5 hours ago
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Replying to @ToddSullivan
Common overpriced, joke

@ethan2369
4h4 hours ago
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Replying to @ToddSullivan
@USTreasury steals this quarter it could face another round of lawsuits.

@bulrun100
4h4 hours ago
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Replying to @ToddSullivan
Bove & his stupid Preferred BIAS 

• 09/10/2019 – Banking committee meeting

some takeways from listeners

• 09/09/2019 – some valuation of FNMA/FMCC – about half of that of Moelis, is this still too high?

• 09/09/2019 – Steven Mnuchin on Fox Business News – Fannie, Freddie: They’ve been in conservatorship for too long
  Sep. 09, 2019 – 7:10 – Treasury Secretary Steven Mnuchin on the Trump administration’s efforts to privatize Fannie Mae and Freddie Mac.
• 09/09/2019 – Mnuchin: Fannie, Freddie overhaul key for future of housing

U.S. Treasury Secretary Steven Mnuchin told FOX Business Monday that he expects a deal on mortgage finance giants Fannie Mae and Freddie Mac – which have been under conservatorship for the past 11 years – very soon.

“I think we’re going to work with Congress on the first part of this. I’d hope that if we’re going to get congressional support it’ll be in the next three to six months. And if we can’t do that we’ll move on the administrative front,” he told Maria Bartiromo in an exclusive interview on “Mornings with Maria”.

“We think now is the time to recapitalize them, make them stronger and make sure that taxpayers aren’t at risk and eventually raise third-party capital so that we restructure them and that in another housing downturn taxpayers are not at risk,” he said.

Mnuchin said the first steps are negotiating with the Federal Housing Financing Agency (FHFA).

“We expect in the near term we’ll have an agreement where we will allow both Fannie Mae and Freddie Mac to retain their earnings which will be a significant increase in capital and a step in the right direction to us ultimately raising third-party capital,” he explained.

Mnuchin said the other issue he “looks forward” to testifying about at the Senate on Tuesday will be bipartisan legislation to get approval to put a full faith in credit on the securities.

“We think that the government should be paid for that wrap and we think there should be significant private capital in front of it – so something similar to the FDIC model or the Ginnie Mae [Government National Mortgage Association] wrap,” he explained.

Taking the two government-sponsored enterprises out from under government control could be a win for some investors, as companies could begin to turn a profit.

When Bartiromo asked about the federal appeals court ruling in New Orleans that concluded the FHFA structure is unconstitutional and backed the government’s rights to take all of the mortgage giants’ profits, Mnuchin said, “we’re not going to let this stand in the way of housing reform.”

“So as I say, there is an investor issue here which will continue to go through the legal process. But the most important issue is, regardless of that case, we will restructure Fannie Mae and Freddie Mac so that they have private capital in front of any taxpayer risk,” he explained.

Bartiromo also asked: “One investor wants to know, given the ruling that the net worth sweep that we now know was illegal, is the September sweep going to be halted? Are we going to see money go back to the investors?”

“The money wouldn’t go back to the investors, the money would stay in the companies and then obviously the legal process will go forward and obviously the Treasury has very significant claims for the money that we’ve outlaid,” he replied. “But, you know, I expect we’re… in the process of working with the FHFA and we’re going to try to see if we can do it in September. If not, it’ll be very soon after that.”

• 09/09/2019 – some background knowledge from Josh Rosner
• 09/09/2019 – another background knowledge 11k documents
• 09/08/2019 – How Fannie and Freddie Have Changed Since the Crisis
  The two mortgage giants have shed some risk, paid back their bailout and now report billions in income

another reference: year 2015, Exclusive: Josh Rosner and Glen Corso on why it’s time for true GSE reform, Industry insiders weigh in on the future of Fannie Mae and Freddie Mac

some interpretation on the court document

• 09/06/2019 – Investors Notch Victory Over Fannie, Freddie Profits
  An appellate court overturned a ruling that supported a government decision in 2012 to sweep all the mortgage-finance giants’ profits to the Treasury Department
• 09/05/2019 – Trump administration seeks major mortgage finance overhaul

Treasury said the government would continue its financial backstop for Fannie and Freddie and called on Congress to charter new companies to compete with them. Still, it left many of the details of releasing the companies — such as the capital levels they would need and what would happen to Treasury’s holdings in the companies — to be hashed out in talks with their regulator, the Federal Housing Finance Agency, starting this fall.

Those details, the official said, “are left to the recapitalization plan. As a result, I think it would be a bad assumption by any of the various interested parties to try to assume how they would fare under that recapitalization plan.”

FHFA is expected to release a rule on Fannie and Freddie’s capital requirements this fall, a condition of their release.

• 09/05/2019 – Treasury Department Submits Housing Reform Plan to President

WASHINGTON – The U.S. Department of the Treasury today released its plan to reform the housing finance system. The Treasury Housing Reform Plan (Plan) consists of a series of recommended legislative and administrative reforms that are designed to protect American taxpayers against future bailouts, preserve the 30-year fixed-rate mortgage, and help hardworking Americans fulfill their goal of buying a home.

“The Trump Administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said U.S. Treasury Secretary Steven T. Mnuchin. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”

Treasury also consulted with the Federal Housing Finance Agency, the Department of Housing and Urban Development, and other government agencies. The Plan was submitted to the President for approval through the Assistant to the President for Economic Policy.

Read the Treasury Housing Reform Plan .

Read the HUD Housing Reform Plan.

• 09/05/2019 – Treasury plan is out here (Treasury_plan_on_FNMA_FMCC)

The document recommends 49 administrative and legislative reforms. It has a clear preference for lawmakers to reach a deal on comprehensive changes, but also includes suggestions of what federal agencies can do in the meantime. The Department of Housing and Urban Development released its own set of recommendations, including that Congress give more autonomy to the Federal Housing Administration.

• 09/05/2019 – Cheat sheet: Trump administration’s road map for GSE overhaul
• 09/05/2019 – Dick Bove’s recommendation on FNMA/FMCC – my strategy on FNMA/FMCC, once plan announces, sell 50% preferred once it reaches 75% par, sell all once it reaches 90% par; sell 50% common once it reaches $5.00, sell all once it reaches $6.00 or higher (remember AIG chart). Sell my 401k once plan announces.

What then is the appropriate investment strategy?
1. Junior preferreds
Buy them now.
Sell them as the Administration puts its program in place.
2. Common stock
Avoid it at present.
Buy it 6 to 12 months following any stock offering.

Preferred
It is my assumption that the preferreds will increase to 75% to 90% of stated par when indications are made public that some payment will be made. Then they may drop back in value if the payments are to be in common stock.
The likelihood is that all preferred shareholders will receive the same amount irrespective of terms or coupons. Therefore, it may make sense to buy the low-coupon, off-the-run preferreds if it is expected that the preferreds will receive payments. The illiquidity risk is higher here but it may be worth the risk.

Common
This is a more complex transaction. In the table below I assumed that
• The required capital will be equal to 4% of assets. This is based on what the current requirement is at present at Fannie Mae.
• The retained earnings at each company will be 2 times H1 2019 net income.
• The junior preferreds will be converted into common at $2.50 per share.
• The common stock offering will also be at $2.50 per share or approximately 12x after my all event earnings estimates.

The numbers are shown in the table on the following page. One can adjust them for any series of reasons but these are the key concepts that must be dealt with. Plus, of course, these numbers assume that once the decision is made to pay the preferred shareholders, all of the court cases disappear.

• 08/30/2019 – Will GSE reform get some clarity from long-awaited blueprints?

Experts have pointed to four areas in particular to look out for when the reports are released that should provide valuable insight into the administration’s direction on housing finance reform.

1. Strengthening Fannie and Freddie’s capital
2. The timeline for reform
3. A role for Congress
4. How GSE reform will affect the Federal Housing Administration

• 08/27/2019 – Trump administration to release plan for Fannie, Freddie after Labor Day, Here’s what to expect

Now, the administration is preparing to release its comprehensive plan for the GSEs. It is expected to release the plan shortly after Labor Day.

“I’m expecting that Treasury and the administration will lay out their vision of what they think Congress should do, what they think I should do and what they think the Treasury and I should be able to do together in terms of amendments to the share agreements that allow an exit out of conservatorship,” Federal Housing Finance Agency Director Mark Calabria said in an exclusive sit down with HousingWire.

Calabria explained the plan will include parts directed at the U.S. Department of the Treasury, the U.S. Department of Housing and Urban Development, the Federal Housing Administration and FHFA.

“I’m hopeful that it will lay the groundwork so that we can all engage with Congress and continue to do my work with Treasury as well as my work as an independent agency,” Calabria said.

So what will be in the administration’s report? Calabria explained he is expecting to see a suggested blueprint for GSE reform.

“There will be suggestions, of course we’re an independent regulator, so Treasury will likely make suggestions on things that they think I should do, and being an independent regulator I will give those to consideration and see what makes sense for us to do,” Calabria said. “There will be a bit of a blueprint that will be a suggested roadmap for Congress.”

“I don’t expect to see legislative language, but I expect to see conceptual language that lays out a vision and a set of principles from the administration of what they think Congress should put in place in terms of a new model,” he said. That’s my expectation of what I think we’re likely to see.”

The plans released previously by the administration also give some idea of what to expect.

According to the administration, the GSEs play an outsized role in the country’s mortgage finance system and stand in the way of competition in the market. Under the previous proposal in June 2018 which is from Office of Budget and Management, not the Department of the Treasury, Fannie and Freddie would be converted to “fully private entities.”

• 08/27/2019 – A Primer on the Future of Fannie, Freddie
  What to expect from the Trump administration’s housing-finance overhaul
• 08/21/2019 – Fannie and Freddie Plan Is Likely Released Next Month
  Trump administration favors returning mortgage-finance firms to private-shareholder ownership

The plan, which could be floated shortly after the Labor Day holiday, is expected to envision a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump. Its provisions aren’t expected to give details for initial public offerings for the firms, the people said.

• 08/21/2019 – Treasury Plan for Fannie Mae & Freddie Mac near complete

In the video he cites a source from the US Treasury that says their recap and release plan will be out Sept/Oct. He also takes credit for the 8% bump we saw today before close.

video of foxbusinesshttps://finance.yahoo.com/video/treasury-reform-plan-fannie-freddie-200203323.html

The Treasury Department is expected to have its reform plan in place and ready for public release sometime by September or October, according to people with direct knowledge of the matter. Treasury has submitted a draft reform plan to the White House that includes suggestions to end the government control of the mortgage companies, known as Government Sponsored Enterprises (GSEs), sources say. The White House is expected to provide input as soon as this week, these people add.

Once the White House has signed off on Treasury’s plan, it could kick into high gear the long-awaited and promised reform effort by the Trump Administration to release both mortgage entities from government control. Also, the plan would also feature a recapitalization of both companies which would likely include the end of the government extracting all of the GSEs profits, and possibly a public stock offering to bolster Fannie and Freddie’s balance sheets.Charles Gasparino @CGasparinoSCOOP: @USTreasury puts final touches on long awaited @FannieMae@FreddieMac reform memo skedded release in Sept-Oct. Addresses “recap/release” from conservatorship; unlikely to address IPO plans. Treas waiting on final word from @WhiteHouse on memo more @FoxBusiness$FNMA$FMCC

While the Treasury report is expected to discuss recapitalization of the companies it is not expected to address the possibility of a stock issuance, these people say. Under the Treasury’s proposal, it’s unclear how shareholders would fare. A public offering could dilute common shareholders, meaning the value of their shares could fall from their current penny stock levels, but an end to the net-worth sweep might bolster shares.

Those investors holding preferred stock, which offers more protection from dilution, may benefit from any recapitalization.

The Treasury Plan – and a separate plan to be issued by the Department of Housing and Urban Development – may be light on specifics on exactly when these changes will take place, but at least on paper, both will provide the first tangible steps in the reforming  GSE’s and their giant share of the housing market.

• 08/19/2019 – Add another 6 months to Fannie, Freddie recap and release timeline
  FHFA will be forced to reissue rule to avoid lawsuits, Cowen’s investors note says

The Federal Housing Finance Agency issued a proposed capital requirements rule for the privatization of Fannie Mae and Freddie Mac last year. Since then, Mark Calabria has replaced Mel Watt as head of the FHFA, and several of Watt’s senior staffers have been replaced with people chosen by Calabria. By now, the final product is probably different enough that it will require the process to start again, Cowen said.

That means publishing it in the Federal Register and allowing at least a 60-day period for comment. Because Fannie Mae and Freddie Mac play such a critical role in the U.S. mortgage-financing system, the comment period last year was extended. The two mortgage companies purchased almost half of all single-family mortgages originated in the U.S. last year, according to FHFA data.

“We suspect FHFA will reissue the rule out of an abundance of caution,” Jaret Seiberg, Cowen’s managing director, said in the note issued on Friday. “The last thing the agency wants is for the courts to strike down the capital rule because FHFA made enough changes from the proposal that the public needed another opportunity to comment. Such a court ruling could come just as the enterprises were trying to raise between $100 billion and $150 billion of capital.”

• 08/15/2019 – FHFA Announces Results of Fannie Mae and Freddie Mac Dodd-Frank Act Stress Tests, 8/15/2019

stress test results

1. 2019: combined loss $43.3 bil, credit loss $12.8 bil, total $56.1 bil (2019_DFAST_Severely-Adverse-Scenario)
2. 2018: combined loss $77.4 bil, credit loss $21.2 bil, total $98.6 bil (2018_DFAST_Severely-Adverse-Scenario)

It seems like the required capital is less than we expected ($150 ~$200 bil), is it a good sign for recapitalization and commons?

Washington,D.C.–The Federal Housing Finance Agency (FHFA) today released a report providing the results of the annual stress tests Fannie Mae and Freddie Mac (the Enterprises) are required to conduct under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  The Dodd-Frank Act requires certain financial institutions with more than $10 billion in assets to conduct annual stress tests to determine whether they can absorb losses as a result of adverse or severely adverse economic conditions.  The report, Dodd-Frank Act Stress Tests – Severely Adverse Scenario, provides updated information on possible ranges of future financial results of the Enterprises under severely adverse economic conditions.

Link to Dodd-Frank Act Stress Tests – Severely Adverse Scenario

Link to 2019 Summary Instructions and Guidance

Link to DFAST Frequently Asked Questions (FAQs)

• 07/31/2019 -Notes:
  • FHFA can and will act administratively
  • Needs Congress’ help also
  • Is going to work with Congress
  • A consensus that the issues need to be fixed
  • Best time to reform the system in before, not during a crisis
  • Kennedy: “Best time to fix the roof is before it is raining”
  • Hopes plan “comes out soon, before the end of the month”
  • Having worked on HERA I never expected any conservatorship to last over 6  months
  • What has happened to the GSE’s is “at odds with the statute” (HERA)
  • Wants to end NWS to starts to rebuild capital
  • Offering coming ~$100B
  • Not calendar dependent
  • FNMA/FMCC should hold capital level the same as other large institutions in the long run
  • I am a strong believer of competitive level playing ground
  • I wish congress will issue more charters to have the market competitive
  • want a limited explicit guarantee approved by congress
  From 6/13/19  
• 07/19/2019 – Sources say FHFA’s Calabria wants massive public offering of Fannie, Freddie: Charlie Gasparino
  Fox Business Videos•July 19, 2019
  FOX Business’ Charlie Gasparino on Sen. Elizabeth Warren’s (D-Mass.) plan to regulate the private equity industry and Mark Calabria’s plan to reform Fannie Mae and Freddie Mac.

• Charles Gasparino@CGasparino

this is because there is no single PLAN for the GSEs; treasury will have a framework thats been delayed but will be available in coming months. concurrently calabria is working on stuff that will allow the GSE to recap, such as ending the NWS and a public offering.

• 07/19/2019 – Nice review of the current legal state of GSE litigation  with David Thompson who leads Fairholme’s legal team
• 07/18/2019 – Fannie Mae, Freddie Mac shares down on 5-year timeline overhaul
• 07/18/2019 – Fannie Mae, Freddie Mac still in conservatorship in 2024? Calabria says it’s possible, Tells Reuters that he hopes to have GSEs out of conservatorship by 2024

At the MBA Secondary Conference in Manhattan in May, Calabria said ending the net worth sweep is the first step toward privatization, and then setting up an IPO for the GSEs to raise capital may follow.

Later, Calabria told Reuters that Fannie and Freddie may not be privatized in unison, as the government might choose to release one and then the other. “It may be preferable to stagger that process due to the complexities involved in getting the government-backed firms,” he said.

As for the administration’s plan for GSE reform, Calabria told Reuters this week that the plan may not be released until September, due to the other issues the administration is currently dealing with, which echoes Bloomberg’s reporting on the matter.

Calabria, in the interview, also hinted at one of the potential reforms to the GSEs’ operations. According to the Reuters report, the Treasury report will call for continued government backing of the GSEs, but not in the current form. Calabria told Reuters that he plans to call for a government guarantee of the mortgage-backed securities issued by Fannie and Freddie, instead of the companies themselves.

• 07/18/2019 – U.S. reform plan for Fannie, Freddie seen by Sept.: housing regulator, by Pete Schroeder and Richard Leong

NEW YORK/WASHINGTON (Reuters) – The Trump administration’s hotly anticipated blueprint for overhauling mortgage guarantors Fannie Mae and Freddie Mac may not be published until September as the U.S. Treasury juggles several other pressing issues, the housing regulator told Reuters.

Mark Calabria, director of the Federal Housing Finance Agency (FHFA), which oversees the government-sponsored enterprises, said in an interview it was his “hope” that they would have exited or be ready to exit conservatorship before his term ends in 2024.

However, Calabria is not operating toward a hard deadline, he noted.

“That’s my time horizon,” he said, referring to the end of his term. “I’m under no expectation to try to get all this done. … So if in four years, nine months they’re not out of conservatorship, I’m not pushing them out.”

Calabria’s comments will temper market expectations for a speedy overhaul of Fannie and Freddie before the 2020 presidential election.

Fannie and Freddie, which guarantee over half of all U.S. mortgages, have operated under government conservatorship since their bailout during the 2008 subprime mortgage crisis. Washington has struggled for years to devise a plan to safely return them to the private sector.

The Trump administration has said it is eager to push ahead with housing finance reform and industry analysts and insiders had expected a Treasury-led proposal for removing them from conservatorship to be published by this month. Calabria said the report was “essentially done,” that he had seen a draft, and expected it to be published in August or September.

Treasury Secretary Steven Mnuchin, who has led the push for reforming Fannie and Freddie within the administration, is “juggling a number of balls,” Calabria said. Mnuchin is involved in the ongoing trade war with China, debt ceiling negotiations with Congress and imposing sanctions on Iran. Craig Phillips, Mnuchin’s adviser who had been closely involved in the reform plan, also left in June.

Despite his heavy workload Mnuchin continues to work with his team on housing finance issues on a weekly basis, a person familiar with the matter told Reuters.

• 07/17/2019 – U.S. reform plan for Fannie, Freddie seen by Sept.: housing regulator

Calabria said he expected the Treasury will in the report back some form of government guarantee for Fannie and Freddie. But he said he planned to advocate for a guarantee limited to the mortgage-backed securities issued by the pair, rather than a government backstop for the companies themselves.

While Calabria sketched a potential five-year time horizon for removing Fannie and Freddie from conservatorship, he added that the government did not have forever to overhaul them and needs to progress while the housing market remains stable.

“The market looks pretty strong now, so that to me is the time when we want to make real repairs, he said.

• 07/16/2019 – WHY IS THE ADMINISTRATION NOT TALKING ABOUT UTILITY-STYLE REGULATION OF G-FEES? – great article by Layton
  Tuesday, July 16, 2019 | Donald Layton
• 07/15/2019 – latest report from Foxbiz Charlie G: Treasury reportedly unlikely to advocate privatization of Fannie, Freddie
  Jul. 15, 2019 – 3:25 – FBN’s Charlie Gasparino on the debate within the Treasury Department’s efforts to figure out how to handle Fannie Mae and Freddie Mac.

1. Treasury is not going to FULLY privatize FNMA/FMCC, this is probably a great news.
2. Also, Charlie said Treasury will come out one day, but with delay.

• 07/11/2019 – news from Tim Pagliara – still there is no act so far
  ‏@timpagliara
  Follow Follow @timpagliara More Tim Pagliara Retweeted 2019 Glen
  Thanks to Dick Bove’ and Odeon Capital Group for hosting a panel discussion with David Thomson, Cooper Kirk, Dan Schmerin , and me to provide a status update on all things recap and release

2019 Glen‏ @DoNotLose 7h7 hours agoMoreReplying to @timpagliara

1. Meaningful action expected H2 2019
2. Court Development appear to indicate Plaintiffs have turned the corner. Judges are seeing the light… Emboldened by rulings form SCOTUS on other cases that touch on similar principles.
3. Congress unable to act.
4. Calabria intends to act.

• 07/09/2019 – FHFA’s new appeal – it does not look too good since Calabria wants to uphold the constitutionality and validity of NWS. – from my understanding of the letter, validity of NWS is always upheld by FHFA, no matter who is the director. So it seems like this letter  does not change anything.Dear Mr. Cayce:The Federal Housing Finance Agency (FHFA) Defendants-Appellees
  write to advise the Court (a) of a leadership change at FHFA that necessitates
  substitution of parties under Fed. R. App. P. 43(c)(2), and (b) that under its
  new leadership FHFA has reconsidered the constitutional issue in this case,
  presently taking the position that HERA’s for-cause removal provision is
  constitutional, and urges the Court to uphold the constitutionality of the
  structure Congress chose for FHFA.
  1. In April, Mark A. Calabria was sworn in to serve a five-year term as
  FHFA Director following presidential nomination and Senate confirmation.
  Pursuant to Rule 43(c)(2), Director Calabria should be substituted for Acting
  Director Joseph Otting as a defendant-appellee.
  2. In this case, Plaintiffs-Appellants challenged the validity of a
  transaction known as the Third Amendment in part as it is unconstitutional for
  FHFA to be led by a single Director removable by the President only for
  cause. Before the district court and the Panel, and in its petition for rehearingJuly 9, 2019
  Page 2
  en banc, FHFA defended the constitutionality of this provision. Shortly after
  this Court granted rehearing en banc, the term of the prior Senate-confirmed
  Director expired. Under interim leadership between January and April 2019,
  including during en banc briefing and oral argument, FHFA elected not to
  defend the constitutionality of its structure. At all relevant times FHFA argued
  and continues to argue the issue does not affect the Third Amendment’s
  validity.
  Under its new Director, FHFA has considered this issue. FHFA now
  advises the Court FHFA takes the position going forward that HERA’s
  structure is constitutional. FHFA respectfully requests that the Court consider
  the arguments on that issue presented at pages 46-56 of FHFA’s Panel brief,
  and pages 10-15 of FHFA’s en banc petition, as presenting FHFA’s operative
  position. FHFA withdraws the statements relating to this issue at page 3 of
  FHFA’s supplemental en banc brief and to similar effect at en banc argument.
  FHFA respectfully requests that, to the extent the Court finds it necessary to
  reach the constitutional issue, the Court uphold FHFA’s structure and
  otherwise affirm the judgment below as to the Third Amendment.Respectfully Submitted,
  /s/ Robert J. Katerberg
  Robert J. Katerberg
  Counsel for Defendants-AppelleesFederal Housing Finance Agency and
  Director Mark A. Calabria
• 07/09/2019 – Why The Government Must Get Fannie And Freddie Out Of Conservatorship

Brian Boyle, CFA, the president and portfolio manager of Boyle Capital, and Erik Ritland, CFA, the research analyst at Boyle Capital, discuss their investment in Fannie Mae and Freddie Mac, what will it take getting Fannie and Freddie out of conservatorship.

See the rest of the interview on ValueWalkPremium

Out Of ConservatorshipBy User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia CommonsRaul: Yes, can you tell me more about the Fannie Mae and Freddie Mac situation, just beginning with a primer to understand this investment and the out of conservatorship side of the argument?

Brian: Sure, so we could probably spend two/three hours, I’ll try to truncate it as much as I can. 2008, you had the financial crisis, obviously, a lot of distress in the environment at that time. A number of financial institutions were bailed out, including both Fannie Mae and Freddie Mac, which were the pillars of United States mortgage market. At the time, they were given a line of credit essentially from the treasury that would require them to, whatever they borrowed on, pay the government ten percent interest and then ultimately, they’d have to pay back whatever they borrowed. The line of credit ultimately got to 400 billion dollars.

They borrowed against that somewhere in the neighborhood of 189 billion dollars. Then in the summer of 2012, in August of 12’, on a Friday afternoon at 5:00, which is when you would want to drop bad news, the treasury and the regulator at the time, the FHFA unilaterally decided to change the terms of the original agreement and instead of ten percent interest on the outstanding balance, they were just going to take 100 percent of the profits in perpetuity. All but making the investments worthless because there was no opportunity for investors to participate in the recovery as it occurred.

That action, of course, was challenged in the courts by a number of different parties and a number of different venues and a number of different arguments. From 2012 to the present, those cases have found their way through the various court systems, from the court of claims to circuit courts, district courts, and everything in between. We started looking at the opportunity in 14’, really started leaning into the investment from a weighting standpoint in the summer of 16’.

I would say at times, it felt like we were the only buyers in these securities. Our participation at that time was almost entirely in the preferred securities of Fannie Mae and Freddie Mac. Our premise was not necessarily the legal cases would be successful, but we do think that the legal arguments in support of the shareholders are stronger. We recognize that winning a case against the government is always an uphill battle.

So, we went into it recognizing that that part of it would be a wildcard. At the end of the day, we just felt like you have the linchpins of the U.S. mortgage market, that at times are anywhere from 50 to 80 percent of the overall market. Some administration is going to look at the situation and say, it makes no sense to have these two linchpins of the mortgage market with no capital and essentially in bankruptcy. We believed at some point, some administration, it wasn’t going to be the Obama administration, would come in and address that.

Obviously, Trump won in November of 16’, and these securities have benefited a great deal from his overall victory in 2016. Now, here we are in May of 2019, the securities have been like a rocket so far this year. Our portfolios have been up very strong this year as a result of that investment, primarily. We believe that more so than at any point during the life of this investment for us, the probability of a successful resolution is the greatest that it’s ever been. Where we’re at today is this, in April of 2019, Mark Calabria stepped in as director of the FHFA, this was the first time that the Trump administration was able to appoint their own person in that role.

Mark Calabria is extremely well-regarded, has a great background in the mortgage markets, was also heavily involved in putting together the law that oversees the conservatorship of Fannie Mae and Freddie Mac. The right man, at the right time for this job. Calabria in recent weeks has talked about the government’s interest in getting Fannie Mae and Freddie Mac out of conservatorship and this would piggy-back off of a memorandum that the Trump administration issued on March 27th, that memo had a number of items that it wanted to see as part of broad housing reform, but at the very top of that was exiting this conservatorship that Fannie Mae and Freddie Mac have been in since 2008.

Based on comments that have been made in the last couple of weeks, we’ve seen the securities continue to move up from as low as six dollars in October, to around thirteen dollars today. Really, why we’re positive on the situation from here is, we believe over the next couple of months, the administration’s plan will be crystalized and more and more of the details will be filled in.

By the time we get to the fall, the expectation would be that they’re going to be in a position to stop the current network sweep of 100 percent of the profits. They’ll reach an agreement with treasury that would enable Fannie Mae and Freddie Mac also to exit conservatorship. That would put them in a position to ultimately move down the path of recapitalizing Fannie Mae and Freddie Mac and doing some kind of public offering.

At the end of the day, you have these securities at 13, par value on the securities would be 25 dollars pers share. We don’t know if par value is going to be the endgame, we think that there’s going to be a high probability that that’s the case, but we feel like the risk/reward here is certainly attractive. The downside is probably pretty low, if you believe that they’re going to get this plan done. They need capital in these entities, and in order to get capital in the entities, you have to cut off the tail risk of litigation. The only way you do that is to solve the outstanding litigation. You settle it with the plaintiffs.

They’re not going to go away for 15 dollars a share, they’re probably going to go way for closer to 25 Out Of Conservatorship. That’s ultimately where we’re at. The securities are probably the biggest special situation that you could find and a very uncorrelated investment to the broader market. In a month like May, where the Dow has been down every week, it’s been down five of the last six weeks. This is an investment that has continued to move higher. We think that through the summer months, that upward movement will continue, but regardless, it will do so regardless of what the broader market does. At a time when people have concerns about valuations and trade talk, this is an attractive opportunity in our opinion.

Raul: Yes, it’s very hard to argue against that. Man. Do you think it will play out by fall-time? If not, when do you think the resolution will be resolved?

Brian: Well, it’s important to distinguish between a resolution and the factors that are going to move the stock price. If you look at what’s going to move the stock price, it’s going to be more clarity around the legal cases, and there are some legal cases that could have some favorable decisions this summer, or the most likely driver would be more clarity around the administration’s plan to exit conservatorship. We do think, based on comments that have been provided by Mark Calabria, the director, that by the fall, he will have negotiated a settlement with treasury as it regards to the government’s ownership in these entities.

At that time, it would make sense for them to ultimately resolve the outstanding issues surrounding litigation because you cannot go and do a road show to raise capital, if there’s just potential liability of 100 plus billion dollars hanging out there. The administration indicated that they’d like to be doing that road show sometime early next year, so our view would be, before you go and do that, you have to resolve how you’re going to treat the preferred securities.

In terms of actually getting out of conservatorship, it’s going to be a process, they’re going to need 100 to 150 billion dollars of capital. There’s never been a raise in the history of the markets of that size. You cannot eat an elephant like that in one bite, it will take three/four bites in order to do that. That will be something that will play out over a multitude of years. In terms of realizing the investment potential, we do believe that the next six to twelve months would be the timeline with respect to the securities, where they’re at today to closer to that par value level.

• 07/09/2019 – What to expect when you’re expecting a report on GSE reform (from Hannah Lang) – “Calabria has also said that he would begin negotiating changes to the preferred stock purchase agreements governing Treasury’s shares in Fannie and Freddie in September or October, if the reports are completed during the summer as expected.“

WASHINGTON — Recent expectations have grown that the Trump administration may prepare aggressive action to end the conservatorships of Fannie Mae and Freddie Mac, but some mortgage policy observers are speculating that a much-anticipated Treasury Department report on housing finance reform plans could be short on details.

A March directive by President Trump called on on Treasury, as well as the Department of Housing and Urban Development, to report on both administrative and legislative reform options “as soon as practicable.” The findings, which will either be released in one or several reports, are expected to come out starting as early as this month.

“This feels like the most significant movement in GSE or housing finance reform in the last decade,” said Thomas Wade, the director of financial services policy at the American Action Forum. “A lot of what I think this debate has been missing is an articulation as to what the appropriate or desired role of government in housing should be and some degree of urgency from the top.”

Treasury Department building
A March directive by President Trump called on Treasury, as well as the Department of Housing and Urban Development, to report on both administrative and legislative reform options “as soon as practicable.”
Bloomberg News
Federal Housing Finance Agency Director Mark Calabria has said he is waiting to see those reports before proceeding to make any decisions about how to supervise the government-sponsored enterprises’ exit from conservatorship.

But there is some skepticism about how much the Treasury and HUD findings might change the narrative around charting a future path for the GSEs. A report or series of reports could lay out goals that Calabria and other officials have already outlined without offering clear details about the mechanics to accomplish them.

Several observers stress the limitations on the administration to make lasting reforms without congressional involvement to create more competition in the mortgage market.

“These are very difficult things to do with administrative action — level[ing] the playing field and doing this without really increasing interest rates and facing any political blowback,” said Michael Bright, the CEO of the Structured Finance Association.

The report might merely be a vehicle for the administration to put priorities that officials such as Calabria have already articulated on paper, said Mark Zandi, the chief economist at Moody’s Analytics.

“So far it’s been some speeches, some interviews, some conferences, but nothing comprehensive or consistent,” he said. “I’m not sure we’re going to learn anything new, but I do think we’ll get a more consistent comprehensive sense of what they have in mind.”

Wade agreed that the report will likely not include much beyond “broad mission statements,” especially in some areas that administration officials have already highlighted as top agenda items.

“The capital plan and potentially amending the [preferred stock purchase agreements] later this year could potentially be much more important than the results of this report, where I just expect to see fleshing out some of the minor details of the administration’s desired direction without necessarily going into the real crunchy details of something so specific as the [qualified mortgage] patch or the desired amount of capital for the GSEs,” he said.

But if there is any detail provided in the reports, it will likely be about capital and ensuring equal access for all lenders in a future housing finance system, said Ed Wallace, the executive director of the Community Mortgage Lenders of America.

“I don’t think it will go into great detail of the specifics, but it will give you a few specifics from the overall perspective,” he said. “It’s going to look at the generalities, and I think from a 40,000-foot view, but I think in certain instances like retained earnings and equality across the secondary market as far as pricing is concerned, we’re hoping it will be more specific in that.”

Wallace suggested that the report could lay out significant reforms that the FHFA could make administratively to ensure equal access for lenders, such as locking in level pricing or establishing a commitment fee to preserve government backstops.

Any mention of capital retention or capital building in the Treasury and HUD reports will be worth paying attention to, said Wade.

“Dr. Calabria has made it clear that he sees effective capital for the GSEs as being the necessary prerequisite for recap and release or any form of flotation of the GSEs into the market, and so having said that, I think it is absolutely certain that the Treasury and HUD plans will widely have some sort of capital retention plan,” he said.

The FHFA has yet to finalize a proposed capital framework that would be implemented upon the GSEs’ exit from conservatorship. Former FHFA Director Mel Watt proposed the risk-based capital requirements last year, and Calabria has said he is still reviewing the framework.

Calabria has also said that he would begin negotiating changes to the preferred stock purchase agreements governing Treasury’s shares in Fannie and Freddie in September or October, if the reports are completed during the summer as expected.

In 2012, the FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.

“Assuming the report is released in the next few weeks, the next step would be for the FHFA to put forward its capital framework for Fannie and Freddie … and then by early next year in 2020 they’ll end the profit sweep and allow the GSEs to start retaining earnings and building capital,” said Zandi.

The priority of capital rebuilding could even supersede the administration’s other priority of limiting the scope of Fannie and Freddie in the market, Wade said.

“I think we’re going to see significantly less in the way of this footprint reduction than many in the industry would like, because I think systemic risk will be sacrificed at the altar of profitability and capital retention,” he said.

The administration will also need to answer the question of what would qualify as capital for the GSEs, said Bright.

“You want to de-risk them, you say that you want them to play a smaller role in the economy, but that you also want them to have more capital and it’s unclear exactly yet what counts as capital,” he said.

The report will also most likely preserve a role for Congress in the reform process, while still outlining what administrative actions don’t require legislation, said Wallace.

“I think Congress will have to play a role for it to be accepted,” he said. “From where I sit, Congress wants to be a part of a solution and I think from what I’ve heard Director Calabria wants Congress to be a part of the solution.”

Bright said the administration would be overshooting if the report minimized a congressional role. There would be a “pretty significant market reaction” if the report were to insist that the administration unilaterally privatize Fannie and Freddie, he said.

“I hope that it’s a thoughtful addition to the discussion that adds an element that says there’s a lot that Congress has to do, but there are some things that make sense to be done administratively and those are as follows and we’ve thought through a few of them and we think we can take some steps,” he said. “That would be a good outcome, if it’s something along those lines, so it’s sort of measured in terms of its goals.”

Ultimately, some sort of compromise is essential for any reform plan to work, said Wallace.

“I think it’s so anticipated people on both sides of the fence are going to have their opinions of it,” he said. “The key will be whether or not the sides can objectively move forward. … If they don’t try and work together, it’s not going to.”

• 07/09/2019 – Mark Calabria’s FHFA Defends Net Worth Sweep and Agency’s Constitutionality

In a letter submitted to the Fifth Circuit on Monday, the FHFA said that under the direction of its new chief, Mark Calabria, the agency had reconsidered the constitutionality question and is now urging the en banc panel to uphold the single director structure. The previous position was put in place by Joseph Otting, who was serving as acting director prior to Calabria’s appointment and confirmation. Otting’s predecessor, Mel Watt, had consistently defended the agency against legal attacks on its structure.

“FHFA now advises the Court FHFA takes the position going forward that HERA’s structure is constitutional,” wrote Robert J. Katerberg, an attorney at the law firm Arnold & Porter that represents the FHFA, in a letter dated July 9, 2019.

The FHFA also called upon the court to uphold a lower court ruling that gave the green light to a 2012 amendment–often called the third amendment because it came after two earlier revisions–to Fannie and Freddie’s bailout agreement. That amendment created a flexible dividend to be paid to the Treasury, known as the “net worth sweep,” essentially forcing the mortgage giants to pay nearly all of their profits to the government but allowing them to pay nothing in quarters where they suffer losses.

• 07/09/2019 – Recap of Fannie and Freddie must protect shareholder rights – is this a good news for commons than that for pref?

The administration will soon announce plans to release Fannie Mae and Freddie Mac from government conservatorship, and potentially recapitalize them with private investment.

First, Treasury should treat the payments it received in excess of the 10% dividend it was originally promised as a buy-down of principal in its senior preferred stock. That would result in its senior preferred stock being fully redeemed, with Treasury still holding over $18 billion in cash beyond the repayment of its principal, plus its 10% dividend. Treasury should return that excess amount.

Second, Treasury should exercise its warrants to acquire 80% of the common stock in the enterprises. That will ensure taxpayers obtain the maximum return on Treasury’s investment in the manner originally agreed, rather than through an unlawful appropriation.

Third, there should be an explicit deal under which the enterprises pay an insurance premium to the Treasury each year in exchange for Treasury holding open its current funding commitment (limited to $200 billion) as a liquidity line of last resort. This converts the nebulous “implicit government guarantee” into something explicit, clear and limited.

Fourth, the enterprises should rebuild capital. This should be possible through a new share issuance and through retaining earnings for a few years, if necessary.

Fifth, the government should not play favorites among private shareholders. There have been rumors about allowing preferred shareholders to convert into common stock, or allowing a limited rights offering to certain shareholders. This will lead to disputes and delay.

The contractual and legal rights of all shareholders should be left in place and respected equally. Anything else will be seen as playing favorites to Wall Street hedge funds that have invested disproportionately in the junior preferred stock. The contractual rights of those shares should be respected, but not favored over those of common shareholders.

Following these five steps will show that the government respects private property rights. It will also promote the confidence investors need to invest in Fannie and Freddie at a good price. That in turn will boost the value of the common stock held by Treasury, which will benefit taxpayers lawfully. And it will delineate explicitly the role of government and the private markets in funding these two institutions.

Fannie and Freddie exist to promote homeownership. The American dream, at the heart of which is owning private property. Corporate stock is also property, and close to the American Dream. Dear administration: You have a great opportunity to send a powerful message about the sanctity of private property rights and to make a profit while doing so. Don’t blow it.

• 07/05/2019 – Bloomberg intelligent great analysis

• 07/01/2019 – US to build capital and to stop taking Fannie, Freddie profits this year: Charlie Gasparino

• 07/01/2019 – S&PGR Affirms Rankings On Fannie Mae; Outlook StableJuly 01, 2019 13:53 ET (17:53 GMT)Press Release: S&PGR Affirms Rankings On Fannie Mae; Outlook StableThe following is a press release from S&P Global Ratings:OVERVIEW– We affirmed our overall ABOVE AVERAGE rankings on Fannie Mae(r) as a commercial mortgage loan master and special servicer.- The charter for The Federal National Mortgage Association (Fannie Mae), established by Congress in 1938, was expanded in 1984 when it formed its multifamily commercial lending business. Fannie Mae has been an active purchaser of multifamily mortgage loans since 1987.– The outlooks on the rankings are stable. FARMERS BRANCH, TEXAS (S&P Global Ratings) July 1, 2019–S&P Global Ratings today affirmed its ABOVE AVERAGE rankings on Fannie Mae as a commercial mortgage loan master and special servicer. The outlooks on the rankings are stable.Our rankings reflect:– The solid depth and breadth of management and staff, with significant industry experience and meaningful company tenure; — The dedicated focus on technology platform and applications, along with extensive data loss protection and oversight; — The comprehensive quality control and audit environment; — The solid multifamily underwriting guidelines and servicer oversight, which benefit from a unique risk-sharing model; — The lengthy track record of special servicing loan resolution activity, though it is predominately limited to the traditional multifamily product; — The historical low level of multifamily delinquencies; — The continued financial support and implicit guarantee from the U.S. government; and — Fannie Mae’s position in the Federal Housing Finance Agency (FHFA) conservatorship, with an uncertain future.Since our prior review (see “Servicer Evaluation: Fannie Mae,” published March 14, 2018), the following changes and/or developments have occurred: — Lending activity remained steady at $65 billion in 2018, including over $20 billion in green bond issuance. — The FHFA issued its 2019 Conservatorship Scorecard, keeping the annual multifamily lending cap to $35 billion for 2019 (the same level as in 2018, excluding carve-outs for certain targeted business segments). — The Director of Portfolio and Partner Surveillance left the company in May 2018. In the interim, those duties are being handled by the Vice President of Debt and Equity Asset Management. Fannie Mae is strategically approaching backfilling this position and anticipates completing this in the coming months.– The Multifamily Chief Credit Officer retired in December 2018, and the position was filled with an experienced industry new hire. — The company replaced the legacy disclosure system in November 2018 with DUS Disclose(r), which includes more data points for servicers. — The company consolidated from five locations in Washington D.C. to one location in Washington D.C. during the third quarter of 2018. — The company relocated its Dallas operations to a Plano office campus, which is approximately 10 miles north of the prior location, in November 2018. — The CEO retired in October 2018, and the position was temporarily filled by a board member who was subsequently appointed as the new CEO on March 26, 2019, following a national search. — The director of special servicing role was split into two roles in October 2018: the director of REO and disposition and the director of special asset management. The previous director of special servicing transitioned to the director of REO and disposition, while an internal team manager was promoted to the director of special asset management. — The Risk & Compliance portal was developed as a repository for policies and procedures in the fourth quarter of 2018, replacing the COPPER application. — KPMG was selected as bond administrator, outsourcing duties previously performed by the internal securities management team. The stable outlooks on the rankings reflect our view that Fannie Mae will continue to serve as a fully capable master and special servicer for commercial mortgage loans with a multifamily focus. Although Fannie Mae’s future existence and role have been under discussion internally and externally within various levels of the U.S. government recently, we assume it will conduct business as usual for the foreseeable future.The financial position is SUFFICIENT.
• 06/29/2019 – Possible Fannie, Freddie IPO whets Wall Street’s appetite

The nation’s largest bank, J.P. Morgan Chase & Co., hosted a private meeting on Tuesday with 75 investors to discuss efforts to overhaul both outfits, which play a critical role in housing financing, but have been wards of the government since the 2008 financial crisis, according to people with knowledge of the matter. The meeting also included members of investment bank Moelis & Co., which has long advocated ending Fannie and Freddie’s conservatorship and allowing the outfits to raise capital and return to their former status as private companies, these people say. A partner at the law firm of Kirkland & Ellis LLP, who specializes in mergers and acquisition, also presented to the group, they add.

********************************************

However, Joshua Rosner comments later as follow,joshua rosner‏ @JoshRosnerMore Replying to @navycmdr

I spoke to several people in the room. I think the characterization is not quite right. They said there was no suggestion it would look like Moellis or of what UST or WH might do and that is it was nothing more than JPM asking Moellis to explain their proposal to clients.

• 06/25/2019 – IMF newsAs IMFnews went to press Tuesday, the Senate Banking Committee was holding a hearing on whether Fannie Mae and Freddie Mac should receive “systemically important financial institution” designation from the Financial Stability Oversight Council. If that happens, the GSEs would be subject to enhanced risk-based and leverage capital requirements…Of course, the whole point is moot though, isn’t it? Fannie and Freddie continue to be wards of the federal government. If they fail to meet a capital test, what’s the worst Uncle Sam can do? Put them in conservatorship? They’re already there. And isn’t Uncle Sam the one that’s prohibited the two from building capital?…Meanwhile, the Federal Housing Finance Agency is working on new capital standards for the two mortgage giants. A proposal is expected this summer…In his opening statement before the hearing, SBC Chairman Mike Crapo, R-ID, said his strong preference is for Congress to pass GSE reform legislation, though he added: “However, we are also interested in analyzing some of the options currently available to the administration to protect taxpayers and put our housing finance system on stronger financial footing…”
• 06/25/2019 – Wall Street insider Craig Phillips leaves Treasury without Fannie, Freddie reform
  Phillips was “one of the few senior folks at Treasury with clout” to negotiate on GSEs

Federal Housing Finance Agency Director Mark Calabria said earlier this month that he hoped Treasury’s plan to release Fannie Mae and Freddie Mac would come by the end of June. The White House is reviewing a draft of the proposal, Bloomberg reported last week, citing people familiar with the matter. The two mortgage giants guarantee more than half of the outstanding residential mortgages in the U.S., according to Federal Reserve data.

The departure of Phillips “matters” to the prospects of getting Fannie and Freddie back to anything resembling the footing they had before the housing crisis a decade ago, Jaret Seiberg, Managing Director at Cowen Group, said in a note to clients on Friday.

“Phillips was one of the few senior folks at Treasury with the clout to negotiate on GSE reform,” Seiberg wrote in the note.  “While we believe he finished the Treasury white paper on GSE reform before he left, his departure means that Phillips cannot push the National Economic Council to approve the document. More broadly, Mnuchin has few other senior advisers and he devotes much of his time to trade disputes. The argument is that Mnuchin simply lacks the time and energy needed to advance a housing finance reform plan given the controversy that will surround any plan to recap and release Fannie and Freddie.”

• 06/25/2019 – Push to Overhaul Fannie, Freddie Nudges Up Mortgage Costs
  Some investors are wary that any big changes could reduce or eliminate the federal backstop – WH is reviewing the draft and might be completed by July

White House staff are reviewing a draft of the plan, written by the Treasury Department, and it could be completed as early as July, according to people familiar with the matter. Only Congress can create a federal guarantee for the Fannie and Freddie’s securities, but the chances of lawmakers acting are slim.

Officials from large asset-management firms, including BlackRock Inc. and Pacific Investment Management Co., met privately on June 7 with Mr. Calabria. People familiar with the meeting said attendees left the session concerned about a lack of clarity over how the Fannie and Freddie would be backstopped in any move to privatize the firms.

• 06/18/2019 – Craig Phillips Leaves Treasury Before Fannie Report Is Finished – another surprise on this topic, and it seems like WH is reviewing his proposal and we will see when they can finish the review and then release it

Craig Phillips, a top aide to Treasury Secretary Steven Mnuchin, left the agency last week before the release of a housing-finance plan he was expected to finish, according to people familiar with the matter. Phillips, who said in May that he was planing to step down, led the Treasury Department’s effort to draft a plan to get Fannie Mae and Freddie Mac out of U.S. conservatorship. Federal Housing Finance Agency Director Mark Calabria said last week that he hoped Treasury’s plan to return the companies to private ownership would come by the end of the month. The White House is reviewing a draft of the proposal, people familiar with the matter have said.

• 06/13/2019 – FHFA Director Flags Risk from Nonbank Mortgage Lenders

Almost 50% of all mortgage originations sold to Fannie Mae or Freddie Mac last year came from non-depository institutions, FHFA Director Mark Calabria said today at an industry event in Washington, D.C. Noting that “there are some key differences between banks and non-banks that we need to address in a responsible way,” Calabria said that under his leadership, FHFA will work to improve counterparty risk standards at Fannie and Freddie. “Our goal is to ensure that originators have the financial strength to continue lending through any market weakness or stressed environment,” he said.

Calabria also outlined his plan for removing the GSEs from conservatorship. A critical step in that process will be building capital at Fannie and Freddie, a process he expects to be underway by next year. He added that he will continue to work with Congress on a legislative solution to housing finance reform, which could include, among other things, an explicit guarantee. Should Congress create an explicit guarantee, he emphasized that “it should be limited, clearly defined and paid for.”

• 06/13/2019 – Prepared Remarks of Dr. Mark A. Calabria, Director of FHFA, at 2019 Ginnie Mae SummitRemarks as Prepared for Delivery, Dr. Mark A. Calabria, Director, Federal Housing Finance Agency, 2019 Ginnie Mae Summit, Thursday, June 13, 2019, 3:30 – 4:00 PMMany of you work in the non-banking sector. You know what an important role your institutions have played in the mortgage market.Non-banks have brought capacity to both originate and service mortgages, providing the liquidity that the market needs. And we fully expect that they will continue to play an important role moving forward.But from a risk perspective there are some key differences between banks and non-banks that we need to address in a responsible way.Prudent, sustainable risk management is one of my top priorities.We have been working with Fannie and Freddie to improve counterparty risk standards. Our goal is to ensure that originators have the financial strength to continue lending through any market weakness or stressed environment.
  Over time I think they should operate under essentially the same capital rules as other large financial institutions. – does this mean that it does not need to be in the same capital rules as others at present?An important step will be to address the Net Worth Sweep. But it would likely take a very long time to build sufficient capital through retained earnings alone.Therefore, we will be exploring other avenues to raise capital, such as a public offering of some kind. This kind of comprehensive reform agenda will strengthen Fannie and Freddie for the future.When implemented, it will allow them to build a sound capital base, backstopped by world-class supervision and regulation. And it should bring added confidence to all market participants.
• 06/12/2019 – Fannie, Freddie +2.1% as FHFA head seeks Congressional action – should we see this plan as early as this week per the following news? What should I do then?

If the legislative branch doesn’t do anything, then the FHFA will do what it can on its own.

Mark Calabria, who heads the agency that oversees Fannie and Freddie, is expected to send ideas to Congress as early as this week, people familiar with the matter told the WSJ.

“If I do nothing and don’t push, then I’m fairly certain Congress will do nothing,” said Calabria, who was appointed by President Trump to head the agency.

• 06/12/2019 – Fix Mortgage Finance, Or We’ll Do It For You, Regulator Tells Congress
  Mark Calabria urges ending government conservatorship of mortgage-finance companies Fannie Mae and Freddie Mac

Mark Calabria has a message for Congress: Help the Trump administration overhaul mortgage-finance companies Fannie Mae and Freddie Mac, or he will do what he can on his own.

“If I do nothing and don’t push, then I’m fairly certain Congress will do nothing,” said Mr. Calabria, the Trump-appointed head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. “They have a lot of priorities, so how do I knock this up a few levels in the priority chain for Congress?”

Both plans take into account the likelihood that Congress won’t take action, Mr. Calabria said. “A lot of what you’re going to see out of Treasury and a lot of what you’re going to see here is, how do we continue to make administrative actions that aren’t dependent on Congress,” he said.

• 06/11/2019 – FHFA Firming Up Outlook for Agency IPOs – prepare for something?

The Federal Housing Finance Agency is advancing with plans to recapitalize Fannie Mae and Freddie Mac via an initial public offering.

Fannie and Freddie shareholders who spoke to FHFA head Mark Calabria this week said they are convinced the Trump Administration intends to conduct a $120 billion equity offering in late 2019 or early 2020. The move would bring the mortgage agencies out of conservatorship.

Meanwhile, the U.S. Treasury Department has called banks including Goldman Sachs, J.P. Morgan and Morgan Stanley about leading the stock offering.

The moves solidify statements by Calabria in May that sales of Fannie and Freddie shares are possible next year. They also advance a long-running White House plan to privatize the agencies regardless of whether Congress consents to such an initiative.

A source described the IPO as a joint sale of shares in Fannie and Freddie, although it remains unclear whether the agencies would come to market sequentially or at the same time. Fannie and Freddie currently trade over-the-counter, with both also maintaining a mix of preferred stock.

The Trump Administration apparently plans to release a complete plan for the IPO this month.

Calabria indicated that as part of the effort, Fannie and Freddie would settle a number of lawsuits that investors filed against them after the 2007-2008 market crash. Those complaints stem largely from a series of actions in which the Treasury took control of Fannie and Freddie in 2008 and, starting in 2012, began claiming the agencies’ profits.

Shareholders argue that money should have flowed to them as dividend payments instead. While many of the lawsuits have been dismissed, some still are outstanding. Most of the actions could be resolved by making preferred shareholders whole, potentially via a mass “sweep” of profits.

Fannie and Freddie stockholders were ecstatic at Calabria’s statements. “It’s exactly what we laid out,” one investor said. “The goal of this president is what can be done administratively. You can see there’s a focus on getting it done.”

One potential obstacle: doubts that investor demand would be sufficient to support such a large stock offering.

Skeptics of the plan point out that Pimco tried three times to raise $1 billion for a REIT called Pimco Mortgage Trust, but withdrew the offering in May after investors balked at its valuation. Bank of America, Credit Suisse, Goldman and Morgan Stanley were leading the sale.

Pimco planned to use the proceeds from the sale to buy and securitize agency mortgages, while expanding into non-agency products later. The outcome suggests that “even if Calabria wanted to IPO in six months . . . there’s no way you can turn [Fannie and Freddie] loose in this market,” an executive at another REIT said.

Following Calabria’s gestures in May toward a coming IPO, outgoing Freddie chief executive officer Don Layton also predicted it would take years to raise the needed capital — which he pegged at $125 billion.

But one shareholder said Calabria was firm that an IPO is feasible. “The Pimco IPO is apples and oranges,” he said. “With Fannie and Freddie you’re talking about . . . the largest financial institutions in the world that represent a large portion of the U.S. economy. I don’t think it’s a problem, and neither did Calabria.”

It remains to be seen how the planned share sale would mesh with other efforts to curtail the activities of Fannie and Freddie, including proposals to reduce loan-size limits, raise guarantee fees and lift a provision that allows the agencies to buy loans that don’t conform to the Consumer Financial Protection Bureau’s “qualified-mortgage” standards. Also uncertain is what would become of the Common Securitization Platform, which Freddie tapped to complete a bond sale for the first time on June 3.

• 05/30/2019 – Administration Nears Plan to Return Fannie, Freddie to Private Ownership
  Effort would put them on sounder footing, then release them from government control

Administration Nears Plan to Return Fannie Mae, Freddie Mac to Private OwnershipEffort would put the companies on sounder financial footing, then release them from government control

Mark Calabria, director of the Federal Housing Finance Agency, is part of an effort to return Fannie Mae and Freddie Mac to private ownership. PHOTO: T.J. KIRKPATRICK FOR THE WALL STREET JOURNAL

By  Andrew Ackerman Updated May 30, 2019 6:13 p.m. ET

WASHINGTON—Trump administration officials are putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae andFreddie Mac to private-shareholder ownership, people familiar with the matter said.

The proposal, coming more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on sounder financial footing and then release them from government control, if Congress doesn’t enact a more fundamental overhaul, these people said.

The plan is being developed by the Treasury Department in consultation with a regulator of the companies, the Federal Housing Finance Agency. It could change as it advances through the Trump administration, works its way through the White House and ultimately is submitted to the president for his approval as early as June, the people said.

The proposal is expected to include a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout. 

If carried out, the companies could return to a status similar to how they operated prior to the financial crisis. Still, administration officials would prefer Congress to act on a more sweeping remake of housing finance.

Former officials of the companies and housing experts say the moves could be daunting. Shoring up Fannie and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering. In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.

Fannie and Freddie are central players in the mortgage market, buying mortgages from lendersand packaging them for issuance as securities.

The companies got into trouble before the crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages.

The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

As part of the draft plan to return Fannie and Freddie to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal guarantee, the people said.

The Treasury’s in-house process for drafting the plan is near completion, with sign-off expected soon from Treasury Secretary Steven Mnuchin, the people said. That approval is likely to come before Craig Phillips, a counselor to Mr. Mnuchin and the Treasury’s point man on the project, leaves the government sometime next month.

Still, the document is unlikely to be released to the public until after a review by other parts of the administration, led by National Economic Council Director Larry Kudlow and involving Mark Calabria, the head of the FHFA. The timing of that review is unclear.

Mr. Calabria, a former aide to Vice President Mike Pence, has long said he wants to put the firms on the road toward returning to private hands. Earlier this month, he said an IPO could come as soon as next year.

People familiar with the Treasury document cautioned it would likely include substantial changes to the business models of the companies, including steps to reduce over time their footprints in housing finance.

Those steps, which could include limits on the types of loans Fannie and Freddie may purchase, could reduce their capital needs. But such constraints could turn off potential investors in their shares.

A Treasury spokesman didn’t immediately comment on Thursday.

For more than a decade, lawmakers have tried to overhaul Fannie and Freddie. The Trump administration has said it wants to work with lawmakers to return the companies to private hands, but the power split in Congress limits the chance of a legislative solution, despite significant interest among lawmakers of both parties.

That impasse in turn provides an opportunity for the Trump administration to take steps on its own.

Any move to recapitalize and then release the firms would be a victory for hedge funds and other investors that have been betting on Fannie and Freddie’s privatization for years. Still, it remained unclear how existing shareholders, including mutual-fund giant Capital Group Cos. and hedge funds such as Paulson & Co., would be treated in any capital-raising by the companies. One possible outcome is that the existing shareholders would see their stakes diluted in any new offering.

• 05/23/2019 – U.S. Government Could Stagger Fannie, Freddie Privatization: Regulator

WASHINGTON (Reuters) – Mortgage giants Fannie Mae and Freddie Mac could be returned to the private market at different times, especially if the government moves to float them on the public markets, the head of the U.S. housing finance regulator told Reuters in an interview.

“I’m open to seeing what makes sense…that kind of sequencing hasn’t been decided, but obviously if you tried to engineer them both at the same time, you’re depending on more things going right at the same time,” he said. “One may be ready before the other, it just depends.”

“There’s less risk of overwhelming the demand that’s in the marketplace,” he said. “But again if they are both ready to go and you start to hear very large appetite, that this is something that the market could absorb at once, then that changes the dynamic.”

In the event of a staggered privatization, Calabria said he hoped any lag between the entities would not exceed six months.

• 05/21/2019 – Fannie, Freddie shareholder payout is part of the reform discussion, regulator says in surprise move

“It would likely take a very long time to build sufficient capital through retained earnings alone,” he said. That’s obvious from a quick look at the math — the two companies made about $25 billion last year. The former FHFA acting director said the two companies could need up to $200 billion in capital, and some analysts say that number could stretch even higher.

In a subsequent appearance on CNBC, Calabria mentioned that the companies’ common shareholders are part of the discussions now underway, a comment that took many housing finance observers by surprise.

“Existing common shareholders have not been a significant part of the discussion,” said Brandon Barford, a partner with Beacon Policy Advisors, a boutique research firm. Before co-founding Beacon, Barford worked alongside Calabria on the Senate Banking Committee at the height of the crisis. “Frankly, there hasn’t been a lot of emphasis on the mechanics of how this would work. I’m curious about that and I’m not sure that’s all been worked out in FHFA, let alone in negotiations with Treasury.”

Calabria’s comments on CNBC, on the sidelines of a major industry gathering, were somewhat rushed as he tried to explain the nuances behind the notion of a “public offering” for companies that already have shares outstanding. Holders of common shares “were never wiped out,” he said. “Whether we can do some kind of conversion with preferreds, or whether they would get par, it’s way too early to figure that out.”jtimothyhowardMAY 21, 2019 AT 3:12 PM

Here and elsewhere, Calabria continues to put forth a vision for a reformed mortgage finance system that includes more competition for Fannie and Freddie and an explicit government guaranty, despite the fact that this vision requires legislation that isn’t going to happen for the foreseeable future. Yes, he does talk about a possible common stock offering for the companies, giving owners of existing junior preferred stock the option to convert to common stock, and the need for Treasury to decide how it wants to handle the warrants, but he seems not to have grasped that these potential elements of the task he’s been asked to execute–getting Fannie and Freddie out of conservatorship–are incompatible with and will made more difficult by his vision, which he characterized in his recent speech to the Mortgage Bankers Association by saying, “if there’s one thing I know for sure it’s that Fannie and Freddie will look much different at the end of my five-year term than they do today.” If I’m one of the investors who will be asked to put upwards of $100 billion into these companies, my reaction would be, “Okay, tell me what they will look like then, and I’ll tell you whether I’ll put any money into them.”

My advice to Dr. Calabria would be to stop giving interviews and making speeches about how he’s going to transform the mortgage finance system, and instead roll up his sleeves, learn what’s possible and what’s not, then get to work with Treasury and its investment bankers on a plan for getting Fannie and Freddie out of conservatorship that can be accomplished in the real world.

• 05/21/2019 – Freddie Mac CEO Casts Doubt on Joint $125 Billion Fannie Funding -This interview is great. No wonder the MSM did not report on it. It lays it out as it is. Very interesting last 10 minutes. Definitely worth listening more than once.This might be the reason common isn’t up as much as preferred today.

Here is the video for the above comments – 2019 FMC/Donald Layton Keynote at about 34 minutes, FMCC CEO is talking about the unprecedented capital requirement. This interview is great. No wonder the MSM did not report on it. It lays it out as it is. Very interesting last 10 minutes. Definitely worth listening more than once.

Don Layton, who plans to step down July 1, said Tuesday that a capital plan issued a year ago by the companies’ regulator would require the mortgage giants to raise a combined $125 billion, in part by selling shares. To underscore how big a figure that is, Layton noted that the biggest initial public offering ever was Alibaba Group Holding Ltd.’s, in which the online retailer raised $25 billion.

Layton, speaking at a Federal Reserve conference in Florida, said it might take a stock sale and four to five years of Freddie retaining earnings to get to the $50 billion capital level envisioned under the Federal Housing Finance Agency’s June 2018 proposal. He also questioned whether any unresolved issues — such as the federal government’s huge stakes in Fannie and Freddie — might dampen investor demand for the companies’ shares should they hold IPOs.

“This is unprecedented to my knowledge,” Layton said.

• 05/20/2019 – discussions on tweeter for valuation of commonsByron Dean‏ @xionhill 5h5 hours ago Preferreds may get 50 cents or less on the dollar coversion to commons with any other upside tied to performance of commons…seems like it may be a fair compromise to encourage upward pressure for commons…. Ron‏ @digiacomo_ron 3h3 hours ago My guess, Tsy offers Pfds less than redemption value in a conversion but with a wink. Tsy prices IPO on the low side so that a 30% run gets pfd holders, now who’d be holding common, to the equivalent of RV. It won’t be 50 cents on the dollar though. Still must settle law suits. Benji Brauser‏ @BenjiBrauser 3h3 hours ago Where do u see this getting the common stock price to?2019 Glen‏ @DoNotLose 3h3 hours ago 4-7? so many factors out of my controlBenji Brauser‏ @BenjiBrauser 3h3 hours ago It was in that range a few times in the last six years with facts not nearly as good as this.2019 Glen‏ @DoNotLose 2h2 hours ago so? pretty sure back then, the administration wasn’t parading 3%+ capital requirements either… just saying, maybe the commons were worth way more back before the government had time to figure out how to fuck them out of upside potential with higher capital requirements?Benji Brauser‏ @BenjiBrauser 2h2 hours ago Don’t u think they want the commons worth a lot so when they convert their warrants they can make the most possible? Do u think u might be extra sour on the CS because u don’t own any anymore. I think u r also underestimating the power of momentum and hype.2019 Glen‏ @DoNotLose 2h2 hours ago i think you’re underestimating the power of new money wanting to buy $100B+ of companies at prices that it will make money when the companies make $15-25B/year… and are basically entirely regulated like utilitiesInvestIt‏ @pgray41

7:02 PM – 20 May 2019

1. New conversation
2. Ron‏ @digiacomo_ron 2h2 hours agoReplying to @pgray41 @DoNotLose and 4 othersThat’s what I’m talking about2019 Glen‏ @DoNotLose 2h2 hours ago check the valuation, etc.Byron Dean‏ @xionhill 1h1 hour ago  Sorry buddy, your just probably very wrong about your valuation. But you are still pretty awesome in my book!HoldenWalker99‏ @HoldenWalker99 1h1 hour ago Moelis uses $22 billion earnings in 2022. No chance the reformed GSEs are making that out of conservatorship. Also, Moelis assumes over two years or retained earnings; more likely just one now.InvestIt‏ @pgray41 1h1 hour ago Push the timeline on Moelis back. It’s going to be a 2.5-3 year recapitalization at minimum.Matthew Mazurczak‏ @mattmazurczak 23m23 minutes agoMore
   1. Replying to @pgray41 @BenjiBrauser and 2 othersYou realize that valuation includes $$ that was already sweeped, will be sweeped and will not have to be raised in addition correct?

• 05/20/2019 – today’s CNBC’s interview of Calabria

from Valueplays: The news we’ve been waiting for….. I said since day one I never thought existing shareholders would be wiped out…. This also means preferred shares must be treated at par if converted.

highlights:

1. Craig Phillips will finish his plan before he leaves;
2. FHFA will end net worth sweep soon to start the exit from conservatorship;
3. FHFA will do it without congress’s action.
4. current common stock will continue to be traded
5. FHFA might let Fannie/Freddie convert 80% Gov’t warrants into commons and the Jr. PFD will likely convert as well.

FHFA Chief: Won’t wait for Congress to take Frannie and Freddie public from CNBC.

05/20/2019 – Prepared Remarks of Dr. Mark A. Calabria, Director of FHFA, at Mortgage Bankers Association National Secondary Market Conference & Expo 2019

“The Housing Finance System’s Status Quo is Over”

An important step on the path to building the necessary capital will be to address the Net Worth Sweep. But it would likely take a very long time to build sufficient capital through retained earnings alone.

So, we will be exploring other avenues to raise capital, such as a public offering of some kind. There is much work and analysis to do in this arena to fully explore all the options.

We are still very much in the early stages of this process. Later this year, following the President’s direction, we expect the Administration to release a Housing Finance Reform Plan.

Once that plan has been finalized, hopefully sometime this fall, I will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly. And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital. At that point, the path out of the conservatorships will depend not on the calendar but on Fannie and Freddie meeting the mile markers we set out for them.

It was insufficient capital that triggered the conservatorship, and it’s going to be sufficient capital that triggers an exit.

• 05/20/2019 – Glen Bradford’s view on FNMA/FMCC’s common price

I own preferred shares. Common shares face dilution risk. The leading insider plan forecasts common shares outperform preferred shares from here despite the dilution. Risks to common include:

1. Higher capital requirements
2. Lower guarantee fees
3. More competition
4. More regulation/cuts to what business they can do
5. Low market multiple
6. Government led recapitalization mechanics

I figure commons IPO $4-7, but I don’t own any because of the risks above. 

My own thoughts:

1. to be relisted might become a huge boost for the stock price since many institutions will like to own the stocks. think about American Funds, Vanguard, etc.

• 05/17/2019 – Craig Phillips talks about FNMA/FMCC, A Public Policy Conversation on Modernization of Financial Regulation, start at about 33:00, he said:

• 05/17/2019 – WATCH LIVE: President Trump addresses National Association of Realtors convention

Starts around 1:07:35:https://www.youtube.com/watch?v=De8UhSfMlOA

• 05/17/2019 – Trump calls Fannie, Freddie a ‘pretty urgent problem’

“We will consider taking administrative actions to modernize our housing programs and to ensure more affordable housing to get rid of ridiculous regulations,” Trump said.

Wall Street figures with “incredible talent” have been consulted on developing a solution, he added.

“We’re looking at different alternatives; we have many geniuses looking at it,” he said. “We’ll figure something out.”

• 05/17/2019 – Trump Says Freeing Fannie-Freddie From U.S. Control Is ‘Urgent’

(Bloomberg) — President Donald Trump said freeing Fannie Mae and Freddie Mac from government control is a “pretty urgent problem” that his administration plans to work with Congress to address.

Trump, speaking Friday at a conference hosted by the National Association of Realtors, said that the mortgage giants lack competition, that taxpayers remain on the hook for any losses at the companies and that they aren’t being run as well as they could be. He added that his administration is discussing ideas for fixing Fannie and Freddie with “some incredible talent from Wall Street.”

The president’s remarks reflect the White House’s determination to release the companies from conservatorship, something lawmakers and policy makers have failed at for years. In March, the Trump administration released an outline for overhauling the housing-finance system that directed the Treasury Department and the Department of Housing and Urban Development to write plans for reform. The reports are expected to be completed within the coming months.

“It’s really a problem that other than government should be doing,” Trump said Friday. “So we’re looking at different alternatives. We have many geniuses looking at it and we’ll figure something out.”

What to do with Fannie and Freddie, which backstop about $5 trillion of mortgage securities, is the main unresolved issue from the financial crisis more than a decade ago. The companies were taken over in 2008 as the housing market cratered and were sustained by a taxpayer bailout. They have since returned to profitability and paid in dividends to the Treasury $105 billion more than they received.

“The taxpayer’s actually been, in some ways, in many ways repaid from the bailout of Fannie and Freddie,” said Craig Phillips, the departing Treasury official who has led the department’s housing-finance reform efforts, at an event in Virginia on Thursday. “We’ve got to turn the page and fix it to move on.”

While there are many aspects of housing reform that require legislation, administration officials and regulators have signaled they may take action on their own if Congress doesn’t act. Federal Housing Finance Agency director Mark Calabria said last week that he’s fine with releasing the mortgage giants from government control without lawmakers.

In his remarks Friday, Trump said that he will work closely with Congress to pass housing legislation that “welcomes the private sector, competition, protects taxpayers and preserves homeownership for future generations.” But he said his administration would also consider taking other actions on to modernize housing programs and expand affordable housing.

• 05/17/2019 – Treasury Department aide hired to reform Fannie, Freddie will step down

Craig Phillips, a deputy to Treasury Secretary Steven Mnuchin who joined the department to overhaul Fannie Mae FNMA, +2.43% and Freddie MacFMCC, +1.92% is stepping down, he told Treasury staff members Thursday. The news was first reported by the New York Times. Shares of the two government-sponsored enterprises have both more than doubled this year after MarketWatch first broke the news that the Trump administration would likely attempt to reform the companies without Congressional input. In March Mark Calabria, a former aide to Vice President Mike Pence, was confirmed to lead the agency that regulates the two GSEs, and has since signaled he may make good on those plans. “Craig has been critical in establishing a housing policy finance reform framework, and will stay until the completion of the Treasury Housing Reform Plan,” a Treasury department spokesperson said in an email.

• 05/16/2019 – Lamberth’s decision (410444336-Lamberth-Decison)

Big government loss in court, Lamberth denies dismissal and FNMA/FMCC goes to trial. Bodes well for Enbanc appeal. The courts are finally turning in our favor.

• 05/16/2019 – Top Treasury Department Official to Depart
  Craig Phillips, Trump administration point person for financial deregulation, will return to private sector
• 05/16/2019 – Treasury Official Hired to Fix Fannie and Freddie Is Leaving

Mr. Phillips told Treasury Department employees on Thursday that he planned to leave the government next month, according to a person familiar with the conversation who was not authorized to speak publicly. He informed colleagues that he expected to return to Wall Street but had not lined up a new job.

During his two and a half years at Treasury, Mr. Phillips helped create a blueprint for relaxing financial regulations imposed after the 2008 financial crisis.

His departure adds uncertainty to the fates of Fannie Mae and Freddie Mac, the two giant mortgage finance companies that have been in government conservatorship since the crisis. The companies provide guarantees on the majority of United States home loans, making it much easier and safer for banks to provide customers with the mortgages at affordable interest rates.

Mr. Phillips and other Treasury officials have been meeting with the biggest American banks to determine how best to raise capital for Fannie and Freddie — a prerequisite to releasing them from government control — as well as how the housing finance system might be restructured, according to two people who participated in the meetings.

• 05/16/2019 – some twitter news – Is June 6 the date to release the recap plan?2019 Glen@DoNotLosehey @CraigPhillipsDC thanks for all your hard work on getting reform done from Treasury’s side. Look forward to watching you go out with a bang when the Treasury plan goes to the White House to coincide with your departure. Hope you are able to pick up preferred  Enjoy.Tom Findley:Craig Phillips, a deputy to Treasury Secretary Steven Mnuchin who joined the department to overhaul Fannie Mae FNMA, +1.52% and Freddie Mac FMCC, +2.53% is stepping down, he told Treasury staff members Thursday. The news was first reported by the New York Times. Shares of the two government-sponsored enterprises have both more than doubled in the year to date after MarketWatch first broke the news that the Trump administration would likely attempt to reform the companies without Congressional input. In March Mark Calabria, a former aide to Vice President Mike Pence, was confirmed to lead the agency that regulates the two GSEs, and has since signaled he may make good on those plans.Katy O’Donnell‏ @KatyODonnell_ 5h5 hours agoCraig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.”TheAdvoQT‏ @TheAdvoQT 4h4 hours ago Any mention when @stevenmnuchin1@USTreasury releases the framework to recap and release #GSE so @MarkCalabria can review and implement? @realDonaldTrump@MariaBartiromo@TuckerCarlson@FoxNews Thomas Morris‏ @tommy1rx Replying to @TheAdvoQT @KatyODonnell_ and

Plans due from Treasury & Housing on June 4th. Pretty sure they already have a plan in mind. They just want everyone’s input. En Banc decision due any day now but surely no later than mid-July. Maybe they are waiting for the ruling?

• 05/15/2019 – Calabria Addresses NAR Membership on GSE Reform

At the National Association of Realtors (NAR) Regulatory Issues Forum, newly-appointed Federal Housing Finance Agency Director Mark Calabria spoke to hundreds of Realtors and industry leaders regarding his vision for the future of Fannie Mae and Freddie Mac. The Forum also presented an opportunity for NAR to highlight its housing finance reform plan, which proposes a utility model to ensure a reliable and affordable source of mortgage capital for Americans going forward.Bethany McLean, a contributing editor at Vanity Fair and author of Shaky Ground: The Strange Saga of the U.S. Mortgage Giants, moderated the event. NAR members and Regulatory Issues Forum Chairman and Vice-Chairman Kurt Thompson and Dean Dawson were also on hand to open and close the panel.McLean led Tuesday’s discussion with Director Calabria, diving deeper into the former NAR economist’s priorities in his new role at the helm of the FHFA.“One of the things I’m going to be trying to do across the board is [determine how we] level the playing field to where all large financial institutions have similar capital,” Director Calabria told the group. “[That will ensure] the GSEs have a good business model because they have good management and good execution–not because they have lower standards than everyone else–and so we have that capital there to protect the taxpayer. At the end of the day, I think that can be done in a way that really does not adversely impact the consumer.”Calabria said loan limits will remain untouched during his tenure at FHFA. He also assured the audience that work to preserve the 30-year mortgage remains critical.“The process of setting loan limits is very mechanical,” Calabria said. “It’s in statute–Congress decided. That’s not my decision, so loan limits are not going to change from what’s in statute.”Still, conversations surrounding the prospects, principles and policies of the GSE reform drove the discussion, as they will likely drive much of Director Calabria’s five-year term atop the FHFA. Specifically, McLean pressed on his approach to orchestrating an end to Fannie and Freddie’s conservatorship.“I would not feel comfortable having [the GSEs] exit conservatorship until I’m comfortable knowing that we never go back to the old days, pre-crisis, and that we have a Fannie and Freddie that are responsible, good corporate citizens that don’t have the arrogance we saw before the crisis,” he said.Although unity surrounding any specific policy changes has yet to emerge in Washington, Realtors have in hand, a ready-made, pragmatic and workable plan for housing finance reform.“Because of the GSEs, homebuyers in Springfield, Missouri and Springfield, Massachusetts have equal access to a mortgage and pay nearly identical rates,” NAR President John Smaby said. “That’s why Realtors have worked so hard to develop a plan that keeps our housing finance system solvent, and why we’ll be able to help aspiring homeowners for decades to come.”NAR’s plan would transition Fannie Mae and Freddie Mac into private, shareholder-owned utilities that would continue to purchase, guarantee and securitize single-family and multifamily mortgage loans.“By retaining an emphasis on private capital, our model protects taxpayers, consumers and the U.S. economy,” Smaby said. “Most importantly, as utilities, Fannie’s and Freddie’s foremost priority would be to serve the public mission instituted by Congress–to support stability, liquidity and access in the mortgage market.”

• 05/15/2019 – Calabria says he has power to end government control of Fannie, Freddie

Federal Housing Finance Agency Director Mark Calabria on Tuesday laid out his most forceful argument yet for why he has the power to end government control of Fannie Mae and Freddie Mac without legislation, even as he urged Congress to take the lead.

• 05/12/2019 – Bethany McLean, Vanity Fair author with two GSE books to her credit, and FHFA Director Mark Calabria will appear next Tuesday, May 14, at a National Association of Realtors (NAR) event in DC. – be aware of this incoming event!
• 05/10/2019 – Fox business news interview of Mark

 jmaxsimonComments5 | + FollowI just watched the Calabria interview on fox. Listen closely to minute 13:30-14:30. He says that the NWS was to raise capital for the enterprises, Carlos is right on this, I know it sounds like a long shot (even though it is the most obvious) but that is the case. The role of a conservator is to conserve assets not to steal all the cash. The goal is to restore them and put them on a sound and solvent footing. As long as we get that money back, basically the NWS from 2012 on, and they kill the warrants I am fine with a secondary offering if needed. Everyone would be fine with that, but as some other poster said that capital should 1. pay off the preferreds 2. Pay a dividend and capitalize on the enterprise. As far as opening up the industry to competition no one is going to want to make mortgages, banks like writing them and selling and refing etc. Point being most properties do one or the other every 6 years. Banks do not want to loan money at 4%, and make bonds and all that. If they had been interested in doing that there would have been no need for fnf in the first place.

• 05/10/2019 – Fannie, Freddie IPO could come in 2020: FHFA Mark Calabria (FBN_interview_Mark_Calabria)

highlights

1. No timeline when things will happen “not calendar driven”
2. No idea about capital ratios – the reporter mentioned 4.5% and he politically danced around it
3. He said he is required to let F&F out of conservatorship but it is up to the companies to meet the requirements he will impose on them and thus up to them when they will get out.
4. Waiting on Treasury plan this summer. Talks will commence in the fall regarding the purchase agreement.
5. No idea how the capital raise will take place. At earliest it will start beginning of 2020.
6. Talked about wishes he has to increase competition- all dependable on Congress ( even he thinks it will be difficult to achieve)

President Trump’s Opens a New Window. new director of the Federal Housing Finance Agency says he’s considering an initial public offering of Fannie Mae and Freddie Mac as early as the first half of next year to raise capital.

In a FOX Business Opens a New Window. exclusive, and his first interview since taking the helm of the FHFA, Mark Calabria, says that allowing Fannie Mae and Freddie Mac to simply rebuild capital by retaining earnings isn’t enough to get the mortgage giants in a strong position quickly.

Right now, Fannie Mae and Freddie Mac Opens a New Window. are under control of the federal government since being bailed out by taxpayers during the financial crisis. Both send all of their profits to the U.S. Treasury, in what’s called a net worth sweep, while maintaining a thin capital cushion of $3 billion. Calabria says a sufficient amount of capital is what’s needed to exit conservatorship or government control.

Calabria is currently waiting on a plan from the U.S. Treasury on reform for Fannie and Freddie, which he expects this summer. Then he will negotiate with Treasury and hopes to come to an agreement by the fall that would then allow them to stop Fannie and Freddie from sending all profits to Treasury later this year. That is, ending the so-called net sweep. By January, Calabria wants to start the capital-building process and thinks it’s possible an IPO could occur at the earliest in the first half of next year.

Calabria maintains Fannie and Freddie should be treated like banks and have capital requirements akin to the ones the Federal Reserve requires of banks – that is, 4.5% of risk-weighted assets. He says somewhere in that neighborhood is a good bet. “How do you get Fannie and Freddie to look no worse than other large financial institutions?” he says.

Raising capital is the first step to exiting government control. From there, Calabria wants to see an entirely new housing finance system, both to improve pricing for consumers and to safeguard against another taxpayer bailout.

He favors fully privatizing Fannie and Freddie and is hoping Congress will offer additional charters to create more Fannies and Freddies that would foster competition. The idea parallels with part of Senator Mike Crapo’s plan outlined earlier this year, which would also look to put Fannie and Freddie in private hands, add additional charters and use Ginnie Mae and the full government backstop. Calabria says Crapo’s plan is a “good framework.” “It can’t be this quasi are you private or you public is there something in the middle,” says Calabria. “It really has to be private capital at risk so the taxpayer is not on the hook… If you have several of these companies you know any one of them can fail and it’s a little less disruptive.”

Calabria concedes it can be difficult to get Congress to go along with a plan, but is hopeful. “It’s broadly bipartisan,” he says. “I think we can come back and try to do that again. I’m hopeful that working with Chairwoman Waters in the House, Chairman Crapo in the Senate, I think that there are some areas for agreement. It’s not going to be easy, but I think that there are some areas we can work on.”

If lawmakers aren’t able to pass something he will take action unilaterally. “Well I think I’m actually obligated to,” he says. “As far as I see it, I don’t really

have any choice but to fix them and get them out because that’s what the statute demands.”

Part of safeguarding the system also means ensuring Fannie and Freddie play by the same rules as the private sector. Calabria says that means making sure the mortgage giants are held accountable to the same rules, including the qualified mortgage rule. The qualified mortgage rule went into effect as a result of the housing crisis and strengthens underwriting standards for mortgages – except that Fannie and Freddie are exempt from the rule. Calabria says that means they are allowed to make riskier loans than what is allowed under the qualified mortgage rule. He believes the mortgage giants should be subject to the rule and hopes to work with the Consumer Financial Protection Bureau to change that.

Calabria thinks his policy approach still ensures availability of mortgages and that mortgage rates will stay where they are currently, barring action from the Federal Reserve. “We’re going to continue to have I think to me historically low mortgage rates for next number of years,” he says.

But bringing private capital into the housing finance system could spell higher mortgage rates since private companies are in business to make money and chase higher returns that could lead to higher financing costs and higher mortgage rates.

Calabria is more concerned about affordability due in part to low housing supply. He wants to encourage more single family homes to be built, but also wants to ensure it’s stable and sustainable. “One of the lessons from last time around is we got a lot of people on housing and they weren’t able to stay in the housing,” he says. “So how do we make sure that if there’s another downturn … that homeownership or is sustainable.”

• 05/08/2019 – Bloomberg news on Mark (fnma_bloomberg)
• 05/02/2019 – comments from T Howard: in the beginning of year 2020, implement of CECL might significantly drag down the stock price. So watch out here.

1. ruleoflawguyMAY 1, 2019 AT 3:09 PMTimfrom the transcript of today’s conference call on 1Q 2019 earnings:(CFO): “…In the first quarter our capital requirement under the proposed capital rule declined by 2% from $89 billion at the end of 2018 to approximately $87 billion. The decline in capital is primarily attributable to an increase in home prices and additional capital relief from credit risk transfers, partially offset by growth of our book of business. We use credit risk transfers to reduce the amount of capital we would be required to hold under FHFA’s proposed rule. For single-family, we have reduced our capital requirement for credit risk on recently purchased eligible loans by more than 75% through credit risk transfers… ”I find that 75% figure to be surprisingly large. this implies that while Fannie will require equity capital to support its existing book of business (and I assume this is approximately $87B), for so long as CRT transactions can be conducted they can be used as the primary source of new capital necessary to support new MBS generation. am I missing something?rolgLiked by 2 peopleReply
2. Tony CastelluccioMAY 1, 2019 AT 2:37 PMHi Tim,
   In the Earnings Call today the CFO talked about changes in the account ‘CECL standards’ issued by FASB, which will most likely lead to a draw Q1 2020. Here is the quote:“Second, I’d like the touch on the current expected credit loss standard, or CECL. CECL is a new standard issued by FASB which we are required to implement by January 1st, 2020. Upon implementation, we expect to recognize a cumulative adjustment to our retained earnings, which could have a significant financial impact and possibly result in a draw on treasury in the first quarter of 2020 depending on many factors, including our first quarter 2020 earnings, the composition of our book and economic conditions and forecast at the time. Under CECL, we will need to reserve for the lifetime expected credit loss of our entire book of loans. Therefore, once implemented, CECL will likely introduce more volatility to our financial results due to its pro-cyclicality.”Would you care to state your thoughts on this, and what it may mean for the businesses. Do you know if CECL standards are mandatory? It seems problematic in conservatorship or not.Liked by 1 personReply
   1. SimSlaMAY 1, 2019 AT 2:53 PMTim,Can you also discuss how it will affect the issuance of new shares?ThanksLikeReply
      1. jtimothyhowardMAY 1, 2019 AT 5:28 PMFor ROLG’s question on the Fannie Mae CFO’s discussion of capital, yes, you are missing something, but more importantly I believe FHFA is as well. In the current post I addressed the need for FHFA to get Fannie and Freddie’s capital standard right prior to any recapitalization initiative, and this is why. The June 2018 version of the standard–which is what Fannie is using currently and is the basis for the CFO’s discussion here–has three features that interact to make it highly problematic, and potentially unworkable in a severe economic environment: it is linked to the current loan-to-value (CLTV) ratios of the company’s loans, it gives excessive capital credit for securitized credit loss transfers, and it is extremely conservative (by not counting guaranty fees as offsets to credit losses, among other things). I’ll briefly touch on each one. Fannie says its first quarter 2019 required capital was $87 billion. That’s 2.54 percent of the company’s total assets, and seems reasonable. BUT…it’s based on Fannie’s CLTV at March 31, 2019, which was just 57 percent compared with the book’s original average LTV of 76 percent, and the $87 billion figure also was reduced by credit for Fannie’s securitized CRTs. Two things will happen during a downturn: (a) Fannie’s CLTVs will rise to approach and perhaps even exceed its original LTV (during the crisis Fannie’s average CLTV got to be 8 percent HIGHER than its OLTV), and (b) the market for its CRTs will dry up. When each of these occurs, Fannie’s capital requirement under the current FHFA capital specification will skyrocket, and be made worse by the fact that FHFA calibrated the current standard to produce a “bank-like” ratio, without CRTs, at a time when the housing environment was very favorable. That conservatism won’t go away in a bad environment. Without a fix from FHFA, the interaction of these features could cause Fannie and Freddie’s capital requirement to double (to 5 percent) in a severe downturn, while the capital requirements of all other financial institutions stay essentially constant. That would be unprecedented, and disastrous; FHFA must fix this in the next version of it standard.For Tony’s question about the FASB’s new current expected credit loss (or CECL) standard that is scheduled to be implemented at the beginning of 2020, I don’t have much to add to what Fannie’s CFO said. There will be a large one-time addition to Fannie’s loss reserve in the first quarter of 2020, to reflect a shift from reserving for “incurred losses” as is being done currently to all expected future losses under CECL, which could exceed that quarter’s profits and the company’s $3.0 billion capital cushion, thus triggering a need for a draw. Subsequently, CECL will cause Fannie’s loss provisioning to be more volatile, and pro-cyclical. As the economy slows and home price growth does as well (or prices even fall), Fannie will have to significantly add to its loss reserves because the lifetime expected losses on its loans will rise (probably substantially), and these additions to the reserve will reduce current period income. Conversely, when the economy recovers Fannie will reduce its estimate of future credit losses and take dollars back OUT of its reserve, increasing income. I’m not a fan of this rule; I think it unnecessarily introduces accounting stress at a time that all financial institutions will be experiencing economic stress. But this consideration obviously hasn’t carried much weight with the FASB, because the CECL rule implementation seems to be on track.Finally, in answer to SimSla’s question, if Fannie and Freddie’s earnings are made more volatile by CECL, relative to what they had been previously, that should reduce their earnings multiple, and reduce their stock prices. This will add yet a further challenge to the investment bankers who will be working on the companies’ recapitalization (and leave even less room for Treasury and FHFA to add some of the constraints on Fannie and Freddie that the banks will be asking for, and still have the recap be successful).

• 04/26/2019 – Less than two weeks on the job, Mark Calabria has set a bold agenda for himself as the new director of the Federal Housing Finance Agency.

It’s not just helping to chart a future for Fannie Mae and Freddie Mac — a Herculean task that has stumped policymakers for more than a decade. Calabria also plans to do a deep dive into problems with mortgage servicing, repair issues with the “qualified mortgage” patch set to expire in 2021, and ensure a better cooperative culture between the government-sponsored enterprises and their regulator.

If there is an overarching theme to his goals, it is to ensure the mortgage market does not return to the pre-financial crisis days.

“Anything that’s simply a return to sort of pre-2008, I would say is unacceptable,” Calabria said during a wide-ranging sit-down interview.

Mark Calabria, chief economist for Vice President Mike Pence
“What I see coming out of this is a roadmap with mileposts and at the end of the day, it’s really predominately in the hands of the GSEs whether they meet those mileposts,” said Mark Calabria, the new director of the Federal Housing FInance Agency.

Housing finance reform
The biggest challenge, of course, is housing finance reform. Calabria is clear he intends to help force the end of the conservatorship of the GSEs, one way or another.

At the moment, he is waiting to see the results of a recent presidential directive to the Treasury Department and Department of Housing and Urban Development to deliver comprehensive plans for administrative and legislative reform. Calabria is hopeful to start implementing changes as early as this year.

If Treasury and HUD’s final reports on housing finance reform are completed as expected this summer, FHFA would be set to begin discussing changes to the preferred stock purchase agreements in September or October, Calabria said. In 2012, FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.

“To me, the GSEs may be able to retain earnings, may be able to build capital, but I think it will absolutely require a conversation and an agreement between FHFA and Treasury on what are other avenues for raising capital,” Calabria said.

“My hope is that by us trying to build some momentum, that that helps enforce a sense of urgency for Congress to act.”
Changes to those agreements would accompany a “roadmap” for Fannie and Freddie to exit conservatorship, said Calabria, with no specific end dates in mind, but rather a checklist of progress.

“What I see coming out of this is a roadmap with mileposts and at the end of the day, it’s really predominately in the hands of the GSEs whether they meet those mileposts,” he said.

Calabria does recognize, however, that FHFA and Treasury alone can only do so much. He has already pledged to work with Congress on changes to the mortgage finance system. He isn’t planning to produce his own plan, however, but rather disrupt the complacency around the status quo.

Though Congress has made attempts to craft housing finance reform, no plan has come close to final passage. Many lawmakers pay lip service to wanting change, but appear willing to live with the current system. Calabria wants to change that.

Part of his role will be “being a vocal advocate for congressional action,” he said.

“The debate on the Hill is kind of fuzzy in terms of what the downsides are, so how do I help illustrate the downsides and how do we do some and more internal stress testing?” he added. “It’s important to recognize that just because some laws are passed and a lot of regulations were put in place by a whole suite of entities doesn’t mean that we’re in a lot stronger place.”

It’s also clear that Calabria hopes that by moving forward administratively, Congress will be prodded to action.

“My hope is that by us trying to build some momentum, that that helps enforce a sense of urgency for Congress to act,” said Calabria. “To me right now, as long as it’s kind of on autopilot, that lessens the pressure on Congress to act.”

As a result, he intends to move forward expeditiously with administrative reforms, though he makes it clear such moves will leave plenty of room for Congress.

“We can create with Treasury a path out of conservatorship,” he said. “That will take a substantial amount of time if in putting that roadmap out, if Congress comes in and says, ‘You know, we think your road map goes the wrong direction.’ That will give them an opportunity and again plenty of time.”

Ultimately, it should be up to Congress to determine what a future housing finance system would look like beyond the existing model, said Calabria, whether it be a multiple guarantor system, which Senate Banking Committee Chairman Mike Crapo, R-Idaho, has proposed, or a utility model. But Calabria’s preference is for more competition in the market.

“I’d ultimately like to see charters open up to anybody who can apply for them, but fundamentally, that’s a decision for Congress,” he said.

Mortgage servicing and QM patch
But GSE reform is not everything on Calabria’s plate. He also said he wants to do a “deep dive” on servicing.

“It’s fair to say that during the last downturn in the housing market, servicing was not where everybody wanted it to be,” he said. “Given what I saw last time, I feel like I want to be comfortable that that’s there, and if it’s not there, whatever I can fix, I can.”

Calabria also plans to work with the Consumer Financial Protection Bureau on the “qualified mortgage” patch. A home loan is eligible to be a qualified mortgage if it meets certain standards set by the CFPB, but the agency granted an exception for loans that are eligible for purchase by Fannie Mae and Freddie Mac. As a result, some loans that wouldn’t normally meet the QM criteria, including loans with higher debt-to-income ratios, have been able to be counted as such.

“If we had to extend the QM patch, I would consider that to be a failure on the part of Washington regulators.”
The different sets of rules for different entities has led to a “tremendous amount of uncertainty in some of the underwriting,” Calabria said.

Calabria said there should be one set of rules in place before the patch expires in 2021.

“My hope would be… that we get to a spot where we have a QM that works for everybody,” he said.

But Calabria drew a red line at suggestions by some that the patch merely be extended.

“If we had to extend the QM patch, I would consider that to be a failure on the part of Washington regulators,” said Calabria.

Protecting small lenders
At his April 15 swearing-in ceremony, Calabria emphasized that his primary goal was to cement the “tremendous progress” FHFA has made since its inception in 2008.

One of those areas is preserving the access for small lenders to Fannie and Freddie. Prior to the crisis, small banks frequently complained about the volume discounts Fannie and Freddie would offer to large banks, including Bank of America Corp. and Countrywide. As a result, large banks frequently paid lower guarantee and other fees.

But the conservatorship put an end to that practice, and Calabria has no intention of bringing it back in a post-conservatorship world.

“Personally, I think the fundamental reason for Fannie Freddie and the Federal Home Loan Banks is for small institutions to have access,” he said. “What can we hardwire in so that we don’t see a return to the days where Countrywide pays 12 basis points and your small lender pays 20?”

His long-term goals also include solidifying the respectful and cooperative relationships the GSEs have with FHFA, which were lacking in the pre-crisis period with FHFA’s predecessor.

“Some of it was the regulator didn’t have the tools they needed, the regulator wasn’t respected, not just by the entities but also by Congress,” he said.

That has changed since the crisis, but he wants to make sure it doesn’t relapse when the GSEs are private again.

Digital banking
November 30, 2018
“I know it’s a lot harder to lock culture in place than it is anything else but I think it’s a critical part of what I’m going to be trying to achieve,” he said.

And although there are still some calls to wind down Fannie and Freddie completely or fold the mortgage giants into a replacement, Calabria, for one, believes Fannie and Freddie aren’t disappearing anytime soon.

“I certainly fully expect at the end of five years there still to be a company named Fannie Mae and a company named Freddie Mac,” he said.

• 04/24/2019 – Mnuchin’s quote

• 04/24/2019 – Fannie and Freddie’s Uncertain Future, Explained
  Talks are heating up about reshaping or shrinking the companies, which back about half of new U.S. mortgages

If lenders couldn’t sell their mortgages, they would probably make fewer of them, charge higher interest rates and require bigger down payments.

That means that without Fannie and Freddie, few lenders likely would offer the 30-year, fixed-rate mortgage.

This product is practically considered an American birthright. But in other countries, where mortgage systems are funded differently, the 30-year, fixed-rate mortgage isn’t widely available.

• 04/23/2019 – FHFA’s Calabria on “Meeting the Mileposts” for GSE Reform

Federal Housing Finance Agency (FHFA) Director Mark Calabria is aiming for privatization of Fannie Mae and Freddie Mac. In an interview with the Wall Street Journal, Calabria stated that he wants to out the now-profitable GSEs back into private hands, something that has been tried and failed by lawmakers in the past.

“I see my goal as setting a path to end the conservatorship” for the companies he said, adding, “they have to be stronger, healthier companies” compared to before the 2008 housing crisis.

“My objective is to get us to a spot where we don’t have to worry about the system blowing itself up,” he added

Calabria stated that he is awaiting completion of plans ordered by President Donald Trump to refashion the mortgage system, set to be completed around June.

Among Calabria’s concerns is the “qualified mortgage patch,” which allows more highly leveraged homebuyers to obtain Fannie and Freddie-eligible mortgages. Patch usage has grown in the last few years, and according to Calabria, changing the patch would be a key tool to shrink Fannie and Freddie without a full overhaul, though he states that he does not intend to do away with it entirely.

“I can draw Fannie and Freddie a map,” he said. “Fannie and Freddie are going to have to be the ones who meet the mileposts.”

During his swearing-in ceremony, Calabria spoke on the GSEs and the FHFA’s ongoing role as conservator and regulator.

“FHFA has made tremendous progress since its birth in 2008, a development I’ve continued to watch with great interest from the outside,” Calabria said. “It is my foremost objective to cement those gains. It is all too easy to watch regulatory improvements erode as the memory of the last crisis fades.”

According to Calabria, there is “more work to do.”

“Markets change and advance, so must we,” he continued. Calabria states that he enters into this new role with a “great sense of urgency.”

During the ceremony, Calabria reinforced his plan for reform.

“I remain optimistic about America’s housing and mortgage market. But I remain so, because I know together all of us can build a stronger, more secure foundation under that market for all Americans.”

• 04/23/2019 – Bloomberg Intelligent analysis on FNMA/FMCC

• 04/22/2019 – Trump-Appointed Official Promises Full Push to Overhaul Plumbing of Mortgage Market
  Mark Calabria wants to privatize Fannie Mae, Freddie Mac—bailed-out but now-profitable mortgage-finance companies—and boost competition

Mr. Calabria is awaiting the completion of plans ordered by President Trump last month to refashion the mortgage-finance system, through a mix of legislative and administrative changes. The plans will be completed by about June, he said.

He has no immediate plans to curtail the existing sweep of the companies’ profits to the Treasury Department, part of an arrangement related to the firms’ conservatorship. Such a move would allow the firms to keep profits and begin to build up capital, eventually operating without taxpayer support. The change could be considered as part of a separate package of changes negotiated with Treasury, he said, adding he doesn’t wish to amend the existing arrangement more than once. Allowing the pair to retain their profits is widely seen as an initial step toward ending the conservatorship.

Mr. Calabria is awaiting the completion of plans ordered by President Trump last month to refashion the mortgage-finance system, through a mix of legislative and administrative changes. The plans will be completed by about June, he said.

• 04/19/2019 – Have We Seen The Last Frannie Net Worth Sweep?

Comments from Milkweed to Glen Bradford on seekingalpha. The fair value Milkweed calculated is $1.8. I need to understand whether it is reasonable or not.Milkweed, ContributorComments3175 | + Follow

Unfortunately I can’t afford to quit my day job and I was rushing to get out a project this morning when I saw Glenn’s request for my math. Now that I have a breather I will provide the math. I did this exercise months ago and I don’t have the energy to dig the numbers up all over again so I am going by memory. I also used FNMA which is a larger entity than FMCC. They are about a 64/36 split if I remember right so I’ll adjust FNMA to the combined entities.2018 financials were not out when I looked into FNMA so I used 2015-2017 financials. 2017 earnings were actually unusually low but there was some sort of tax hit causing this so I normalized 2017 using the 2016 tax rate. This resulted in about $11B in average earnings 2015-2017. Given this period is at the higher end of the business cycle and the GSE’s are likely cyclical companies I assumed a 10X multiple and ballparked FNMA was worth about $110B. To extrapolate out to the combined entities I divide $110B/0.64= $172B. So FNMA and FMCC combined are worth on the order of $172B.Per recent disclosures the combined companies will be required to raise $150B to $200B in new capital. The only way to do this quickly outside of tax payers footing the bill is equity capital raise(s) ala recapping TBTF. Given my ballpark value for the combined entities puts them not much more valuable than the low end projected capital raise and not as valuable as the high end; new equity capital will want to own damned near the entire combined companies for the investment to be worth their while.For arguments sake lets say $172B is fair value and they only have to raise $150B. That means new equity will want at LEAST 87% ownership of the companies for their $150B investment. I believe pre-warrant exercise combined share count is 2.4B. the warrant will have to be exercised ahead of new equity capital raises if at all. Assuming the warrants are exercised that will increase the share count to 2.4/0.2= 12B shares. In order for new equity to own 87% of the companies this will then need to be increased to 12/0.13= 92B shares outstanding.So after increasing shares outstanding to 92B in the exercise of the warrants and 150B in new equity capital raise(s) we can calculate EPS. To extrapolate FNMA’s $11B avg earnings to the combined entities $11B/0.64= $17B combined. To get EPS we simply divide $17B/ 92B shares for $0.18 EPS. Since this is at the high end of the business cycle I stick with a 10X multiple and the shares are probably worth ~$1.80. This of course is before the inevitable reverse stock split.

• 04/16/2019 – Former Fannie Mae CFO: Trump’s Treasury pick can get Fannie out of government control ‘reasonably fast’

In the process of negotiating those lawsuits, Mnuchin will learn the facts of what actually happened that led to conservatorship and the way the companies have been managed subsequently, Howard added.

“I would say look at the facts of what happened leading up to the financial crisis. Look at the Fannie and Freddie model for guaranteeing mortgages. Look at proposed alternatives. And make the right choice. I think because he’s a financial person, it won’t be hard for him to understand what actually happened and to evaluate competing alternatives and say this actually works, This doesn’t work. Let’s do what works.’ Because remember if he does what doesn’t work it’s on him and the Trump administration. There’s no passing the buck. They now own this problem and so they have a very strong incentive to get it right,” Howard said.

• 04/15/2019

Dr. Mark Calabria Sworn In as Director of the Federal Housing Finance Agency

4/15/2019 Washington, D.C. – In an Agency ceremony, Dr. Mark A. Calabria was sworn in today to a five-year term as the second Senate-confirmed Director of the Federal Housing Finance Agency (FHFA). Dr. Calabria was appointed to head the Agency by President Donald J. Trump. FHFA was created by the Housing and Economic Recovery Act (HERA) of 2008 to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Bank System and is responsible for oversight of the $6.3 trillion mortgage finance market.

“I enter this office with a sense of urgency. The foundations of our mortgage finance system remain vulnerable, and we must not let this opportunity for reform pass,” said Dr. Calabria.

• 04/14/2019

Ackman added another 5 million common shares on FNMA – I need to confirm this

Concentration of Current % Held

Low
Avg. Turnover Rating

TOP MUTUAL FUND HOLDERS

• 04/13/2019

Growth Fund of America, continued…. 

I have been tracking the Growth Fund’s holdings of FNMA and FMCC for six quarters. I haven’t tracked the preferred issues since I’m invested only in Freddie commons. In addition to the quarterly numbers I think the trend of the numbers is also worth considering:

FNMA FMCC

12/31/17 67,083,000 68,082,000

3/31/18 70,296,000 +4.8% 70,348,800 +3.3%

6/30/18 29,388,000 -58.2% 96,538,000 +37%

9/30/18 37,884,270 +28.9% 86,138,785 -10.8%

12/31/18 52,637,000 +38.9% 87,037,375 +1.04%

3/31/19 77,989,064 +48.2% 91,929,599 +5.6%

So: 1) it appears that The Fund has been more inclined to hold Freddie commons than Fannie commons; 2) The Fund holds (as of 3/31/19) more than 2 1/2 times the amount of Fannie commons as it held at the low point of 6/30/18; 3) checking for correlation between The Fund’s share count and market price of Fannie commons (viewing the FNMA chart on Yahoo Finance) it appears that The Fund has made its largest accumulation of Fannie commons during the quarter where the price of FNMA was at it’s highest over the last five out of six quarters – in other words, they weren’t scarfing up the shares when the price was down in the $1.50’s as it was during most of 2018 – they are loading up NOW, at a much higher price.
4) I wonder why is is that none of the other large mutual funds are reporting holding any quantities of Fannie or Freddie commons of any consequence?

Regarding the ratio of preferred holdings to commons: an absolutely valid point, but I think that if we were to know the trend of that ratio this might be even more helpful.

Growth Fund of America – FNMA, FMCC holdings 3/31/19

FNMA = 77,989,064 – up 48.2% from 12/31/18
FMCC = 91,929,599 – up 5.6% from 12/31/18

As of 3/31/19:
FNMA holdings = $218,369,379
FMCC holdings = $247,290,621
https://www.americanfunds.com/individual/investments/quarterlyholdings/agthx

FNMA line 159
FMCC line 149

Capital Research and Management Company, the advisor to the monster fund manager American Funds, right?  https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=2ahUKEwjg2YmIqK_iAhVNgK0KHaj3BJsQFjACegQIAxAC&url=https%3A%2F%2Fwww.morganstanley.com%2Fwealth-investmentsolutions%2Fpdfs%2Fadv%2Fcapitalgroup_adv.pdf&usg=AOvVaw0frxiZ_O7pfQBbUfRcqT6s

description of this company: capitalgroup_adv

Capital Research and Management Company, a wholly-owned subsidiary of The Capital Group Companies, Inc., is a Delaware corporation that traces its roots to 1931. The Capital Group Companies form one of the most experienced families of investment management firms in the world. Capital Research and Management Company and The Capital Group Companies have always been privately held. Capital Research and Management Company is the investment adviser to the American Funds family of mutual funds, including American Funds Target Date Retirement Series, American Funds Portfolio Series, American Funds Retirement Income Portfolio Series, American Funds College Target Date Series, and American Funds Insurance Series. It is also the investment adviser to the Capital International Fund and Capital International Portfolio, Luxembourg
investment companies, and is the sub-adviser to asset pools of Capital International Asset
Management (Canada), Inc., whose adviser is an affiliate of Capital Research and Management Company. In addition, Capital Research and Management Company serves as the investment adviser to Capital Bank and Trust Company in its capacity as the trustee of certain collective investment trusts that are exempt from SEC registration. Capital Bank and Trust Company is an affiliate of Capital Research and Management Company.

As of June 30, 2018 Capital Research and Management Company managed approximately
$1,940,103,300,000 (about $2 Tril) in discretionary assets under management.

his is why Capital Research and Management Company increased their common position by more than 50%. This is a pension fund that is not allowed to invest in OTC securities and yet their CEO and Board of directors have authorized $500 million investment in the GSEs common stock.  It’s a huge vote of confidence.

• 04/03/2019 – This Fund Expects To Triple Its Money On GSE Preferred Shares

Muirfield Capital is among the funds which have invested in the GSEs’ preferred shares, which are widely believed to hold the bulk of Fannie’s and Freddie’s value. Other hedge funds we know have owned shares of Fannie and/ or Freddie include Paulson’s fund, Gator Capital Management and Pershing Square.

Muirfield expects the Trump administration to release its plan to privatize Fannie and Freddie after the Senate votes to confirm Mark Calabria, the president’s nominee to take up the reins of the Federal Housing Finance Agency, which oversees the GSEs. Calabria is expected to be approved this month, so Muirfield expects the privatization plan for Fannie and Freddie to be released in April. When that plan is unveiled, the Muirfield team expects Fannie and Freddie preferred shares to rally.

• 03/11/2019 – Trump administration looks to reform Fannie Mae and Freddie Mac
  Mar. 11, 2019 – 3:30 – FBN’s Charlie Gasparino on how the U.S. Senate Banking Committee voted to advance President Trump’s pick, Mark Calabria, to oversee Fannie Mae and Freddie Mac.
• 02/23/2019 – Fannie and Freddie fist fight brewing amid Trump administration infighting – mostly negative news by Charlie Gasparino, Lydia Moynihan, but

But White House officials say shareholders won’t be the primary concern in the Fannie and Freddie reform effort. Rather, administration officials are seeking to prevent a repeat of the risk-taking activities by the companies that contributed to the mortgage bubble, leading to its 2008 collapse and $200 billion government bailout.

These officials, who spoke on the condition of anonymity, also say any reform must have the blessing of Calabria, a long-time libertarian economist and frequent critic of the outfit’s pre-crisis business model.

Spokespeople for for Paulsen and Otting both declined to comment.

A key feature of the framework touted by Mnuchin, Phillips, Otting and Paulson is that both Fannie and Freddie would have some backing from the federal government in times of emergency while remaining public companies, a business model similar to the one the GSEs operated with before 2008. Phillips, for example, is planning a series of meetings with mortgage industry executives next week to discuss Fannie and Freddie reform, these people add. A Treasury spokesman declined to make him available for comment.

But now some White House officials are telling people at the Treasury to back off and allow Calabria to the lead the effort once he officially replaces Otting, according to two people with direct knowledge of the matter.

• 02/22/2019 – IMFnews

This coming Tuesday, the Senate Banking Committee will vote on the nomination of Mark Calabria to be the next permanent director of the Federal Housing Finance Agency. In a new research report, Cowen & Co. views the quick vote (his confirmation hearing was nine days ago) as “consistent with our view that the full Senate will confirm Calabria by late March or early April. There would be no need to rush the committee vote if floor action was not imminent. It also suggests that GOP leaders believe that Calabria has the 50 votes needed to be confirmed…”

After Calabria is blessed by the Senate, the heavy lifting on GSE reform begins. Will Treasury start the process rolling for “recap and release” or will it side with the Mortgage Bankers Association and go with a multiple guarantor plan?…

One idea that hasn’t received much attention is the utility plan floated by the National Association of Realtors earlier this month. NAR, working with Susan Wachter and Richard Cooperstein, urge re-chartering Fannie Mae and Freddie Mac as “systemically important mortgage market utilities” or SIMMUs. In its 33-page blueprint, NAR notes: “In support of their public mission, the SIMMUs would fund their operations outside the government appropriations process through fees as the GSEs do now. They would regularly testify before Congress on their operations and mission objectives, but they would not be allowed to lobby in their own interest. This well-tested structure supports the public missions of liquidity and broad access through its board and its enhanced oversight. Shareholder equity generates the discipline to use resources efficiently to maintain regulated returns.” Sounds easy.

• 02/21/2019 – Senate Banking Committee will vote on Calabria nomination next Tuesday 2/26 morning. Then a full senate vote on March. Calabria is on the full senate confirmation fast track by early march (according to Glen Bradford).

Senate panel sets vote on Calabria nomination for FHFA

• 02/19/2019 – A NEW FANNIE MAE PLAY
  Trade Ideas · Featuring Gabriella Heffesse (Garby_transcript)

So what else are we looking for? It’s our understanding that Treasury is looking for a financial advisor. So that’s a huge signal to markets because you want to put math before a plan. So Treasury hiring an FA means that they are working on this restructuring and they’re trying to figure out how to do it.

Probably the other part of this is it could be easier to capitalize them without this liability– we also spoke about that– and trying to incentivize them into becoming assets, so trying to convert them into equity. And in order to do that, you would probably need to amend the warrants. Well, before that, you need to give them a price that gives them their proper value. You need to get them up to $25 in the form of equity. And then you need to protect them against dilution because they’re not going to convert if then they think that in the next capital raise that’s going to be worth half the value.

So the junior prefs are kind of in a seat where, should the government engage them to settle, they can do that. And I truly believe that the government wants to do this and soon to have the economic benefits, to have it as another achievement of the president, and to keep it far enough away from the election cycle. So if you want to do it soon, the litigation is a key component to consider.

• 02/19/2019 – Gary’s great article (In-Defense-of-the-Hedge-Funds-2.21.19)
• 02/19/2019 – Dick Bove’s viewppoints (FNMA_dick_Bove) (Bove-GSE-Decision) (Bove-Calbria-Hearings-Bove)
• 02/19/2019 – Moelis meets with investors at Pepperdine Univeristy

ruleoflawguy

FEBRUARY 20, 2019 AT 11:15 AM

@ around 1:15:00. vartaninan: “I talked to one of them [mnuchin, otting, Phillips, calabria] who said if we dont do it [act on GSE reform] no one will do it”

Liked by 3 people

Reply

1. jtimothyhowardFEBRUARY 20, 2019 AT 2:28 PMIt was refreshing to hear a panel on mortgage reform hosted by the School of Public Policy of a university 2600 miles from Washington (Pepperdine), with participants who have practical knowledge about and experience with the subject matter they were discussing. Even though this session is long (about 80 minutes, and doesn’t start until around minute 24), readers of this blog will benefit from listening to it, and I encourage them to do so.What’s unique about this conference (in contrast to ones sponsored by advocacy groups) is that it addresses in detail why 10 years of legislative reform proposals have failed, and identifies the elements that have to be included, integrated and balanced in a successful reform package. As the panelists agree, there are four: a level of capital sufficient to address safety and soundness concerns but not so high as to cripple Fannie and Freddie’s abilities to use cross-subsidization effectively to support affordable housing (which is the second essential element in reform); a regulatory structure that defines the role of the secondary market in relation to the primary market, and a transition that treats existing shareholders fairly (essential in order to get new shareholders to buy the amount of new equity necessary for recapitalization).I have talked at length in this blog about most of these, although not so much about the regulatory component. On this, I thought a statement made by Mike Calhoun of the Center for Responsible Lending was insightful: whatever reformed regulatory structure Treasury, FHFA and the other interested parties (including Congress) agree upon, it has to have “political stability.” Investors won’t invest in companies whose roles in the market or permitted methods of operation can change based on which political party is in power. To prevent that, reformers have to address and somehow “lock down” the roles of government-sponsored credit guarantors in the secondary market and lenders in the primary market. That’s not easy, but I’m glad the group that’s working on administrative reform is aware of the issue and is working on it.As I listened to the session, the phrase that kept recurring to me was “TINA (there is no alternative) and the Warrants.” There really IS no realistic alternative to the Fannie and Freddie business model–as ten-plus years of failed legislative proposals have shown–so reformers have to build on what has proven to work. And the warrants are what give the administration the incentive not only to preserve the existing (and proven) system, but also to do so in a way that allows it to function efficiently and effectively for all stakeholders, including the affordable housing community, since that will maximize the value of the shares Treasury will own and be able to sell once it converts the warrants.Balancing all of the elements of successful reform won’t be easy, but we have a motivated group of principals now in place who are focused on their task and have the experience and credentials to pull it off. Let’s hope they can.

• 02/19/2019 – revisit OMB’s (the office of Management and Budget) framework

Roger Kory Zuckweiler

FEBRUARY 22, 2019 AT 1:36 PM

Tim, this is similar to what the Executive office of the President of the United States put out last year. Once again it has a ‘Reform Federal Role in Mortgage Finance’ section which starts on page 75. Do you know if it carries any weight?https://www.performance.gov/GovReform/Reform-and-Reorg-Plan-Final.pdf

jtimothyhowardFEBRUARY 23, 2019 AT 9:30 AM

This document from the Office of Management and Budget is “the Administration’s comprehensive plan for reforming and reorganizing the Executive Branch” of government. It recommends 32 broad “organizational reform priorities,” broken into three categories–mission alignment imperatives, management improvement and efficiency opportunities, and new capability requirements.

One of the mission alignment imperatives is to “Transform the way the Federal Government delivers support for the U.S. housing finance system.” In this housing finance initiative, though, OMB elects to propose “legislative reforms [that go] beyond restructuring Federal agencies and programs,” including “ending the conservatorships of Fannie Mae and Freddie Mac [and] reducing their role in the housing market.” OMB’s ideas for accomplishing this are the same ones that have failed to gain legislative traction over the past ten years: eliminating Fannie and Freddie’s federal charters, having multiple private credit guarantors chartered and overseen by “a Federal entity with secondary mortgage market experience,” providing the securities issued by these guarantors with an explicit government guaranty, and replacing their statutory housing goals with federal programs financed by an annual fee assessed against the guarantors’ securities.

So, no, this proposal does not “carry any weight;” it’s a tired recycling of off-the-shelf reform elements assessed and passed over countless times before.

• 02/14/2019 – Mark Calabria’s nomination hearings
• 02/14/2019 – Calabria: Committed to Making FHFA a “World-Class Regulator”

Calabria said that if he was confirmed as the FHFA Director his objective would be to ensure the GSEs were, “well capitalized, well managed, and well regulated.”

• 02/04/2019 – Glen Bradford’s comments

Glen Bradford, ContributorComments1913 | + FollowAuthor’s reply »thanks to all who commented so far.good luck to you regardless of your perspective.my advice especially when trying to digest this comments section is to consult a lawyer if you aren’t sure.if you ask me, admin action takes next steps in next two weeks. from there, the companies are put on the road of the utility model.if you ask me, the warrants will be exercised.if you ask me, buy preferreds.if you are asking someone else, or me, figure out what they or i own, and do your best to figure out if they or i know what we are talking about.really, this is the climax. thanks to all the people out there that have actually made a difference here… by talking to their congress people / senators — filing lawsuits — writing publicly about the fraud — etc.i am already starting to explore and look for other investments since this one will rapidly be appreciating in my opinion very near term… with long term (post ipo) normal stock potential.im trying my best. cheers

• 01/29/2019 – Tim Howard’s comments

jtimothyhoward
JANUARY 29, 2019 AT 4:00 PM
I don’t see there as being that much distance from what acting director Otting was quoted as saying a couple of weeks ago and what the White House spokesperson Lindsay Walters is saying in the Bloomberg article you cite. Otting’s statements were over-interpreted as implying that the release of Fannie and Freddie from conservatorship had been decided upon and was imminent, whereas the Bloomberg article, along with a couple of other articles I’ve seen, contain editorial comments and third-party spin saying “not so fast.”

Just what did Walters say today? According to Bloomberg, that “Housing finance reform is a priority for the administration,” and that “The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly. ” Nothing new here, other that Walters said “shortly” whereas Otting said “soon.” The reporter (Elizabeth Dexheimer) added, “Walters said no decisions had been made on any reform plan. [I suspect she meant final decisions.] The administration intends to work with Congress to formulate a proposal that fully addresses the risks to taxpayers and that improves the ability of creditworthy Americans to buy a home.”

Note that “working with Congress” does not mean legislation; that remains a “bridge too far” in the current divided, partisan and dysfunctional Congress. And Treasury Secretary Mnuchin has repeatedly stressed his desire to consult with Congress on any administrative reform plan he proposes. As recently as December 18 of last year–at Bloomberg’s offices in Washington–he said, “I would like to get [Fannie and Freddie] out of conservatorship, My preference would be to do something that has bipartisan legislative support [note the use of the word ‘support.’] There are changes we will be able to make with a new director at the FHFA.”

The letter to Otting from Maxine Waters and Sherrod Brown last week very likely did result in the renewed emphasis this week on the “working with Congress” aspect of the administration’s plan, but other than that I don’t see much sustantive difference between where we were then and where we are now. I think the pro-Fannie and Freddie crowd got a little too far over the tips of their skis last week, and the pro-bank side is now working to sell a counter-narrative. We should all take deep breaths, sit back, and wait to see what the administration actually comes up with.

• 01/29/2019 – Fannie Overhaul to Focus on Legislative, Regulatory Changes, Sources Say

The White House may outline a broad set of recommendations, such as increasing competition for the companies and protecting taxpayers from losses, and then request that the Treasury Department and the Department of Housing and Urban Development propose plans for implementing them, said the people who asked not to be named because plans are subject to change.

“Housing finance reform is a priority for the administration,” White House spokeswoman Lindsay Walters said in a Tuesday statement. “The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”

Some of the changes that the White House has discussed could be done by federal agencies, such as allowing Fannie and Freddie to hold more capital. Others would require congressional action, including providing an explicit government guarantee of mortgage securities backed by the companies. In meetings, officials have been resistant to any plan that would completely circumvent lawmakers, the people said.

There are some aspects of what the White House is considering that would be good news for hedge funds. For example, officials have discussed allowing Fannie and Freddie to hold more capital, the people said. But the White House hasn’t endorsed an approach that would let Treasury and the FHFA permit the companies to build up bigger capital buffers and then free them from federal control, the people said.

• 01/29/2019 – Trump Won’t Act Alone to Get Fannie, Freddie Out of Government Control White House to work with Congress to overhaul mortgage-finance giants. – It seems complicated. We should wait and see what will happen.

Joseph Otting, the acting head of the Federal House Finance Agency, said in a private meeting with agency staff earlier in January that the administration was preparing to end the conservatorship on its own. “The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do,” Otting said, according to a copy of the audio reviewed by The Wall Street Journal.

The comments surprised housing-policy experts, who warned they could derail the pending nomination of Mark Calabria, a libertarian economist and aide to Vice President Mike Pence, to head the FHFA on a permanent basis.

The Senate Banking Committee is preparing to hold a nomination hearing on Mr. Calabria as soon as February, but the release of a detailed plan could delay or even imperil Mr. Calabria’s confirmation chances, analysts said.

• 01/29/2019 – How the Trump Team Might Make Some Hedge Funds Solvent Again (from CEPR) – unfair and negative view on admin reform. Admin has given ten years to congress, but congress made no viable plan. That is the reason admin wants to step up the plan.

However, we do not claim to know with any confidence what is driving these recent developments. Nonetheless, we believe that the Trump administration’s actions regarding GSE reform, both in 2016 and in the last month, represent cause for concern. The ability of people like Otting and Mnuchin to put aside their indebtedness to their past investor John Paulson is uncertain. Close relationships between members of the administration and individuals with large stakes in the future of GSE reform, in concert with numerous irregularities in the administration’s conduct and the dubious nature of Otting’s temporary appointment, warrant further investigation.

Unfortunately, the SEC, which monitors and punishes insider trading, puts much more emphasis on disciplining insider trading in public companies than from the halls of government. Recent experience suggests that it should consider putting government officials under greater scrutiny. The consequences of political insider trading have the potential to erode public faith in both securities markets and government.

• 01/28/2019 – What is Otting’s plan for GSE reform? It’s complicated

In the case of the FHFA, the White House announced its intention to nominate Calabria for the role before it appointed Otting as acting director, suggesting that Otting may have been viewed as just a temporary placeholder.

“Calabria’s nomination, given his experience, seems likely to go ahead,” said Thomas Wade, the director of financial services policy at the American Action Forum. “For an acting FHFA director to announce this plan rather than wait suggests an urgency I can’t pinpoint.”

But Otting and the White House could be tracking the economy and thinking ahead, said Karen Shaw Petrou, managing partner at Federal Financial Analytics.

Otting “knows as does Mark and as does the White House that confirmation will take some time, and they do not have an awful lot of time to take this kind of administrative action given the state of the economy and the potential downturn and the already evidenced strain in the housing market,” she said.

• 01/28/2019 – there might be some implication in Otting’s plan

Short Takes: Rep. Waters Wonders: Is Otting Legal? / An End-Run? / Cowen on Calabria’s Chances / The Fed Gets a New Director of Research
By Paul Muolo, pmuolo@imfpubs.com

House Financial Services Committee Chairwoman Maxine Waters, D-CA, late last week shot off a letter to newly installed acting GSE regulator Joseph Otting, questioning his legal status as FHFA director and asking for more information regarding his plan to make administrative changes to Fannie Mae and Freddie Mac. (The correspondence was also signed by Sen. Sherrod Brown, D-OH.) Early in the letter, Waters cites The Housing and Economic Recovery Act of 2008, which allows the president to select an FHFA deputy director to be interim leader, suggesting that President Trump violated the law by picking Otting, who serves as Comptroller of the Currency…

Some in the industry believe the Trump White House might have acting Director Otting name Mark Calabria – the Trump pick to be the permanent FHFA director – as deputy director, paving the way for his ascension, one way or the other…

In a new analysis, Cowen Washington Research expresses the opinion that Democrats in Congress are unlikely to support Calabria “because of his prior views on the GSE role in affordable housing. So, he can only lose three GOP votes and still be confirmed.” Calabria is a libertarian economist who isn’t a big fan of the federal government having much of a role in the housing market, including affordable housing.

• 01/26/2019 – Popular Hedge Fund Bet on Fannie and Freddie Is Paying Off Big This Year
  Signs that the government may move to privatize the mortgage-finance giants have sent shares soaring
• 01/25/2019 – congress is requesting the Treasury and FHFA’s plan on FNMA/FMCC and we might have it in one week (Feb 01, 2019). I need to get ready for this.

It seems like Waters and Brown care more about that “the Enterprises continue their work to facilitate a liquid national mortgage market and access to affordable rental housing“.

same news on this Maxine Waters calls into question FHFA independence after MarketWatch reports Fannie, Freddie privatization plan

• 01/24/2019 – within weeks fannie freddie plan exit conservatorship

from Glen Bradford

“I think the biggest move for common would be when the net worth sweep ends if the preferred are not converted to common at that time.”

“If you own preferred, you basically are looking at the possibility to own some common converting at par value at the IPO price.”

I think that if I was a better asset allocator I would have a small common position as well, perhaps up to 10%. That said, given my position size and leverage, and the fact that I have difficulty sleeping if I feel weird about my allocations, I currently do not own common. If you are concerned about my recent decreases in share counts, don’t be. This is still a 95% portfolio position for me, which by most people’s standards makes me a crazy person.

• 01/24/2019 – White House plans to overhaul housing finance system, top regulator says

The White House will announce a plan by next month to end government control of Fannie Mae and Freddie Mac in a bid to resolve a long debate over the fate of the two companies that dominate the mortgage market, a top regulator said.

Joseph Otting, acting director of the Federal Housing Finance Agency, told employees last week that the administration would not wait on Congress, where attempts to overhaul the housing finance system have repeatedly faltered in the years since Fannie and Freddie were rescued during the financial crisis, according to a recording of his remarks obtained by POLITICO.

“In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be,” Otting said at a Jan. 17 staff meeting.

Otting’s remarks, captured in a 30-minute recording, present the fullest picture yet of the Trump administration’s plans for the massive companies, which bolster the housing market by buying mortgages from lenders and selling them as securities to investors, freeing up more money to lend. He pledged significant headway on an overhaul within “six to 18 months.”

He referred to Treasury Secretary Steven Mnuchin’s past statements that he wants to wind down the government’s control under his tenure — “and I will tell you that is a commitment,” Otting said.

Yet that move would re-ignite a long-simmering dispute over Fannie and Freddie’s future. Republicans have long argued that the companies have an unfair competitive edge over private companies because of their government guarantee. Some even blame the companies for the financial crisis, pointing to their over-extension in subprime loans.

Democrats, meanwhile, are fiercely protective of the companies’ affordable housing goals, which they see as a priority in any discussion of housing finance reform.

Trump administration officials have typically at least paid lip service to the idea that Congress should go first; Mnuchin told Bloomberg in December that he would prefer to “do something that has bipartisan legislative support.”

Otting said otherwise.

“The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do,” said Otting, who was named acting director of the regulator earlier this month when Mel Watt’s term expired.

Otting, who also serves as comptroller of the currency, vowed to “move the path forward” on overhauling Fannie and Freddie while Mark Calabria, President Donald Trump’s nominee to assume the position full time, awaits a Senate hearing and confirmation.

“This is a path that’s been established by the White House and the Treasury, and Mark has signed off on it, I’ve signed off on it, Treasury has signed off on it, the White House has signed off on it,” he said.

MarketWatch previously reported some of the comments, along with an FHFA spokesperson’s denial that any timing or plan details had been discussed.

• 01/24/2019 – Politico obtained the audio of Otting “In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be,” Otting said at a Jan. 17 staff meeting.He pledged significant headway on an overhaul within “six to 18 months.”“This is a path that’s been established by the White House and the Treasury, and Mark has signed off on it, I’ve signed off on it, Treasury has signed off on it, the White House has signed off on it,” he said.“But I do think over the next six to 18 months, we will solve that issue,” he added. “And I can assure you that I’m not here to just sit around and enjoy the fruits of being the director. I’m here to kind of move that path forward. And then when Mark is confirmed in his role, he can kind of come in and just continue down the path.”The capital needed is “probably somewhere, based upon their business models today, [in the range of] $150 billion to $200 billion,” he said.“$6 [billion] to $150 billion is a big road, especially when you consider the earnings are, what, probably $11 billion a year?” Otting said. “So it’s like, how do we accelerate that, or what do we do to try to achieve that? And I think that’s going to take some really heavy lifting and thought processes around that.”

the $150 billion to $200 billion recap estimation is in the ballpark of that of Moelis’s plan ($160 bil, 3% asset).

• 01/23/2019 – Riveting en banc oral arguments in the 5th Circuit today in one of the many $FNMA $FMCC shareholder suits challenging the sweep of profits to @USTreasury.

I have listened to the whole oral arguments, they are good, but not great from my standpoint. So be cautious.

oral recording (http://www.ca5.uscourts.gov/OralArgRecordings/17/17-20364_1-23-2019.mp3)

Alec Mazo‏Verified account @Alec_Mazo 15m15 minutes agoMore

From the judges who asked questions, the edge was probably 5:1 being sceptical of NWS. Others were watching quietly. The tape recording comes out later today

bailout list (including FNMA/FMCC) the profit from FNMA/FMCC is the largest in US history!!!

• 01/23/2019 – another report on John Paulson’s intreview (same as that of 01/22/2019)
• 01/22/2019 – interview of John Paulson on Podcast

INTRO:

2:28 It takes a sixth-sense

4:05 Choosing which deals to participate in

6:30 SKY ltd / Comcast / Disney

7:45: Early career

17:00 Hedge fund vs. family office

18:34 PFE/ AGN

25:17 BMY / CELG

32:08 Detour Gold

40:02 Merger -arbitrage post The Big Short

42:10 Activism

45:30 Puerto Rico

50:09 6 questions for John Paulson

1) President Trump

2) Fannie / Freddie:

52:56 Journalist asked whether and when Trump will return favor to Paulson on FNMA/FMCC, Paulson did not answer it directly.

It is not a favor from president, it is an urgent need for the government.

The recap and release of FNMA/FMCC is more beneficial to government than to investors (common 4:1, preferred investors have no dividend, government takes all dividend).

There is a hope that since government received way enough profit from this investment, it is time to help investors.

3) When you seek an opinion that lies outside of Paulson funds, who is your first call?

4) If you could only invest in 1 outside hedge fund, who would it be?

5) Word association: cannabis, bitcoin, Elon Musk, CNBC Television

6) If you’d never become a fund manager, what would you have become?

• 01/22/2019 – Big Changes at Fannie/Freddie, Is Conservatorship Nearing an End?

Jan 22 2019, 11:25AM
MarketWatch is reporting that Federal Housing Finance Agency (FHFA) along with Treasury and other parts of the administration are about to reveal a plan to end the 10-year plus conservatorship of the two GSEs Fannie Mae and Freddie Mac. Joseph Otting, who is keeping the FHFA director’s seat warm until former director Melvin Watt’s replacement is confirmed, is said to have told a full FHFA staff meeting on Thursday that there should be a blueprint announced in about a week.

• 01/22/2019 – John Paulson mulls shutting his hedge fund – Currently, 70%~80% of the money in Paulson’s fund are his own capital, that is the reason he is thinking about start home office and manage his own money. I might can do the same thing to work on home office instead of manage other people’s money. By managing my own money using home office format, I can have more freedom, much less pressure and less regulation.

Turning into a family office is a retirement of sorts for hedge fund managers, who return outside investors’ capital and focus on solely managing their own fortunes — an activity that does not come with as much regulation as managing other people’s money.

“Most people eventually, when they get to this level, they do make a decision, do they want to get bigger and you know, create a bigger business of managing money,” or opt to “make their life easier and morph into a family office”, Mr Paulson said on the According to Sources podcast hosted by Broome Street Capital founder Michael Samuels.

In the interview, Mr Paulson cited George Soros and Stanley Druckenmiller as examples of hedge fund managers who had converted their fund management operations into family offices. More recently, Leon Cooperman of Omega Advisors took the same step.

Mr Paulson, who specialises in merger arbitrage investing, rose to fame following the financial crisis when his fund made billions of dollars from anticipating the US housing crisis and making bets on complex credit derivatives. But the business has struggled in recent years and he has slashedthe number of managers working for him.

In the hour-long podcast, Mr Paulson touched on topics including his bet on Puerto Rico as a tax haven, his support for US President Donald Trump, his push for the government to privatise Fannie Mae and Freddie Mac, and his beginnings in merger arbitrage.

He said he opted for a career betting on mergers rather than advising on them because the hours were shorter and he could make more money.

“Even though M&A fees are a lot greater than lawyer fees, they’re still capped by the time you have, what you can sell your time for, whereas when you manage money there’s no cap. There’s unlimited upside to what you can do with the capital you manage,” he said.

“The other thing I love about this business, when I say why I went into this business, is the fee structure,” he added, detailing how much he could make in charging a 1 per cent management fee and 20 per cent performance fee on different levels of assets.

“The more money you manage, the greater the fees,” he said. “Now ultimately we managed over $30bn, and there were years our returns were well in excess of 20 per cent, so to get to those levels, the fees just pour out of the sky.”
Paulson & Co has been hobbled by a string of large and unsuccessful bets in recent years, including on the shares of pharmaceutical companies Allergan and Valeant and on banks and gold, and by betting against German bonds.

Mr Paulson said he would support Mr Trump in a re-election bid because he was pleased with the moves the president had made in cutting the corporate tax rate and reducing “unnecessary regulation”, plus the crack down on illegal immigration.

• 01/22/2019 – Fannie-Freddie Share Rallies Go Unchecked Amid Analysts’ Doubt

There’s “an enormous difference between the promise of a plan at some point in the future and an actionable proposal reshaping a vital cornerstone of the economy,” Boltansky cautions in a note. Many of his contacts have suggested Friday’s comments by Joseph Otting, acting director of the Federal Housing Finance Agency, were “simply the repackaging of a previously used talking point.”

Otting 2019 Glen‏ @DoNotLose 11m11 minutes agoMore

Otting 2019 Glen Retweeted Otting 2019 Glen

The reality is I am not surprised by analysts throwing cold water on this one. It wasn’t an official press release. It did probably happen. I look forward to Calabria questions.

Otting 2019 Glen‏ @DoNotLose 15m15 minutes agoMore

Otting 2019 Glen Retweeted Otting 2019 Glen

I will say, all of the analysts here basically say that Otting won’t do anything within weeks, but he has previous quotes saying he will take actions and there is a clear plan.

Jan 18: Cancel SPSPA & End NWS‏ @MattWildy 30m30 minutes agoMore

And now…the Fannie & Freddie rally Bloomberg hit piece. What they blatantly/purposely fail to mention is how Otting said “within the next few weeks”.  I’ve personally confirmed with 2 FHFA employees that he really did say that.

• 01/22/2019 – should I continue to buy FNMA/FMCC common and preferred?

Otting 2019 Glen‏ @DoNotLose when the trump recapitalization plan comes out in the next ~60 days, these prices are going to look cheap8:20 AM – 22 Jan 2019

• 01/21/2019 – The story of FNMA and FMCC can be like that of “the big short” per Tim Howard

jtimothyhowardJANUARY 19, 2019 AT 12:13 PM

First of all, there is someone—a published author of both nonfiction and fiction—who now is working on a book about the current situation with Fannie and Freddie (although I’m not at liberty to give that person’s name). I have met with them, and we have an ongoing dialogue, by email and phone. (This person also talks about writing a “Michael Lewis-style” book.)

Second, I highly doubt Mr. Lewis would wish to co-author a book with me—he does quite well with those he writes on his own. I also suspect that for him even to consider the subject, he’ll want to know how the drama resolves itself, with a view to doing the “inside story” on it.

Some traders might do profit taking of these stocks, that might be the reason the price does not go one way up but dip in the middle of the day. I need to take advantage of this momentum trading, and take a break while wait for the good price to come.

mag1205Comments780 | + FollowWhere are you PD?Looks like some thing good is happening for FF shareholders.
Nice jump for FF.
Wait till you see it go beyond $4 to $5 in the next few weeks for sure but don’t be surprised if the profit takers bring FF down to $2 level by the end of the day.
Long Fannie since 2008/09

Maiden35Comments282 | + FollowMnuchin said THE EXACT SAME THING when he was slobbering over Maria and the stock soared to over 5$. This is just more empty rhetoric. Take your profits.

Poor DudeComments2674|+ Follow@ghlbtskIt is not clear to me that the above outcome would be more beneficial to JPS shareholders than to common shareholders. And especially so, not now. What is the potential JPS upside from current prices? 2x to 3x?I am fairly sure the commons would go up significantly more than that from here, although I admit I haven’t done the exact math under various assumptions. If the government demands a full up-front 100% capitalization through the IMMEDIATE issuance of new common shares (on the order of tens to hundreds of billions of new shares) BEFORE the companies will be released (a la the Milkweed Plan), then maybe the commons do not do better than 2x to 3x from here. But under almost any other assumption, they will. It all depends on your assumptions surrounding any ‘forced recapitalization’ and its method and timing.

ghlbtskComments375 | + Follow@Poor Dude“It all depends on your assumptions surrounding any ‘forced recapitalization’ and its method and timing.”Of course. My three main ones: recap must happen before release to comport with Mnuchin’s desires for “taxpayer safety” and “lots of private capital” (retained earnings aren’t private capital!), capital standards will be between 3.25% (Watt, Moelis) and 5% (Calabria in previous papers), and that the timeline for recap is very short: two years at the most.All that together paints a very bleak picture for the commons. Note how I left out the warrants and a junior conversion. Those just make things worse.

Poor DudeComments2674 | + Follow@mauldin0495” end implicit government guarantee now”Why is our Fed still holding MBS on its balance sheet? The answer to that question is simple. The world’s investors were more than glad to invest their money into Fannie / Freddie -insured MBS because they knew those corporate obligations were backed by title to real property. And conservatively valued, with built-in protections (down payments and / or PMI to cover a 20% decline in market value, etc.).But once our government seized the corporations (and thereby, the companies’ title to the property backing their investments), their investments became essentially worthless. Or at best, subject to the whims of politicians who come and go with each election cycle.Result: World investors disappeared.Necessary consequence: The Fed purchased what no one else was willing to purchase, in order to sustain our system of finance.This is not as complicated as many would like to make it appear to be.

ghlbtskComments375|+ FollowBerkowitz sold all his commons years ago. I believe he actually sold them to Ackman.The statement “Almost all hedge funds who have preferred also have commons” is false in general. Do you have proof?In fact, Ackman himself bought preferred shares, and one of his stated reasons was that he was afraid that a restructuring of the GSEs could disproportionately benefit preferred shareholders.If you are 100% common, you’re taking a risk that Ackman himself won’t take.

ghlbtskComments375 | + Follow@SmuskulaCheck page 15 of Pershing Square’s last annual report.
pershingsquareholdings.com/…“”While the substantial majority of our investment historically has been in Fannie/Freddie common stock, we acquired preferred stock recently because (1) we believe that the timing of a favorable outcome for the two companies is more proximate (timing is an important consideration for the preferred shares as they are noncumulative and perpetual), (2) it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares, and (3) we found the trading prices of the preferred securities attractive at current levels.””

mag1205Comments780|+ FollowToday, let’s rejoice for a change.
We shall see FF trend on Tuesday (After MLK holiday).
My bet is that once again profit takers will come in droves & lower FF share price to around $2.
In the mean time let’s take a breather & enjoy this long weekend.
Cheers.

Poor DudeComments2674|+ FollowThe stock ended up 30+%, on 10x the ‘normal’ volume – and that is when the ‘normal’ volume (as measured today) is double its average for the last few months.Algos are now starting to kick in, and no one can contain this movement over the short term. Try as they may, the ‘market makers’ are going to just have to let this thing run until our market finds its natural high.

Willy42Comments330 | + FollowThe GSE’s: “We do not have a crisis at Freddie Mac, and particularly Fannie Mae, under the outstanding leadership of Frank Raines.” Who said this? Maxine Waters, chairperson on the House Finance Committee.

• 01/16/2019 – to study GSE’s recap mechanics and understand different scenarios of outcomes
• 01/15/2019 – Relisting of FNMA/FMCC might drive the price up significantly

GSE Stocks Moving On New FHFA Director Otting Comments

InTheTube
Comments394 | + Follow
D. Common trades on the OTC, which prevents 90% of professional investors of even holding them in their portfolio. Fun fact: when they get re-listed there will be a lot of mandatory buying as they will have to be added to ETF baskets.

January 7 2019 sea change

Glen Bradford, Contributor
Comments1862 | + Follow
Author’s reply » depends on recap mechanics.
if you ask me, the government has an interest in maximizing its warrant value to some extent…

• 01/11/2019 – to do a detailed calculation of price of FNMA’s common
• 01/11/2019 – I need to study the commons and preferred price history of AIG and citi in order to somewhat understand the possible price movement of GSE

Milkweed, ContributorComments3015 | + Followj.b,The same way they recapped TBTF at the height of the financial crisis, they forced them to do massive equity offerings which at the time were done at severely depressed prices making them highly dilutive.Citi is the closest case to F&F that I somewhat followed. Common shares that owned prior to the equity offerings to bolster capital permanently lost 90% of their value; preferred shares quickly reset back to par. New common shareholders squeezed out old owners to provide the additional capital the government determined Citi needed to survive the financial crisis.New F&F common shareholders will most likely squeeze out existing common shareholders in exchange for the $75B to $100B each the GSE’s need to be deemed well capitalized as the prelude to being set free from conservatorship.Dilution is a risk that common shareholders sign up for when they buy shares so there is no permission needed, no change to the capital structure and no reasonable grounds to sue about. I’m sure this is why it was the method of choice for recapping TBTF and why Citi’s shareholders didn’t sue. It’s instant and from the governments perspective painless solution to recapping.

Milkweed, ContributorComments3047 | + FollowAndrew,Per an earlier post Mnuchin has telegraphed enough information about how he will get the GSE’s “out of government control” that the street knows at least enough to assume common are toast.seekingalpha.com/…FNMA hit $4.00 when Mnuchin discussed getting the GSE’s “out of government control” when he was set to take over Treasury late 2016 early 2017. Now that he’s made it clear he plans to act administratively once Watt is out and “out of government control” is looking imminent; FNMA trades for $1.08.

• 01/19/2019 – Fannie Mae and Freddie Mac regulator discussing plan to end conservatorship

A spokesperson for the agency confirmed there was discussion about ending Fannie and Freddie conservatorship but denied there was any talk of timing or details.

“Acting Director Otting held the internal meeting to meet FHFA staff and establish open lines of communication,” the FHFA said. “He mentioned, as he previously has, that Treasury and the White House are expected to release a plan for housing that will include details about reform and will likely include a recommendation for ending Fannie Mae and Freddie Mac conservatorships. [Treasury] Secretary Mnuchin has said that the goal of the [Trump] administration is to take the GSEs out of conservatorship. Acting Director Otting said that he and FHFA will work to advance that plan.”

• 01/09/2019 – FNMA and FMCC commons jump a lot in the beginning of 2019, I missed the boat since I did not pay attention to the sell in Dec 2018 might cause by the tax purpose. A big lesson learned for me!!

• 01/08/2019 – rethink of the returns of common and preferred. Should I start to invest in commons?

According to the fine print of Figure 5 of Blueprint for restoring Safety and Soundness of GSEs”, the preferred “Conversion price and terms can be pre-established (consistent with the approach used by Treasury in AIG), or can be set at the IPO price“.

Given the estimation of Moelis, the common might jump to $11.73 (=7.23x of today’s price) by end of year 2019, preferred might become 50% of face value (=2.2x of today’s price).

Interpretation of the above Blueprint from SeekingAlpha,

“Here is what I decipher from Table 10 on page 28 of Moelis’s updated blueprint:
They show a starting share count of 8.996 billion shares, which would ostensibly be the current outstanding common shares plus 4x that number to be distributed to the government via warrant exercise.
Then, in 2019, they issue a primary (or preliminary) capital raise of $37.5 billion in exchange for 3.197 billion shares. That pegs the issue price at $11.73 per share, which matches their share price for 2019.
The starting shares (8.996b) plus the IPO shares (3.197b) equals a total of 12.193 billion, which is 1.44 billion shares shy of the total they show outstanding at the end of 2019. So that difference is undoubtedly the shares they assume will be issued to the current JPS shareholders in a conversion.
As near as I can tell, their plan is to convert $33 billion in existing JPS face value into $16.9 billion of common shares: i.e., to swap JPS into common at roughly 50% of stated value. That’s a nice jump from current market prices, but is obviously considerably less than the JPS contracts call for. And while the math doesn’t work out precisely, it does approximate the “Relative Ownership” of 10% they show for the converted JPS. The JPS will hold 1.44 billion shares of 13.633b total, or roughly 10.6% of the total company at that point in time. Along with everyone else, they will then be diluted by the secondary offering in 2020 to raise additional capital.”

shucmuComments15 | FollowingSorry for my rudimentary question: if JP is converted to commons, does that mean that JP also has the benefit of common stock appreciation if common appreciates? Does that for JP holders, we do not need to purchase commons but we still have the chance to have common stock appreciation? Thanks18 Nov 2018, 01:16 PM Edit/DeleteReply0Like

Poor DudeComments2592 | + Follow@shucmuYes, but in return you would give up your superior place in the capital structure and your contract rights (your priority for dividend payments and priority for liquidation payments, in the event of a liquidation).And you would assume full downside risk as well, should the share prices drop, because you will also have given up your right to redemption of your shares at a fixed price no matter WHAT happens to the price of common shares.If you are worried about missing out on any potential appreciation in the price of common shares, I would recommend that you go ahead and buy some common shares right now. There is absolutely NO guarantee that JPS shares will be converted. It is simply one possible element of one particular plan that is being floated around right now (the Moelis blueprint). Before a conversion could happen, the FHFA and Treasury would have to agree to let it happen. And only THEY will get to decide WHICH series of preferred shares are given the OPPORTUNITY TO VOTE for or against a conversion. And if the JPS series you own is given the option, 2/3rds of the holders of your series would have to vote FOR the conversion before it could happen. Individual shareholders will not get to make the decision for their own shares, but will have to abide by whatever the 2/3rds majority of the holders of that particular series votes for. That’s a lot of “what ifs and maybes” to overcome, so I would not make current investment decisions based on that eventuality. Not at this point, anyways. It is WAY too early to contemplate such things, IMHO.If the government decides to go the LLRE route planned for in HERA, both the JPS and commons are going to zero. Payment should come later from the Court of Federal Claims, but the timing and amount of any such payment (if any) is uncertain.If the government decides the taxpayers have been adequately repaid, and decides to release the companies as they are currently configured, the amount of any common share price appreciation will depend largely on two things: 1) whether or not the government cancels its warrants along with its SPS, and 2) the method and timing of any capital raises that are forced onto the companies before they are released.That’s my take, anyways. Others may view it differently.18 Nov 2018, 09:00 PMReply2Like

Glen Bradford, ContributorComments1861 | + FollowAuthor’s reply »

on a forward basis, yes

Glen Bradford, ContributorComments1861 | + FollowAuthor’s reply »according to the updated moelis plan..if it’s right, i’m missing out. and i should make changes.

• 12/11/2018 – President Donald J. Trump Announces Intent to Nominate and Appoint Individuals to Key Administration Posts
  Issued on: December 11, 2018 – so this is official
• 12/10/2018 – Trump Expected to Nominate Fannie, Freddie Critic to Oversee Mortgage-Finance Giants
  Vice president’s chief economist Mark Calabria would lead Federal Housing Finance Agency.
• 11/24/2018 – Trump Defends Mnuchin’s Work as Treasury Secretary – it seems like Trump still likes Mnuchin
• 11/23/2018 – Trump Expresses Dissatisfaction With Treasury Secretary
  President faults Steven Mnuchin for backing Jerome Powell as Fed chief and for stock-market volatility – is Mnuchin’s job in danger? I need to watch out on this.
• 11/15/2018 – latest comments from Ackman (2018.11.15 Pershing Square Comment Letter) and ICBA (Capital RFI Letter-FINAL) on FHFA’s recapitalization plan
• 11/15/2018 – ‘Auntie Maxine’ Waters Gets Ready To Take On The Banks As House Panel Chair
• 11/14/2018 – U.S. court rejects challenge over Fannie Mae, Freddie Mac profits
• 11/13/2018 – Commerce Secretary Wilbur Ross says the economy’s success depends on infrastructure“Corporate earnings certainly have been very, very strong. there’s no question about that. And it’s also no question that market’s job is to look ahead,” Ross says. “I think a lot will have to do with whether infrastructure gets the kind of treatment that it really deserves.” Ross, speaking at the Yahoo Finance All Markets Summit in Washington, also says the only real obstacle to passing an infrastructure bill is funding.

Maybe GSEs’ $100~150 bil can help fund this bill.

Kudlow says White House looking at infrastructure plan, including energy pipelines, LNG terminals

President Donald Trump’s administration is looking at a multifaceted infrastructure plan, according to top White House economic advisor Larry Kudlow on Tuesday.

• 11/13/2018 – Fannie Mae and ‘Freddie Maxine’

Democratic Rep. Maxine Waters’ statements during a 2004 congressional hearing when she said: “Through nearly a dozen hearings, we were frankly trying to fix something (Fannie and Freddie) that wasn’t broke. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Franklin Raines.”

• 11/13/2018 -Short Takes: Assessing the Value of GSE Common / The Prior Decade and GSE Share Prices / Worrying About Home Values in California / Another MBS Settlement for Wells Fargo / Vendor Hires Fannie Mae Official
  By Paul Muolopmuolo@imfpubs.comWhat if Fannie Mae and Freddie Mac were allowed to raise capital? How would it effect the price of GSE common? In a recent research note, Keefe, Bruyette & Woods assumes a capital requirement (under a federal restructuring plan) of 2.5 percent and that capital would be raised at $5 a share. “The resulting dilution would reduce fair value from the $16 to $17 range to roughly $4 for both companies. So even in a best case scenario, the common shares would appear to have little upside from here once we incorporate a fairly modest capital requirement…”Currently, Fannie common sells for $1.36, Freddie $1.25. Early last decade, Fannie common once traded as high as $85.03, Freddie $68.20. The two were taken over by the Federal Housing Finance Agency and Treasury Department in September 2008…
• 11/12/2018 – The future of mortgage finance? 6 key takeaways from the midterm elections, What will this split Congress mean for housing?

Here are some key takeaways from this week’s midterm elections:

–  Rep. Maxine Waters, D-Calif., will take the reins of the House Financial Services Committee. She has demonstrated a strong commitment to affordable housing, access to homeownership, and consumer protection throughout her tenure on the committee. Expect her to continue to focus on these issues, while also conducting robust oversight of the Trump administration.

– It is uncertain who will chair the Senate Banking Committee in the next Congress. Sen. Mike Crapo, R-Idaho, is the current chair, but there is speculation that he may seek the chairmanship of the Senate Finance Committee. If he does, Sen. Pat Toomey, R-Pa., would likely become the committee’s chairman. Regardless of which senator ultimately ends up leading the committee, the expectation is that the committee will largely maintain its current course with regard to its policy priorities.
-GSE reform isn’t happening this Congress. Not that there was much traction previously on this issue, but the divided Congress will only make it that much more difficult to find consensus on such monumental legislation. Any non-legislative changes that come to the GSEs would likely be minor and focused on reducing the government’s footprint in the market.

• 11/11/2018 – Mortgage Industry Braces for Trump Administration to Make Changes at Fannie, Freddie
  Split Congress means White House is more likely to take the lead in overhauling the mortgage-finance firms

In the coming weeks, the Trump administration is expected to signal its intentions for the companies when it nominates a successor to current FHFA Director Mel Watt. Mr. Watt is due to step down in early January when his five-year term expires. A nominee is expected around that time.

• 11/10/2018 – updated plan from Moelis (Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final-1)

Interpretation of the above Blueprint from SeekingAlpha,

“Here is what I decipher from Table 10 on page 28 of Moelis’s updated blueprint:
They show a starting share count of 8.996 billion shares, which would ostensibly be the current outstanding common shares plus 4x that number to be distributed to the government via warrant exercise.
Then, in 2019, they issue a primary (or preliminary) capital raise of $37.5 billion in exchange for 3.197 billion shares. That pegs the issue price at $11.73 per share, which matches their share price for 2019.
The starting shares (8.996b) plus the IPO shares (3.197b) equals a total of 12.193 billion, which is 1.44 billion shares shy of the total they show outstanding at the end of 2019. So that difference is undoubtedly the shares they assume will be issued to the current JPS shareholders in a conversion.
As near as I can tell, their plan is to convert $33 billion in existing JPS face value into $16.9 billion of common shares: i.e., to swap JPS into common at roughly 50% of stated value. That’s a nice jump from current market prices, but is obviously considerably less than the JPS contracts call for. And while the math doesn’t work out precisely, it does approximate the “Relative Ownership” of 10% they show for the converted JPS. The JPS will hold 1.44 billion shares of 13.633b total, or roughly 10.6% of the total company at that point in time. Along with everyone else, they will then be diluted by the secondary offering in 2020 to raise additional capital.”

Comments from Tim Howard on above plan, jtimothyhoward, NOVEMBER 9, 2018 AT 10:54 AM

“I’ve now read the revised blueprint. I see it as more of a supplement than a revision. The revision aspect relates primarily to the incorporation of new information and assumptions into the recapitalization and valuation projections, resulting in a faster path to full recapitalization and a higher corporate valuation for the companies once the full capitalization is attained. Both are favorable, although in my view it’s still too early to “take them to the bank” in light of the remaining uncertainties associated with removing the companies from conservatorship and returning them to shareholder ownership.

I was very pleased to see the Moelis team directly address the main proposed alternatives to their plan. In the section titled “The 2019 Outlook and State of the Debate” Moelis gives their analysis of and opinion about five proposed alternative objectives of or paths to reform: (1) Revoking Fannie and Freddie’s statutory charters; (2) Chartering new credit guarantors to compete with Fannie and Freddie; (3) Having the government change from a posture of backstopping credit guarantors to explicitly guaranteeing their securities; (4) Having Ginnie Mae effectively replace Fannie and Freddie, and (5) Running Fannie and Freddie through receivership. Moelis summarizes by saying, “All of these concepts risk substantial negative side effects, which should be weighed carefully by the government in assessing whether or not to support them,” and then goes on to give detailed and practical critiques of each.

I agree with Moelis on all of these points, and think it’s an important step for them to have made the critiques in such a clear and straightforward way. I believe all of these alternative ideas have been given currency and kept on the list of possibilities only because they have been advanced by prominent individuals or interest groups. The fact that they are impractical, unworkable, unwise or all three is known to most secondary mortgage market insiders and professionals, but not to those engaged in the political aspects of the reform debate. Having Moelis spell out the weakness and dangers of these ideas in this document hopefully will convince more people to focus their attention and effort on an administrative approach to reform that has a much greater promise of success and a much lower risk of going off the rails.

I continue to be concerned that both FHFA and Moelis have pegged Fannie and Freddie’s post-conservatorship capital and guaranty fees at too high a level for the companies to be able to serve a broad and wide enough set of the country’s potential mortgage borrowers to enable the companies to do the volume of business implicit in Moelis’ financial and valuation projections. Specifically, I’m concerned that the average 60 basis point charged guaranty fee Moelis shows for the companies in 2022 (in Figure 8) may be too high to attract the business of high-quality borrowers–who will find bank portfolio or non-agency securities execution more competitive–and that the resulting loss of this high-quality business will push Fannie and Freddie’s risk-based guaranty fees up even further, pricing out medium-quality borrowers as well. But this is a topic for another time–and after we’ve seen the range of comments on FHFA’s June capital proposal submitted near or at the deadline of November 16.”

• 10/29/2018 latest comments from Bloomberg Intelligent (BI-10-29-18)

GSEs’ capital plan may help privatize them a bit faster.

• 10/29/2018 – FAIRX Oct 2018 investment update (FairholmeFundsInc20181029)

1. GSEs’ future is still murky so far
2. I need to learn from Bruce B to have good portfolios with allocations in cash, bond (SEARS bonds), bank preferred stocks, treasury bill, etc.

Fannie Mae (Fannie) and Freddie Mac (Freddie)
Until recently, a majority of judges in various venues have agreed with DC District Court Judge Lamberth’s 2014 decision that the Federal Housing Finance Agency (FHFA), as Fannie and Freddie’s government overlord, could do whatever it wanted with the companies’ past, present, and future earnings. But, on September 28th Judge Lamberth changed his mind due to allegations based on new evidence discovered in the Court of Federal Claims and decided that FHFA is not the government but a private actor. Fairholme and others can sue FHFA for money damages for breach of the implied
covenant of good faith and fair dealings to be expected from any shareholder-owned company.

This is good news when you count the cash that Fannie and Freddie have earned and will earn. It is obvious that Fannie and Freddie were always sound and solvent. There was never a need for conservatorship or a “net worth sweep” as Fannie and Freddie performed their mandated jobs to protect and serve home ownership during times of financial crisis.
And, as was factually obvious in 2009 or 2012 by loan vintage analysis, both have come back strong. Judge Lamberth’s latest ruling should advance the re-IPO of Fannie and Freddie in similar fashion to AIG in 2012.

• 10/19/2018

BI (bloomberg) is out with an analyst’s piece (GSEs_Bloomberg-Intelligence-20181019), a link to which which I am appending below. wonder if you have been hearing some of this too. if correct, the trump administration may be getting ready to go.

rolg

jtimothyhoward

OCTOBER 19, 2018 AT 4:12 PM

A number of people have called my attention to this piece. I’ve now read it three times, and haven’t found anything new or insightful in it. It’s mainly speculative, and the speculations run in different (and contradictory) directions.

The author (who I don’t know and haven’t heard of) states in a section heading that “Trump’s Officially Eyeing Fannie, Freddie Payday,” but offers nothing to back up this claim. He also refers to the plan for Fannie and Freddie outlined by Craig Phillips this week as “Trump’s plan,” but again offers no evidence that the president has had any involvement with this issue (and I personally doubt that he yet has). The rest of the piece are things we all know (the Phillips plan requires legislation), points most people agree on (Congress is unlikely to act on Fannie and Freddie reform next year, and probably beyond that), and musings about what might happen then (administrative reform, but with no indications of structure or timing, or how the knotty issue of the net worth sweep and lawsuits might be tackled). So, no, I didn’t see anything in this that signaled to me that “the Trump administration may be getting ready to go” on resolving Fannie and Freddie’s indefinite conservatorship.

Asset Backed alert link: (Asset Backed Alert 20181019 FHFA)

jtimothyhowardOCTOBER 19, 2018 AT 5:29 PM

I saw that one as well. It quoted “one source” (unnamed) as saying, “We are hearing that the most probable path of movement is on the administrative front, with an interim head for the FHFA who can go ahead and pursue a reform agenda without Congress needing to sign off. And they are going to act right away.” Except… how do you explain Craig Phillips’ statement on Monday at the MBA conference, laying out a plan that would have to be legislated? If people like the unnamed source in the Asset Backed Alert believe this was a deliberate head-fake they should say so. Otherwise, we have a glaring contradiction between what the most senior official to recently speak on the subject says is the Trump administration’s plan and what these analysts assert the REAL plan is.

• 10/18/2018

Rep. Jeb Hensarling interview vibe is that housing finance reform initiative must come from Trump administration (Mnuchin). Nobody in Congress wants to do the “heavy lifting”. – If this is the case, can legislation pass to remove GSEs’ charter?

Podcast Hensarling’s last stand: More reg relief and fixing the GSEs

Download

Rep. Jeb Hensarling, R-Texas, has spent the past six years as chairman of the House Financial Services Committee trying to undo the Dodd-Frank Act. In this episode, he discusses his hard-nosed legislative approach and his more recent willingness to reach across the aisle on regulatory relief and reforming the government-sponsored enterprises Fannie Mae and Freddie Mac.

• 10/15/2018

Mnuchin’s top housing advisor says GSE charters should be removed
Craig Phillips: Trump administration working to end GSE conservatorship

Craig Phillips, Department of the Treasury Secretary Steven Mnuchin’s top housing advisor, told the crowd at the Mortgage Bankers Association 2018 Annual Conference in Washington, D.C., on Monday that the Trump administration is working to end the conservatorship of Fannie Mae and Freddie Mac.

Phillips, whose official title is counselor to the Secretary, also said for the first time that the Treasury believes the government-sponsored enterprises’ federal charter needs to be removed.

“The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said Monday. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market.”

The part about the Trump administration working towards ending the GSEs’ 10-year stay in conservatorship isn’t new.

Back in June, the Trump administration unveiled a sweeping proposal to overhaul the federal government. Included in that proposal was a section about privatizing the government-sponsored enterprises and ending conservatorship.

That proposal came from the Office of Budget and Management, and also included a section about removing the GSEs’ charter, but Phillips made it clear that that is the way that the Treasury feels too.

“Guarantors should have access to an explicit federal guarantee for MBS (mortgage-backed securities) that they issue which is on budget and fully paid for, designed for use only in exigent circumstances and designed and overseen in a manner that protects the interests of taxpayers by their primary regulator,” Phillips continued.

“We’d like to see a more level playing field between the private and federally backed sector, measured by the effective market share and lending volume, which can be achieved by careful review of the participating guarantors risk profile, product focus, pricing, and alignment of subsidies,” he added.

Mortgage Bankers Association

@MBAMortgage

Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury discusses the administration’s plan for #GSEreform at #MBAAnnual18:

Phillips also said that the housing finance reform is a “very important” goal of Mnuchin, adding that Treasury’s central position is that reform is desperately needed.

Phillips also gave a brief update about the GSE single security, which is scheduled to be fully rolled out next year.

Phillips said that the Treasury, Federal Housing Finance Agency, and the GSEs are spending “a lot” of time on the single mortgage-backed security that will be issued by both Fannie Mae and Freddie Mac.

‘We think this will reduce costs to borrowers, especially on Freddie Mac securities,” Phillips said. According to Phillips, “word is that most systems are go for a launch in June 2019,” in line with the scheduled launch.

• 10/15/2018 – take aways from Craig’s speech – 1) ending conservatorship; 2) remove charter (so explicit guarantee which needs congress agreement?)Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury discusses the administration’s plan for #GSEreform at #MBAAnnual18:“The administration Advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership. The charter should be removed from statue. The operations should be overseen by the primary regulator that has the authority to approve additional guarantors for competition into the secondary mortgage market. Guarantors should have access to an explicit federal guarantee for MBS as they issued which is on budget and fully paid for. Designed for used only in an urgent circumstance. And designed and overseen in a manner that protects the interest of taxpayers by their primary regulator. We’d like to see more Level Playing Field between the private and Federally Back sector measured really by the effective market share and lending volume which can be achieved by careful review with the participating guarantors risk profiles, product focus, pricing and alignment of subsidies.”According to Tim Howard’s comments, the current admin is probably taking MBA’s plan,jtimothyhoward
  OCTOBER 15, 2018 AT 2:35 PM
  Phillips’ proposal for the secondary mortgage market has four main components, similar to what has been proposed by the MBA: removing Fannie and Freddie from conservatorship, revising their charters, authorizing additional credit guarantors and giving all credit guarantors access to a paid-for explicit government guaranty. The last three require legislation, however, which strongly suggests that the administration is going to make a serious post-midterm election run at mortgage reform legislation. If it does, it should not take long before we know whether the new legislative proposal suffers the same fate as previous proposals, and does not move forward. In that case, the administration will face a choice. Should it simply stick with the status quo (sweeping Fannie and Freddie’s profits) until Congress gives it what it and the MBA are asking for? That might have been a reasonable choice a few weeks ago, but it now will run the risk of an adverse ruling in the breach of implied covenant case Judge Lamberth has cleared to go to trial in his court. David Thompson of Cooper & Kirk estimates this trial will begin no later than the end of 2020. Given that, I would guess that if the next Congress balks at passing a bank-friendly mortgage reform bill, Treasury and the administration will get serious about settling the lawsuits, removing Fannie and Freddie from conservatorship, and planning for their recapitalization well before the breach of implied covenant claim is argued in Lamberth’s court.J BarnesOCTOBER 15, 2018 AT 6:35 PMHi Tim
  What is your opinion about having other guarantors ? FHFA says that too many would ensure a race to the bottom. I suppose they mean diminish the quality of the loans that they buy? On the other hand small lenders say that vertically integrated guarantors would put them out of business. Can you tell us your view ?Liked by 1 personReplyjtimothyhowardOCTOBER 15, 2018 AT 9:08 PMIn reality my view on multiple guarantors isn’t going to matter–if the administration gets what appears to be its wish on legislation the result will be to permit multiple guarantors; if legislation does not move forward (which would be my bet), then administrative reform will need to accept the two guarantors we now have, Fannie and Freddie. Personally, I don’t see any compelling arguments for additional credit guarantors, and think that providing for their creation will make the administration’s legislative proposal unnecessarily complex, and reduce its (already slim) chance of success.Is it similar to FHFA’s plan, or/and Moelis’ plan, comparing with the following Moelis’ plan,By avoiding the need for a full government guarantee on mortgage-backed securities, the Safety and Soundness Blueprint not only reduces risk to the taxpayer but also avoids the need for new legislation to authorize such a guarantee. Further, this Blueprint does not require new charters to be put in place, a feature of the MBA’s plan, or amendments to the existing charters, as contemplated by the ICBA, both of which would require incremental legislation. Our Blueprint is, however, wholly compatible with any legislation that potentially re-charters the GSEs as utilities with an independent board that would set guarantee fees, should Congress agree to enact such a change.As many commentators have recognized, we are long past the time when the conservatorship of Fannie Mae and Freddie Mac should have ended. Proposed plans that require new government guarantees on mortgage-backed securities, new charters, or an expanded government role in the mortgage market create complications which introduce dramatic timing and execution risk to solutions that the American people deserved long ago. Through existing legal authorities the FHFA and Treasury can largely implement the near-term process of reforming the GSEs, while still providing ample room for Congress to enact comprehensive housing reform legislation in the future.
• 10/12/2018

Fannie Mae’s Comeback Captain Reflects on His Tenure
Departing CEO shares lessons he learned as he led the mortgage titan from the housing crisis back to profitability.

WSJ: If the Treasury secretary comes to you and says, “Tim, what do we do with Fannie and Freddie,” what advice would you give him?

Mr. Mayopoulos: What I’d say is that we should separate what kind of housing finance system you would want to create from the two entities that are currently Fannie and Freddie. The political aspect of just talking about Fannie and Freddie complicates the debate. One of the things that we collectively as a country underappreciate is how successful our housing-finance system really is. The system we have very efficiently attracts capital to the United States and deploys it in a way that is really the envy of a lot of other countries.

The other thing I would say to the Treasury secretary is that while housing-finance reform is important, the real crisis of housing isn’t housing-finance reform—it’s really affordable housing. There’s really just not enough supply of decent, affordable housing available to most Americans.

• 10/10/2018

I am not sure what will happen on Dec. 11, 2018.

the following is from http://www.glenbradford.com/2018/10/fnma-fanniegate-786/

The parties presented a stipulation to Judge Lamberth this afternoon asking him to set Dec. 11, 2018, as the deadline for FHFA, Fannie and Freddie to answer the litigating shareholders’ amended complaints. The parties advise Judge Lamberth that they intend to meet and confer on Oct. 15, 2018. A copy of the parties’ stipulation is attached to this e-mail message.

Additionally, James A. Kraehenbuehl at Boies Scholler Flexner has joined the Class Plaintiffs’ legal team, and a copy of his appearance filed today is also attached to this e-mail message.

• 10/09/2018

It will be a nightmare if Michael Bright becomes the director of FHFA!

Bill Maloni says

A longtime acquaintance—reflecting one of my fears—suggests scuttlebutt is Ginnie Mae’s Michael Bright is prepping himself as is he soon may be nominated for the Directorship of the FHFA and –if that happens—still be permitted by the Trump Admin to hold onto his current Ginnie Mae job, as well.

• 10/05/2018

i’ve attended moelis meetings

• CURRENT moelis plan assumes 2/3 JPS approve plan and only 50% allowed to convert. remaining jps gets new pfd with mkt rate coupon. fyi yank, would be VERY naive to think they haven’t already polled holders and feel comfortable re approval
• all of the specificity re warrant exercise, timing, dilution is addressed in the plan in great detail
• with except of fairholme, large holders own significant $50 positions in addition to s, t, and z

LOL … attend meetings and you will learn. only trying to help those w/o access to moelis

• ” november surprise”
  capital alpha comment
  resolution happens after midterm elections and before swearing in

the prefs are totally mispriced, particularly older issues & 50’s, and have been, jmho, for long time

but particularly crazy last few weeks b/c of tax selling, hedge funds who closed/closing shops and are foreced sellers, and redemptions at fairholme.

they SHOULD be trading at discount to par for all reasons you so clearly state, but believe “fair value” is where they traded in february before d.c. circuit fiasco

• 09/28/2018

Per Glen Bradford:

Judge Lamberth released a memorandum opinion this afternoon dismissing shareholders’ claims for:

— breach of contract;
— breach of fiduciary duty;
— violation of Delaware and Virginia law;

and ruling that shareholders’ claims for:

— breach of the implied covenant of good faith and fair dealing

survive and will go to trial.

And shareholders might appeal to the first three rulings.

• 09/01/2018

http://www.delawarebayllc.com/images/10_Years_After_Henry_Paulson_s_Colossal_Blunder.pdf

The continuing saga of Fannie Mae and Freddie Mac (10_Years_After_Henry_Paulson_s_Colossal_Blunder)
10 YEARS AFTER HENRY PAULSON’S COLOSSAL BLUNDER
Take the money and run. Trump can claim credit for making the best deal since the Louisiana Purchase . . .. . . unless he lets the opportunity slip away.
They may have been able to fool most of the judges most of the time, but the government hasn’t been able to fool Judge Margaret Sweeney.

By late January, the case will be fully briefed. I expect Her Honor to rule by late spring.