Good recap of GSE story – Part II

Good recap of GSE story – Part II

Posted on February 10, 2020 by Timeless Investor

here is a good recap (Part II) of GSE story

investment in GSE common’s strategy

• 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?
• 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.
• 02/11/2020 – this might be the largest IPO in history. The size of IPO will determine the price of stock

The Government Takes a Step Toward Releasing Fannie Mae and Freddie Mac
If privatization happens, the stock sale for these government-owned entities could be four times the largest IPO ever.

In many ways, the common stock of Fannie Mae and Freddie Mac represents a litigation lottery ticket. Much will depend on the opinion of the president’s administration. The Obama administration was dead set against paying stockholders anything. In their mind, the companies were insolvent when the government bailed them out, and if the GSEs had gone through a typical bankruptcy, the shareholders would have been wiped out. Current FHFA director Mark Calabria has said he will wipe out the current stock in each “if he has to.”

• 02/11/2020 – this might hurt the future earnings of FNMA/FMCC

Trump Proposes a Hike in Fannie/Freddie Guarantee Fees
pmu…@imfpubs.com

Although the White House wants to recapitalize and release Fannie Mae and Freddie Mac from conservatorship, it’s proposing to hike the guarantee fees the GSEs charge by 10 basis points, a move that would increase the cost of borrowing for consumers.

The 10 bps hike was buried in Trump’s new budget, released Monday morning, under the section labeled “Major Savings and Reforms.”

G-fees currently average about 55 basis points, 10 bps of which cover funding of the Temporary Payroll Tax Cut Continuation Act of 2011, which is set to expire next year.

If the White House gets its way, the additional 10 bps charge would start in fiscal 2021 and run through 2025, raising an additional $34 billion for the U.S. Treasury. The Trump administration states the increase “would help to level the playing field for private lenders seeking to compete with the GSEs.”

Rob Zimmer, head of external relations for Community Mortgage Lenders of America, said, “Washington is often not very careful when it comes to raising the cost of mortgage money in the different channels.” For more on the president’s new budget and how it could affect the mortgage market, see the next edition of Inside Mortgage Finance, available Thursday afternoon.

• 02/11/2020 – Will the new capital rule come at the end of first quarter? It is possible

Katy O’Donnell @KatyODonnell_· 15h Calabria also said the RFI on FHLB membership will be our “within two weeks,” capital rule sometime near the end of the quarter.

Glen Richard Bradford III @DoNotLose so, repropose by end of march —> calabria is going as slow as possible.. lol… but, he’s still doing it before it’s too late… #fanniegate $fnma — will be finalized in time for capital restoration plans, 4th amendment, etc.. http://thecmla.com/cmla/2019/12/19/cmla-joins-icba-chla-and-lba-in-letter-to-fhfa-regarding-gse-capital-rule/…

It is possible that the capital rule will come near the end of this quarter, because

Additionally, if the regulatory capital rule is not final before late May or early June of next year, the consequences of further delay or inaction become particularly acute.  Under the Congressional Review Act, the regulatory capital rule – or any rule enacted within the prior 60 legislative days by FHFA – can be overturned if there is a change in leadership in Congress and the White House after the 2020 elections.

• 02/10/2020 – the litigation process is about two years long. Dick Bove thinks no significant court decisions in any of these cases are expected before the presidential election in November.

Here’s where the major court cases for Fannie/ Freddie stand

Legal cases involving Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) continue to make their way through the court system. Shareholders want to stay on track of these cases because their outcomes will have significant impact on the value of their investments. Bank analyst Dick Bove provided an update on all the major court cases for the government-sponsored enterprises.

Supreme Court not moving on Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) yet.

For example, he believes the Supreme Court is reluctant to move forward on the cases involving Fannie Mae and Freddie Mac. The court has not yet said it will hear any of the cases, so there’s no guarantee that it will.

However, the Supreme Court will listen to arguments on a related case about whether the position of the director of the Consumer Financial Protection Bureau is unconstitutional. This case applies to the GSEs because another case ruled that the position of the Federal Housing Finance Agency’s director is unconstitutional. If the Consumer Financial Protection Bureau’s director is ruled to be unconstitutional, it’s expected that the FHFA director’s position will remain unconstitutional.

The broader issues involving Fannie Mae (OTCMKTS:FNMA) and Freddie Mac are not expected to be heard by the Supreme Court this year.

Appeals court and district court
The Fifth Circuit Court of Appeals is the court that ruled the FHFA director’s position to be unconstitutional. The court also said the director can be removed at any time by the president at will.

However, the Fifth Circuit Court of Appeals hasn’t ruled on any of the issues related to the net worth sweep. Instead, it has remanded that issue to the U.S. District Court for the Southern District of Texas in Houston for fact checking.

The Houston court will be tasked with checking the facts presented by the plaintiffs in the case that was before the Fifth Circuit Court. According to Bove, it’s hoped that this court will reverse itself and declare the net worth sweep to be illegal.

Federal claims court
The U.S. Federal Claims Court has been asked to rule on whether the government has illegally taken benefits from shareholders in Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC). Bove said the court “is showing a clear disposition to the view that something illegal has happened here.”

The court is now setting rules for a trial on this issue. There is no timeline yet for that trial.

DC District Court on Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC)
The U.S. Appeals Court asked the U.S. District Court for the District of Columbia to review the cases involving Fannie Mae (OTCMKTS:FNMA) and Freddie Mac for the second time. It has requested 70,000 documents from the government in the case. A trial is expected in March 2021.

According to Bove, the court may be leaning in the same direction as the Federal Claims Court, which would be a good thing for the plaintiffs.

He added that no significant court decisions in any of these cases are expected before the presidential election in November. If the plaintiffs do win any of the court cases, the results will be appealed to higher courts, which means it could take another two years for the matter to finally be resolved.

• 02/10/2020 – a great update and recap of what happened and what might happen

Fannie Mae: Here’s what plaintiffs want in the GSE court cases (what plaintiffs want from Dick Bove)

He expects the Federal Housing Finance Agency to produce a new capital rule soon. He also looks for a consent agreement to allow Fannie Mae and Freddie Mac to return to the public market outside their conservatorships. The agreement should also allow them to operate without the required capital until the desired level is achieved.

Bove notes that advisors close to the Treasury secretary are being put in place, and the GSEs themselves must make plans for their own initial public offerings. He doesn’t expect anything to be rushed through before the election. Recapitalization and release from conservatorship still seem to be two years away.

The ultimate ratio

Addressing these issues in the capital rule will determine just how profitable Fannie Mae and Freddie Mac will be. They will also influence the three biggest variables as the GSEs look to exit conservatorship. The variables include whether they will be able to offer value to investors, whether investors will be willing to put up the extra funds that are needed, and whether the build-up of retained earnings will meet the needs of the companies.

Bove emphasized once again that for those who care only about the preferred shares of Fannie Mae and Freddie Mac, only the outcomes of the court cases matter. However, those who want to profit off the common shares will care more about the outcome of the capital rule issue.

Dec. 19, 2019 Update: The future of Fannie Mae and Freddie Mac continues to hang in the balance amid debate over what should happen next.

Investors who hold the government-sponsored enterprises’ junior preferred shares are depending on the court system to uphold their rights and eliminate the net worth sweep. However, Democratic lawmakers want everything to remain the way it is.

A number of Democratic senators sent letters to the Federal Housing Finance Agency and the Treasury Department about the GSEs. The letters reveal that the senators don’t want anything to change with Fannie’s and Freddie’s status in conservatorship. Bank analyst Dick Bove offered insight into the senators concerns in a note this week.

• 02/10/2020 – HL is starting to draft roadmap for GSEs, late but good start. everything is still up in the air. If the required recap is really $200 bil, common price will be crushed in the short term. Not sure what will happen to preferred.

FHFA names advisor for massive IPO of Fannie Mae and Freddie Mac
Houlihan Lokey Capital will create “roadmap” for GSEs to exit conservatorship, Calabria says

“Hiring a financial advisor is a significant milestone toward ending the conservatorships of the Enterprises,” said FHFA Director Mark Calabria. “The next major milestone for FHFA is the re-proposal of the capital rule, which will happen in the near future.”

The size of the share offering may be as high as $200 billion, according to sources. In comparison, the largest IPO in history was last year’s offering of Saudi Aramco, the Saudi Arabian government’s petroleum and natural gas company. It raised $25.6 billion on Dec. 5, beating Alibaba’s $25 billion IPO in 2014.

For the record, offering shares of Fannie Mae and Freddie Mac technically wouldn’t be “initial public offerings,” because Fannie Mae began trading on the New York Stock Exchange in 1968, and Freddie Mac began trading on the same exchange in 1989.

The “offering” would be the 80% of Fannie Mae and Freddie Mac held by the federal government since 2008.

• 02/05/2020 – Ackman is still quite bully on commons. Will I back into the game?

• 02/04/2020 – Hiring the financial advisor opens up the next series of gates needed to end #GSE conservatorship: new cap rule, settle litigation, PSPA amendment & equity offering. – It seems like it is still a long journey.

Here is the possible timeline from ACG Analytics

• 02/04/2020 – Howlett expects Fannie to price common shares in the offering at $5 each and Freddie to price at $4.50 apiece. Is it possible? even though, the rate of return is less than preferred?

Fannie, Freddie gain after FHFA hires financial adviser

Fannie Mae and Freddie Mac climb in early trading after its federal overseer announced late yesterday that it hired Houlihan Lokey (HLI +6.5%) to help develop and implement a plan to release the government-sponsored enterprises from federal conservatorship.

Nomura Instinet’s Matthew Howlett writes that the milestone supports the firm’s thesis for the GSEs’ recap/release.

Howlett expects conservatorship to end sometime in H2 2020/H1 2021 by way of a consent decree followed by $60B capital raise.

Expects Fannie to price common shares in the offering at $5 each and Freddie to price at $4.50 apiece.

• 02/03/2020 – finally, FHFA hires an experienced financial advisor. We will wait and see what will happen. Should I come back to buy more shares?

FHFA Hires Financial Advisor – announcement from FHFA website

Washington, D.C.  – Today, the Federal Housing Finance Agency (FHFA) selected Houlihan Lokey Capital, Inc. (Houlihan Lokey) as a financial advisor to assist in the development and implementation of a roadmap to responsibly end the conservatorships of Fannie Mae and Freddie Mac (the Enterprises). While developing the roadmap, Houlihan Lokey will consider business and capital structures, market impacts and timing, and available capital raising alternatives, among other items as outlined in the previously published Statement of Work.

“Hiring a financial advisor is a significant milestone toward ending the conservatorships of the Enterprises,” said Director Mark Calabria. “The next major milestone for FHFA is the re-proposal of the capital rule, which will happen in the near future.”

The Contracting Operations Section of the Agency oversaw the open and competitive selection process. The contract amount for the first year is $9 million. FHFA has options to extend for an additional four and a half years, with the total contract not to exceed $45 million.

similar news from HousingWire: FHFA names advisor for massive IPO of Fannie Mae and Freddie Mac, Houlihan Lokey Capital will create “roadmap” for GSEs to exit conservatorship, Calabria says

similar news from wsj: Fannie, Freddie Regulator Hires Adviser on Mortgage Giants’ Privatization, Federal Housing Finance Agency taps investment bank Houlihan Lokey

also from American Banker: FHFA picks Houlihan Lokey to advise agency on GSE plans

old news on relevant subject:” Treasury Discussed Hiring Houlihan to Advise on Fannie-Freddie”

Tim Howard’s comments on this newsjtimothyhowardFEBRUARY 3, 2020 AT 6:47 PM

I agree with you about the easy money. Here’s the “advice” I would give if I were at Houlihan Lokey:

– To Treasury: get with plaintiffs’ attorneys, and negotiate an unwinding of the net worth sweep and a cancellation of your liquidation preference on terms acceptable to them, before a court forces you to do it under less favorable circumstances.

To FHFA: Get your foot off the companies’ air hoses, and promulgate a true risk-based capital standard without the excessive conservatism and cushions the big banks want, and

To Fannie and Freddie: keep doing what you’re doing (provided FHFA allows you to), build up enough capital through retained earnings to meet your new critical capital requirements, and then draw upon your knowledge of your business to put together a killer roadshow that will convince the investment community to give you the equity you need to meet your new risk-based capital requirement, free yourselves of the restrictions of your consent decree and, in the words of Pinocchio, “become a real boy” again.

Can you just wire me the money now?

• 01/31/2020 – FHFA renamed DOC to DOR, hopefully it can really do something instead of doing show business or adding more bureaucracy into FHFA

FHFA Announces Realignment of Agency Structure

Renaming the Division of Conservatorship (DOC) to the Division of Resolutions (DOR)

Washington, D.C.  – Today, the Federal Housing Finance Agency (FHFA) announced a realignment that will further bolster FHFA’s capacity as a world-class regulator of Fannie Mae and Freddie Mac (the Enterprises) and the Federal Home Loan Banks. The realignment of its structure is designed to ensure that the Agency is well-positioned for the Enterprises to responsibly exit conservatorship.

“The changes we are implementing today will solidify FHFA as a world-class regulator,” said FHFA Director Mark Calabria. “The revised structure and appointments of highly qualified senior leaders will ensure that FHFA continues to protect taxpayers from future bailouts and deliver on our obligation to create a competitive, liquid, efficient and resilient housing finance market.”

• 01/28/2020 – legal update from last week – I need to listen to it and take notes

2020 January 24, 2020: Investors Unite Legal Update for GSE Shareholders

David Thompson:

1. 2 petitions before SCOTUS
2. being held is the logical inference
3. if they were to deny, would have done so already
4. 1 petition…. FHFA is unconstitutionally constructed, Saila law
5. likely option of of three – GVR: Granted vacate and remand 5th circuit rulings, might be good for plaintiff, or not mandatory but suggestion for lower court
6. decision expected in June on the case before them.
7. within one week SCOTUS will rule on our motion
8. will know much more March 3, video recordings
9. 2nd petition … administrative procedure. assets are not being preserved and protected in violation of HERA
10. still moving forward in Southern Texas District
11. the government will have to provide administrative record- tricky as this will expose conflicting testimony by the government- will eventually move for summary judgment during the summer
12. Lamberth: complaint against companies for breach of implied covenant and faith
13. companies/treasury were ordered to provide emails they were withholding
14. Sweeney: will certify opinion to Federal court
15. expect her opinion to be appealed and expect to have a decision on that by end of year/early next
16. the government under “massive” litigation pressure
17. have a strong incentive to “deal with shareholders”
18. none of the litigation will be resolved during the Trump administration
19. don’t think they will “roll the dice” with the election.
20. thinks they will settle with shareholders this year to raise capital

• 01/28/2020 – IMF news to remind (1) the upcoming news of Financial Advisor for FHFA; (2) the ongoing events in the courts. We have to patiently wait for more news.

The Grand GSE Prize: Not the FHFA Contract but the IPO
pmuolo@imfpubs.com

In a few weeks, the Federal Housing Finance Agency is expected to announce which firm will be its consigliere as the government moves to recapitalize and release Fannie Mae and Freddie Mac from what seems like interminable conservatorships.

All totaled, the fees from that work could net the lucky FHFA contractor $20 million to $30 million, according to interviews conducted this past fall by Inside Mortgage Finance.

But the financial windfall from the underwriting contracts where the two mortgage giants will offer new shares of common to the public should be considerably larger.

A first-round initial public offering could range from $30 billion to $100 billion, depending on how much money Fannie and Freddie earn and keep as retained capital over the next few quarters. Investment bankers maintain that a 1% underwriting fee (not unreasonable) could result in gross investment banking fees of $300 million to $1 billion. For more on the story, see the new edition of Inside Mortgage Finance, now available online.

Short Takes: Framing the GSE Debate / 55 in 12 / Craig Phillips’ New Job / Flagstar’s Broker Partners / Mortgage Tech Vendor Gets New COO
pmuolo@imfpubs.com

In a new research note issued this week, Dick Bove of Odeon Capital frames the debate surrounding the future of Fannie Mae and Freddie Mac as thus: “Wrong decisions by legislators could meaningfully decrease housing values, and panic the financial markets causing a recession or worse. Consequently, the nation’s politicians have implicitly decided to do nothing. They are rightly fearful of making the wrong decisions…”

The veteran stock analyst adds: “The nation’s court system does not have the luxury of ignoring the issue of what should be done with Fannie Mae and Freddie Mac. The system has done everything it can to delay and obfuscate here but the key court cases move inexorably forward.” Odeon has published 55 comments on the GSEs in the past 12 months…

• 01/14/2020 – So it is a waiting game. Let us wait for a few weeks (possible longer) for financial adviser to show upFannie Mae, Freddie Mac watchdog set to name IPO advisor – HousingWire

The watchdog for Fannie Mae and Freddie Mac has been interviewing advisory firms to handle the public offerings of their shares and is likely to announce a name within the next few weeks, according to Jaret Seiberg, managing director of Cowen Washington Research Group.

“Our expectation is that FHFA in the coming few weeks will announce its financial adviser,” Seiberg said in a note to investors obtained by HousingWire. “We believe the agency in February will publish the proposed capital rules. We expect the enterprises to hire financial advisers this spring.”

• 01/13/2020 – A great clarification  on the difference of requests from plaintiff and defense to SCOTUS. It is possible that SCOTUS will accept both requests and then make the final decision, which might be a coin flip. I guess in the end of June of July, the most possible outcome is NWS gets invalidated, but plaintiffs receive no compensation.

I understand that the ideal outcome would be for SCOTUS to deny cert on the question of the constitutionality of the NWS and to grant cert on the question of the remedy for the improper “director arrangement”, but my own personal logic was to ask why would the court grant cert on one question and deny cert on the other. I guess I’d expect a “While we’re here …” approach. I would love for you to tell me that my logic is incorrect.

The constitutionality of the NWS is not a question presented by either party.

The questions presented concern the two different decisions made by the United States Court of Appeals for the Fifth Circuit en banc concerning Collins et. al.’s appeal.

Collins seeks, as a prevailing party, to revisit the 5th Circuit en banc decision on Count IV and gain a retrospective remedy of setting aside the NWS.

Mnuchin et al. are making an interlocutory appeal in seeking to reverse the Fifth Circuit en banc’s reverse and remand of Count I still pending in Judge Atlas’ court. That is, Mnuchin et. al. seek to cut off the future possibility that Judge Atlas may/will rule for the Plaintiffs as instructed by the Fifth Circuit.

See: For Counts see p. 13 http://www.ca5.uscourts.gov/opinions/pub/17/17-20364-CV2.pdf

Perhaps, a reconsideration of the elements in logic (cert questions) would be useful.

Below are the questions given in the petitions for writs of certiorari.

Patrick J. Collins, et al., Petitioners v. Steven T. Mnuchin, Secretary of the Treasury, et al.
1. Whether FHFA’s structure violates the separation of powers; and

2. Whether the courts must set aside a final agency action that FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make FHFA independent. https://www.supremecourt.gov/DocketPDF/19/19-563/120380/20191025201313249_Mnuchin%20FINAL.pdf

Steven T. Mnuchin, Secretary of the Treasury, et al., Petitioners v. Patrick J. Collins, et al.
1. Whether the statute’s anti-injunction clause, which precludes courts from taking any action that would “restrain or affect the exercise of powers or functions of the Agency as a conservator,” 12 U.S.C. 4617(f), precludes a federal court from setting aside the Third Amendment.

2. Whether the statute’s succession clause—under which FHFA, as conservator, inherits the shareholders’ rights to bring derivative actions on behalf of the enterprises—precludes the shareholders from challenging the Third Amendment. https://www.supremecourt.gov/DocketPDF/19/19-563/120380/20191025201313249_Mnuchin%20FINAL.pdf

• 01/07/2020 – Here is the expected recovery path for FNMA/FMCC. I can wait for the dilution of commons then start to buy in gradually.

Why This Firm Sees Massive Upside in Fannie Mae and Freddie Mac

Fannie Mae (FNMA) and Freddie Mac (FMCC) were initiated with Buy ratings at Instinet ahead of what is expected to be a recapitalization and release of the companies over the next 12 to 18 months. Fannie Mae comes with a $5.00 target price, almost 50% higher than the current price. The $4.50 target price for Freddie Mac offers an implied upside of just over 40%.

Instinet’s view is that Fannie Mae and Freddie Mac will operate as near monoline guarantors of mortgages with insurance-like features that mainly stand in second or remote loss positions behind risk-sharing arrangements. The firm also expects that the firms will transition toward dividend-paying public utility models with roughly 4.5% earnings growth on a blended basis and with a low operating and credit expense structure.

There is a serious caveat here. The Treasury’s Senior Preferred Stock Purchase Agreement remains a major elephant in the room. For GSE reform to be successful, the firm noted that the Treasury’s stake must be eliminated. That was $191.4 billion at the end of the third quarter in 2019 and is expected to rise to $238 billion after the most recent amendment.

A visual outline of the expected steps that was created by Instinet for its report is shown below. Remember, any breakdown or extension in negotiations would create delays or other negative expectations to many of the expectations within this report.

• 01/06/2020 – news from IFM- rumors about imminent capital plan

Short Takes: FHFA’s Capital Proposal Release Date? / The Sen. Warren Factor / CMBS Trouble in NYC / Judge Questions the Past Financial Distress of the GSEs / Promotions at Digital Lender

pmuolo@imfpubs.com, dhollier@imfpubs.com

In a new note to clients, Cowen Washington Research Group predicts the Federal Housing Finance Agency will issue its Fannie Mae/Freddie Mac capital proposal some time in February with finalization coming by the summer. Inside Mortgage Finance has been hearing it could see the light of day by the end of January. Bottom line: It’s just weeks away…

• 01/04/2020 – an upcoming event for Mark Calabria, will he say something negative again (like he always did before) to hurt FNMA/FMCC or some good news coming?

Wednesday, January 08, 202012:00 PM – 1:30 PM EST
Category: Events WHF Public Policy Luncheon with Federal Housing Finance Agency (FHFA) Director Dr. Mark Calabria

• 12/20/2019 – A great letter to Calabria from ICBA, CMLA, LeadingBuilders and Community Home Lenders Assoc. They not only raise the urgency of proposal of cap rule, but also urge to write down the liquidation preferences of SPS. Right now, all eyes are on treasury. Treasury might need a good political cover since the election year is coming. The stake is high.

Lenders-Letter-to-FHFA-on-Capital-Rule

If the regulatory capital rule is not final before late May or early June of next year, the consequences of further delay or inaction become particularly acute. Under the Congressional Review Act, the regulatory capital rule – or any rule enacted within the prior 60 legislative days by FHFA – can be overturned if there is a change in leadership in Congress and the White House after the 2020 elections.

Therefore, and in conformance with HERA’s directions to the Treasury, it is crucial you insist that Treasury write down to zero the liquidation preferences of its senior preferred stock to enable new private investors to participate in the GSEs’ capital raise. The GSEs have repaid to Treasury the full amount of principal and dividends, significantly exceeding the 10% rate of return the Government contracted for in the original Preferred Stock Purchase Agreements.

• 12/19/2019 – a good article from Don Layton. He thinks the exit from conservatorship might be way longer than 4~5 years.

harvard_jchs_treasury_to_do_list_layton_2019

Mr. Layton’s prediction

1. The earliest date for a proper external capital raise is almost undoubtedly later than currently expected, probably getting into late 2021 at the very earliest, and I would predict likely not until even later than that. (This excludes a market-testing capital raise, something small and perhaps unusual, to claim a policy/political victory.)
2. To the degree the above list of investor-centric issues takes a long time to resolve, the GSEs will have to rely more upon retained earnings and less upon external capital raises. There is nothing problematic about this financially. The current administration would like to move faster for its policy reasons, but it is unclear that Democrats, should they win the next presidential election, would agree. In fact, a strategy of recapitalizing the two GSEs over four or five years through retained earnings and then just issuing a single new equity underwriting at the end makes a lot of sense: it would also reduce the difficulty of addressing certain of the above fourteen issues. (In this case, Treasury would do secondary sales only after these other actions had been taken.)
3. To summarize, the timing and specifics of actual new issues (excluding a small market-testing one) is very much up in the air, and my bias is “probably longer.” We should calibrate our pitch to become a lead underwriter for the GSEs accordingly, perhaps aiming for such a small, market-testing transaction to give the administration a policy victory, earlier than would be possible for a major and more conventional raise.
4. And, just to be complete, let me point out that, if the FHFA and Treasury decided not to prioritize the speed of exiting conservatorship (or becoming “well capitalized” to satisfy and end a consent decree), the simplest and cleanest approach to this entire situation would be as follows: 1) The two GSEs recapitalize solely via retained earnings, taking as long as it takes (probably well over five years); and 2) Treasury, with no competition from primary equity raising, cleanly accesses the public markets to sell its shares on a secondary offering basis, potentially allowing the taxpayer to sell off its interest sooner. This is more akin to what happened at AIG. If this is a possible outcome, it means our underwriting marketing efforts should be directed mainly at Treasury, and not so much at the two GSEs or the FHFA.

• 12/17/2019 – Good questions from democratic senators. However, I am afraid that they are in bad motivation. Will they intend to throw a wrench to the running wheel? According to Tim Howard, MBA and ABA are probably behind this letter. It is very hard for Calabria and Mnuchin to answer these Qs in the current status. Could be negative given the political pressure; could be positive if they answer them straightly.

Democratic senators have questions of calabria and mnuchin: https://www.acg-analytics.com/wp-content/uploads/2019/12/Warner-Banking-Letter-to-FHFA-and-Treasury-121719.pdf are all good questions.

also, Bloomberg news on this is here “Senate Democrats Ramp Up Scrutiny of Trump’s Fannie-Freddie Plan”jtimothyhowardDECEMBER 17, 2019 AT 8:42 PM

I see the hands of the Mortgage Bankers Association and the American Bankers Association all over this letter. Both groups have made clear that they believe mortgage reform only can be done “properly” by Congress, and both also have perfected the technique of slowing down something they don’t want to proceed at all by posing an endless set of questions that must be answered to their satisfaction first. I agree that almost all of the questions asked by the Democratic members of the Senate Banking Committee are good ones. But good questions have good answers, IF you’re basing your plans for reforming and recapitalizing Fannie and Freddie on facts and solid economics rather than politics. If I were in charge of the companies’ recap, I could do a decent first draft of an answer to the Senators’ questions in a day. And that would be my advice to Calabria and Mnuchin: play this straight, do reform and recap the right way, and the Senators’ questions will answer themselves.

• 12/17/2019 – good discussion on FNMA/FMCC that I need to listen

Policy & Politics: GSE Reform | Natixis Investment Managers

• 12/16/2019 – Counter argument on Sweeney’s ruling from John Carney. – there are quite a few conflicted rulings from different courts, the end results from Supreme court seems like a toss up.

Carney: Fannie and Freddie Investors Should Be Wary About Latest Legal WIn
Another reason for caution is that Sweeney’s decision to let the derivative claims proceed rests on a very thin legal reed. Most courts have held that the FHFA’s actions as a conservator do not amount to state action because the agency is essentially stepping into the shoes of the private companies. Sweeney, following a decision in a federal trial court in Rhode Island, went the other way and said the FHFA counts as an arm of the government when it acts as conservator. That’s crucial because the Court of Federal Claims can only hear cases against the government.

• 12/09/2019 – If FHFA plans to have FNMA/FMCC 2nd IPO 1+ year from now, do they need to interview investment banks now? or, do they want to IPO earlier?

Fannie Mae, Freddie Mac watchdog prepping for “massive IPO”
Fox News: FHFA interviewing Wall Street investment banks to handle the offering

For the record, offering shares of Fannie Mae and Freddie Mac technically wouldn’t be “initial public offerings,” because Fannie Mae began trading on the New York Stock Exchange in 1968, and Freddie Mac began trading on the same exchange in 1989.

The “offering” would be the 80% of Fannie Mae and Freddie Mac held by the federal government since 2008.

• 12/09/2019 – FNMA/FMCC might get the same outcome from supreme court – I need to think about action plan on it.

• 12/02/2019 – Craig is obviously very fair and in realistic, however, he is already gone from treasury. His opinion has little weight on the housing reform plan.

Postscript on Housing Reform, Q&A for Keynote Speaker Craig Phillips

With FHFA’s plans to re-propose a Capital Rule, how does that impact the timing for implementing the Treasury Plan?

I believe the decision to re-propose the Conservatorship Capital Rule clearly delays the timing of achieving the goals laid out in the plan. I support Director Calabria’s judgement on this matter, but I do hope the changes that are ultimately proposed justify the cost of the delay.

This is a unique situation where policy must be conformed with market expectations, since an important part of the plan is raising new capital. Achieving a framework that assures the safety and soundness of the GSEs and provides a market rate of return on the required capital is the delicate balance that must be struck.

Changes to the originally proposed rule might have included adjustment to the leverage ratio; reducing its pro-cyclicality by decreasing the frequency and impact of current loan-to-value adjustments; and incorporating explicit capital provisions for operational risk. I believe it is important to retain the appropriate capital treatment of the credit risk transfer tools the GSEs have developed to better manage their risk.

One topic in the public narrative concerns the nature of “bank-like capital” and whether the proposed rule was too lenient relative to the capital requirements of our largest banks. The logic holds that if the GSEs don’t have the same capital as banks it gives them an unfair advantage operating in the market and that will, in turn, contribute to over-sized market share.

The GSEs operate as an insurance model and not a balance sheet-funded model. Because the GSEs primarily finance themselves through asset sales, by issuing guaranteed mortgage-backed securities, unlike banks they do not have funding roll-over and interest rate management risk. It is a matter of opinion, but I believe the risk weighted capital requirement in the originally proposed rule was aligned with the capital treatment for a bank that engaged in similar activities to those of the GSEs. Numerous private sector calculations based on historic losses have validated that judgment.

Is the market ready to absorb new offerings of common stock from the GSEs? How do the interests and concerns of the current holders of common stock and junior preferred stock factor into all of this?

Properly positioned, I believe there is sufficient demand in the capital markets to recapitalize the GSEs. In fact, through the combination of retained earnings and capital raises both entities could be fully recapitalized to a reasonable capital standard within a four-year period.

Why do we need capital in the first place?  It is not to enrich shareholders or Wall Street – it is to protect the interest of taxpayers. Virtually all the earnings of the GSEs in conservatorship have been distributed as dividends to the U.S. Government. Any insurance provider needs reserves to cover claims resulting from realized losses on the guarantees they have issued. At present, the GSEs have over $5 trillion of obligations and virtually no reserves. That is not sound and is the biggest reason for the urgency of reform.

There are a few key requirements for a successful capital raise. These requirements are also aligned with sound policy for our federal housing finance system. First, a clear and consistent policy environment must be established concerning the regulatory oversight of the GSEs and the impact on their activities and footprint. Second, we need an explicit capital standard and an operating framework that that creates a path for the GSEs to earn a market return on such capital. Third, we need a criteria to exit conservatorship. Finally, we need clarity on all key obligations of the GSEs, such as obligations toward supporting affordable housing or the cost of a periodic commitment fee for the Treasury line.

It is important that the treatment of the historic holders of common stock and junior preferred stock are also considered as part of the final policy on executing the end of the conservatorships. Fannie Mae and Freddie Mac are public companies, with the rights of the existing holders suspended, not eliminated, by conservatorship.  The government left these shares outstanding and freely trading in the market since 2008. The ultimate manner of treating the shareholders has tremendous precedent value for U.S. Government capital markets policy.

The junior preferred stock should be exchanged for common stock on a basis that is viewed as fair, based on capital markets standards and the prevailing market value of those securities. The U.S. Treasury should exercise its warrants to acquire 79.9% of the common stock of the GSEs, as agreed in the PSPAs. Since the beginning of the conservatorships, Treasury has received dividends totaling over $300 billion on its original capital infusion of $191 billion. Consequently, the liquidation preference of the senior preferred stock should be reduced to zero and the Treasury should be considered “repaid”.  These actions are aligned with the interests of the U.S. Government to move forward in recapitalizing the GSEs, namely in eliminated the current significantly negative net worth of Fannie Mae and Freddie Mac and removing claims that negate the value of the very common stock that must be offered to the public to raise capital.

While putting the GSEs into receivership is a possibility, and is an option established in the statute, it introduces numerous complexities.  Receivership is potentially unsettling to the stability of the housing finance system by leaving the future of that system in doubt.

• 11/29/2019 – plaintiff filed a new petition to supreme court on 27Nov19, it all makes sense, but I am not sure it works or not.

20191127103429028_USSC 19-563 Brief for Respondents

to compare with Treasury’s petition on Oct, 25

20191025201313249_Mnuchin FINAL

• 11/27/2019 – here is the conversion of C’s preferred to common, maybe it can be served as a precedent. All preferred including TARP and public pref were converted to commons at $3.25/share.

C_pref_conversion

• 11/26/2019 – Sweeney court document transcript – it seems like judge sides with plaintiff, but whether and when it will work, nobody knows. I need to read the whole document through.

so far I have read through p193, I think both sides argued very well. And it seems like Judge sides more with plaintiff. I think we have 70% chance to get a trial.

Fairholme-Condensed-Transcript-todd-anno

• 11/23/2019 – Timing is risky on this “attractive” investment. Treasury and FHFA are playing the games with investors because of the political pressure. It is very frustrated. I should not be so greedy this summer and should have sold part of my investment on this.

I should always remember “Bird in the Hand Worth Two in the Bush” Future-orientation detracts from the present moment, shifting our focus from what we have and can enjoy to what we lack and cannot. In many cases, future-orientation is little more than a form of fear or greed, both of which are manifestations of insecurity. Gratitude, in contrast, is the feeling of appreciation for what we already have. Studies have linked gratitude with increased satisfaction, motivation, and energy; better sleep and health; and reduced stress and sadness. On a more spiritual level, gratitude promotes consciousness, enthusiasm, joy, empathy, and tranquility, while protecting from anxiety, sadness, loneliness, regret, and envy, with which it is fundamentally incompatible. All this it does because it opens us up onto a bigger and better perspective, shifting our focus from what we lack or strive for to all that we already have, to the bounty that surrounds us, and, above all, to life itself, which is the fount of all opportunity and possibility.

The complete verse from Ecclesiastes is: For to him that is joined to all the living there is hope: for a living dog is better than a dead lion.

Seen in this light, a bird in the hand is worth much more than two in the bush, if only you don’t strangle it.

Heffesse: The Path Forward Is Attractive For Fannie

Summary

1. Fannie Mae is on its way out of conservatorship and that will be beneficial, ultimately, for stockholders, says Gabriella Heffesse, CFA, of ACG Analytics.
2. Fannie’s preferred stock was at $14 over the summer but recently took a hit. Heffesse said the current price is a result of what’s happening in the industry.
3. She says timing and politics will both strongly influence the path out of conservatorship, but by next summer, she expects we’ll see the preferreds at 18 to 20.

Fannie’s (OTCQB:FNMA) recent 40% price drop from $14 over the summer may not make sense with the fundamentals of the risk/reward actually at play right now, Gabriella Heffesse, CFA, of ACG Analytics, told Real Vision’s Trade Ideas.

youtube video is here:  An Update on Fannie and Freddie: The Road to Recapitalization

Since the $14 mark, we saw a treasury plan that outlined a path forward; a win in the Fifth Circuit, which was a surprise win; a letter agreement between FHFA and Treasury; and the FHFA announced they’re hiring a financial advisor—which are all very positive signals.

Though all of these things are up in the air, Heffesse expects clarity by next summer, and thinks we’ll see the preferreds at 18 to 20.

“I think we’ll see it along the way, but right now…the path forward is very attractive,” she said. “We haven’t been here in the last six months. I think people should try to capitalize on it.”

she said the price drop from Sept 9 to Nov 16 of $4 (in FNMAS) was due to liquidity problems in the big hedge funds (BHFs) holding PG & E (PCG) stock and Intelsat (I) which have declined steeply in the last two months (PCG) and last week or so (I). (She doesn’t explicitly state her reasoning, but I believe she is saying the BHFs have suffered steep losses and have had to sell a more stable F&F, rather than I and PCG to cover margins.) She also says (near the end) that some of the price drop is due to the fact that change is coming more slowly than previously expected. She says the price action on GSE preferreds goes against the fundamentals of risk/reward at play now and should not have happened in light of all the recent positive developments. She believes SCOTUS will grant cert to the gov’s petition and issue a ruling next June positive for shareholders, giving cover to FHFA to change the PSPA by September. She said she expects a settlement (consent decree) by late next summer to make a path out of conservatorship permanent and not easily changeable by a future administration, and she expects FNMAS to be trading at $20 by then. She says commons will have their day, but much later, so preferreds is the trade she is recommending right now.

Mentions the ‘buzz’ that traded down due to Intelsat and PCG drops

Mentions crazy good news, but stock still down, so risk-reward is best in 6 months.

Preferred more of focus, but common will have their day.

Timeline not great:

Legal rulings next summer

PSPA 3Q 2020

Consent decree 2021

Release 2022/2023

I think the following argument is a bit biased to investor side, there are unknown and uncertain risks:  Guys, what do you think about the 3 possible scenarios Gaby Heffesse lays out regarding the Supreme Court (1) not taking the case, (2) taking the case and gov’t wins, (3) taking the case and gov’t loses.  I’m trying to figure out how juniors prefs get hurt in any of those scenarios.  Thanks.

Video: at around 9:30 https://www.realvision.com/tv/shows/trade-ideas/videos/an-update-on-fannie-and-freddie-the-road-to-recapitalization

Here’s the transcript…
GABRIELLA HEFFESSE:There’s three scenarios. There’s one, the Supreme Court does not take this up, in which I think we can see the PSPA amendment around the second quarter because it, I think,forces the government’s hand to settle because as they said,it frustrates their policy objectives. They can’t do it. B, Supreme Court decision in June,there’s two outcomes,either the government wins or the government loses. I think both of them and then a pretty similar outcome actually. Because if they win, then they can just do whatever they want. They have more flexibility. If they lose, they settle the litigation and they have great political cover to really not have the headline of you’ve made hedge funds billions of dollars. I don’t think there is a bad outcome for the administration given what their policy goals are.

JUSTINE UNDERHILL:What about in terms of shareholders, do you see negative outcomes there or positive?

GABRIELLA HEFFESSE:That gets into the timing. If the Supreme Court takes the case, and they go in June, I don’t think we’ll see the PSPA amendment until late summer next year. Really, if they don’t take it, and it signals a settlement, it’s somewhat positive. I think that the shareholders think there is a good chance of winning this case in the Supreme Court. If it’s legally decided the benefit that you get from it isyou can’t retroactively change it. If there is a different president and they would change their policy objectives, having the net worth sweep deemed to be illegal in the first place, make sure that it will never happen again and gives more investor confidence in investing in the enterprises.

• 11/22/2019 – comments from Bove. Bove becomes a bit optimistic due to the progress of court from Judge Margaret Sweeney. However, the risks still persist – Supreme court decision, and election outcome. So we still have 50% chance pref and common go to zero. Common has more chance to go under.

U.S. Government Acted Like “Thugs” In Fannie, Freddie Case

According to Bove, the judge made comments like, “The United States government has acted like thugs in a mob in this situation.”

She also said once again that the net worth sweep isn’t valid. She has asked the Appeals Court to certify her views, and Bove noted that Tuesday’s hearing isn’t a final result. The Appeals Court and the Supreme Court might have to weigh in on the issue, but he believes Sweeney’s rulings will be upheld. Because of this, he upgraded both the preferred and common shares of Fannie and Freddie, although he noted that he still has a Hold rating on the common shares and would not buy them at this time.

FHFA Director Mark Calabria said this week that he will rewrite the capital rule for Fannie Mae and Freddie Mac and that it might not happen until 2020. However, given that 2019 is nearly over, that isn’t a huge surprise.

“What is off-putting here is the estimates that the likely release and recap of these companies from their conservatorship may be a 2021 or 2022 event,” Bove wrote. “Further, if the Democrats gain the Presidency, it may never happen.”

• 11/21/2019 – All we can do is to applaud to Craig Phillips, a smart, reasonable, decent, and honest man. Just nobody knows whether and when treasury will write down the senior preferred shares.

Former Treasury Official Stands Up for GSE Shareholders

November 21, 2019
Dennis Hollier

Craig Phillips, the former Treasury official who served as Secretary Steven Mnuchin’s point man on housing issues until departing for the private sector in June, has come out in defense of Fannie Mae and Freddie Mac investors.

Speaking midweek at a conference in Washington, the man widely credited as the author of the Treasury’s plan for housing-finance reform said the recap and release of the GSEs should “really respect the rights of the current shareholders.”

Phillips’ comments were couched in a how-we-got-here description of “the role of capital markets and the pesky nature of the existing shareholders.”

“When a company fails,” he said, “the capital structure is typically eliminated and there are no shares left. But when these companies were put into conservatorship, for a variety of reasons, the interests of the common stockholders and the preferred stockholders were not eliminated. So those shares continued to exist. They trade freely. It wasn’t a bailout or a sweetheart deal that got them there.”

The result, Phillips said, is an unusual circumstance where there are both historic shareholders who suffered catastrophic losses when the companies failed, and opportunistic investors who purchased the stocks at pennies on the dollar in the hopes of a windfall when the companies emerge from conservatorship.

The other oddity about the GSEs is that in conservatorship both the shareholders and the company leadership are essentially powerless. That leaves Fannie and Freddie under the control of the director of the Federal Housing Finance Agency, as conservator, and the secretary of the Treasury, through the terms of its preferred stock purchase agreements.

Phillips said legally there are two paths forward for the GSEs. If FHFA Director Mark Calabria decides the two entities cannot be saved, he can put them in receivership and liquidate them. “The other option,” Phillips said, “is simply to have them exit conservatorship, which is an act that the Treasury secretary and the FHFA director can decide to do when they want under the PSPAs.”

Calling receivership impractical, he said, “The companies should leave conservatorship, and these shareholders would continue to have their rights.”

The former Treasury official then sketched out what he called “the math of the situation.”

Noting that Fannie and Freddie are strong earners with reasonable returns on equity, he said, “I truly believe they can be fully recapitalized in four to five years, between retained earnings and raising shares from the public.”

That new capital could come in the form of an initial public offering or, more precisely, what Phillips called a “re-IPO,” a capital raise by a company that, like Fannie and Freddie, has been dormant for some time.

Phillips also reminded the audience that Treasury owns warrants to buy 80% of the common stock of the companies. That too, he said, will have to be accounted for in any recapitalization plan for the GSEs.

This complex mix — historic shareholders and speculators; common, junior preferred and senior preferred stocks; Treasury’s ownership of senior preferred stocks and warrants on the commons; and finally, multiple litigants fighting it out in court —makes any recap and release of Fannie and Freddie daunting.

Phillips suggested one way to proceed: Treasury should write down its senior preferred stocks.

“The government did put $190 billion into these companies,” he said. “But they’ve now received dividends in excess of $300 billion. That’s a pretty good private equity deal. Now, we just have to turn the page on how we got here.”

Phillips then offered a plan to move the net worth of Fannie and Freddie from negative to positive.

“I think the only way to square the circle and give shareholders appropriate treatment is to really respect the rights of the current shareholders,” he said. That means selling new shares without completely wiping out current common shareholders.

“The common shares would be substantially diluted by the exercise of the Treasury warrants options, but they would still exist,” Phillips said. “I think that a sensible path forward would also include an exchange of the junior preferred shares and the common shares to align their interests in the exercise.”

But these moves wouldn’t be sufficient to put Fannie and Freddie in the black again, Phillips acknowledged.

“We want a positive net worth,” he said. “Right now, we still have a negative net worth because of the bailout. But if the Treasury … writes down the senior preferred, that’s a big part of getting to zero.”

• 11/21/2019 – BI report: court rule might happen at 1Q20 or end of 2019.

• 11/21/2019 – good update from ACG Analytics, need to pay for the premium to watch the video

AN UPDATE ON FANNIE AND FREDDIE: THE ROAD TO RECAPITALIZATION
Trade Ideas · Featuring Gabriella Heffesse
Published on: November 20th, 2019 • Duration: 18 minutes

Fannie Mae’s stock was up almost 300% in 2019, however shares have recently fallen sharply over 40% in the past few months. Gabriella Heffesse, CFA, of ACG Analytics, returns to Real Vision to argue why prices are deviating from fundamentals, and to discuss the current opportunity in the junior preferred stock. In this interview with Justine Underhill, Heffesse reviews the timeline for the road to recapitalization, analyzes the upcoming legal and regulatory hurdles, and highlights how traders should position over the coming months. Filmed on November 19, 2019.

• 11/20/2019 – from National Mortgage news, the extension of recap plan deadline to Jan. 21, 2020 (good to have a concrete date instead of just saying ‘sometime’ in 2020). And it talks about the reason to extend. Hopefully, the reason here is real and not because FHFA is play political hardball. Maybe FHFA is also waiting for consultant company to come (by end of Nov’19) and help finalize the recap plan.

FHFA extends deadline to give the market more time to weigh UMBS plan

The Federal Housing Finance Agency has extended its deadline for investor comments on a proposal aimed at better aligning pooling practices for loans in uniform mortgage-backed securities.

The new deadline is now Jan. 21, 2020, which gives market participants another month to consider and comment on the plan, which also seeks to reduce specified pool use.

The proposal the FHFA issued a request for input on would channel the majority of Fannie Mae and Freddie Mac’s production into larger, multilender pools while continuing to allow about 20%-30% of issuance to be comprised of custom or specified pools. Currently,

• 11/20/2019 – numerous press briefings say the reproposal of recap plan is not expected to delay the companies’ exit from conservatorship, at least that’s how the agency sees it. In addition, here is the rumor again about Warren Buffett’s potential investment. be aware that common price can go to zero, and imf brings up receivership again.

• 11/19/2019 – FHFA will repropose recap rule “sometime” in 2020, It is quite frustrating since FHFA is dragging feet on reforming even though it is a fair statement. But this introduced lots of uncertainties. And investors hate it so much.

FHFA Will Re-propose Enterprise Capital Rule in 2020
FOR IMMEDIATE RELEASE
11/19/2019
Washington, D.C. – Today, the Federal Housing Finance Agency (FHFA) announced plans to re-propose the entire regulation on capital requirements (Capital Rule) for Fannie Mae and Freddie Mac (the Enterprises) sometime in 2020.

“The 2018 Capital Rule was proposed before FHFA began the process of retaining capital at the Enterprises as a first step toward ending the conservatorships. In fairness to all interested parties, the comments submitted during the previous rulemaking were submitted under a different set of assumptions about the future of the Enterprises. During the process of the rulemaking, important issues were identified that will be addressed in the re-proposal,” said FHFA Director Mark Calabria.

“The Capital Rule is one of the most important rules I will issue as Director. This rule will be re-proposed and finalized within a timeline fully consistent with ending the conservatorships. Requiring the Enterprises to build capital that can properly support their risk ensures that taxpayers will never be on the hook again during an economic downturn.”

• 11/19/2019 – UPDATE 1-U.S. housing finance agency to revisit key Fannie, Freddie capital rule

WASHINGTON, Nov 19 (Reuters) – The U.S. housing finance regulator on Tuesday said it planned to re-issue new capital rules for mortgage giants Fannie Mae and Freddie Mac next year, in a development that is likely to slow the pair’s removal from government control.

The Federal Housing Finance Agency (FHFA) said it would again propose the rule first unveiled in July 2018 in light of the administration’s decision to begin rebuilding the mortgage giants’ capital bases as part of a broader plan to ultimately remove them from government conservatorship.

The decision means the proposed rule may be changed and would have to be submitted to another round of consultation and public feedback, before being finalized. The entire process could take several months.

“In fairness to all interested parties, the comments submitted during the previous rulemaking were submitted under a different set of assumptions about the future of the enterprises,” said FHFA director Mark Calabria in a statement.

Fannie and Freddie, which guarantee over half the nation’s mortgages, have been in conservatorship since they were bailed out during the 2008 financial crisis, with their earnings being swept into the Treasury’s coffers. Washington has since struggled to agree on a plan to get them back on their feet.

In September, the Trump administration unveiled a blueprint to recuperate them, with FHFA and the Treasury saying the pair would be allowed to retain a total of $45 billion in earnings going forward. Analysts estimate that the pair may need more than $100 billion in capital, although the final figure is largely contingent on the outcome of the FHFA capital rule.

Calabria has previously said he hopes the pair may be released from government control within the next five years. (Reporting by Michelle Price Editing by Chizu Nomiyama and Lisa Shumaker)

• 11/15/2019 – Study from Joshua Rosner on Calaria’s latest comments – Rosner thinks The PSPA amendments and Capital Rule are likely to be done sometime in the 1st quarter with write-down of UST’s liquidation preference. It is reasonable, but since there are so many dramas here, we have to wait and see.

435137928-Context-FHFA-Dir-Calabria-s-Latest-Comments-the-Non-Fake-News-Version

If our analysis is correct there is nothing new or inherently inconsistent in
Dir. Calabria’s comments. Rather, it appears reporters have not provided
the proper historical context of Dir. Calabria’s comments:

i. Dir. Calabria again stated the GSEs should retain earnings for 1-1.5 yrs. But the context of this statement appears to have been lost in the reporting- the GSEs have been retaining earnings since April 1 and by Q1’20 they will be at a year of retained capital;

ii. The PSPA amendments and Capital Rule are likely to be done sometime in the 1st quarter. As a prerequisite for the GSEs to meet the expected benchmarks for full release from government control the PSPAs must address the periodic commitment fee payments for ongoing UST backstop support and, to allow the Enterprises to eventually be able to access the capital markets, it must address the write-down UST’s liquidation preferences (which would essentially moot plaintiff suits against the Government);

iii. Only after these milestones have been met could the GSEs be directed to provide FHFA with Capital Restoration Plans (30-days for GSEs to respond to request, ~60-days for FHFA to approve or disapprove);

iv. Upon eventual approval of these restoration plans the GSEs could enter into consent decrees that place limitations on their activities as public companies;

v. Although reaching regulatory capital requirements is not a legal requirement to exit conservatorship having approved capital restoration plans are functionally requirements. Upon approval of CRP, and agreement on consent decrees, the GSEs could be released from conservatorship and begin their own process of deciding how/when to go to the capital markets;

vi. The GSEs would likely continue to operate under consent decrees until at least the time they reach regulatory capital – at which time they will be “freed” in one sense of that word.
vii. It is important to note:

1. If the liquidation preference is written down and/or the GSEs are allowed to put the DTAs on balance-sheet (consistent with GAAP accounting for APIC) they would
already be at statutory capital today;
2. Even without full credit for the DTAs/prepaid-asset the GSEs should achieve retained sufficient capital to reach statutory capital requirements by around the time of the
Presidential elections;

• 11/14/2019 – remember to finish reading this link

• 11/14/2019 – Next week…
  -Oral arguments in Sweeney’s court on Tuesday
  -Gaby Heffesse from ACG Analytics doing another interview on Real Vision
• 11/14/2019 – Mark Calabria threw a lot of uncertainty here, that is why FNMA/FMCC tanks.Fannie-Freddie Share Sales Might Come in 2022, Watchdog Says(Bloomberg) — Fannie Mae and Freddie Mac’s regulator said the mortgage giants will likely be ready for public offerings by 2021 or 2022, a key step toward their exits from government control. Federal Housing Finance Agency Director Mark Calabria, speaking Wednesday at a housing finance policy conference in Washington, said he expects that his agency will have a rule dictating capital requirement“If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safCalabria said that under his timeline, the companies could exit U.S. control by 2022 or 2023. While Calabria has stressed his work is not “calendar-driven, but process-driven” the timeline he laid out may disappoint investors who were hoping that the companies would be freed sooner. It also means that prospects for housing-finance reform as envisioned by Trump administration appointees probably hWhile Calabria has stressed his work is not “calendar-driven, but process-driven” the timeline he laid out may disappoint investors who were hoping that the companies would be freed sooner. It also means that prospects for housing-finance reform as envisioned by Trump administration appointees probably hinges on the president’s re-election next year. The Treasury Department is required to sign offFannie fell 5% to $3.05 in New York trading Wednesday, while Freddie slipped 1.7% to $2.90. The shares were up before Calabria’s comments. Whether Fannie and Freddie can be freed under his timeline depends on market support for the move, Calabria said. He added that it’s up to the FHFA to set the benchmarks for freeing the companies, but up to them to meet those parameters. Calabria has previoussaid that while progress is being made on ending U.S. control, there is still a lot of work to be done. He has said the FHFA hopes to select a financial adviser soon to provide advice on an exit path, and that he also expects the companies to seek their own advisers. He said that he hopes to have an update on plans for setting Fannie and Freddie’s capital structure soon. He still hasn’t specifiedwhether he plans to start from scratch or build upon the rulemaking initiated by his predecessor at FHFA.
• 11/13/2019 – Calabria said the IPO might be 2021 or 2022, exit of conservatorship by 2023 or 2024. – it seems like FHFA and Treasury are very reckless on plan the exit, they do not even have contingency plan in case Trump loses election and Calabria is forced out of agency. Is it real or just a strategy to negotiate with investors? Anyway, pretty bad statement, no wonder there is big sell today.

Fannie and Freddie will likely exit conservatorship by 2024, Calabria says

“If all is going well, [in] 2021, 2022 we will see very large public offerings from these companies,” Calabria said at a Conference of State Bank Supervisors conference. “We will be allowing these companies to go out there and raise the capital they need so they can get out.”

• 11/13/2019 – Mark Calabria talks about consent decree, when will it come?

CSBS @CSBSNews “There will be a level of capital where we think it sufficient to let them out of conservatorship but are not adequately capitalized. During that they will operate under a consent decree.” –@FHFA @MarkCalabria #mortgagesummit

related news on Oct 10, 2019 FHFA may use consent decrees to reduce GSE “election risk”
The method would keep Fannie Mae and Freddie Mac on the path to privatization

In a note to investors obtained by HousingWire, Cowen Washington Research Group is suggesting the FHFA may resort to using consent decrees to ensure the GSEs stay on the path to privatization whether Trump is in office or not.

“A new president could replace Calabria as FHFA director,” the Friday note said. “There is no guarantee that the new director will support the same post-conservatorship structure. Having the consent decree in place would make it tougher for the new regulators to derail recap and release. As such, this would reduce election risk.”

Other federal regulators use concent decrees – sometimes called consent orders – to legally bind the companies they regulate to act in predetermined ways. For the Federal Reserve and the Office of the Comptroller of the Currency, it’s a normal way to ensure their orders are carried out.

“The bank regulators use consent decrees with banks that have become undercapitalized to lay out a plan and a timeline for them to recapitalize,” the Cowen note said. “Such orders also tend to include conduct restrictions on the banks.”

Calabria has discussed using consent decrees to facilitate the recap and release of Fannie and Freddie, the note said.

“The idea is to include conduct restrictions in the decree such as the prohibition on volume discounts as well as to specify firm dates by which each enterprise has to raise specific amounts of new capital,” it said. “We believe this could even include requiring Fannie and Freddie to reach an agreement with Treasury and junior preferred shareholders on the future of their stakes. The advantage of this approach is that it could put Fannie and Freddie on a path to recap and release next year even if they are not ready to approach new investors until 2021 or 2022.”

But, there’s a drawback, the Cowen note said.

“Our concern is that we believe FHFA cannot use a consent decree to establish permanent restrictions on an enterprise,” it said. “Eventually, consent decrees expire. This could be because the target has completed what is required in the decree or the issuer can conclude it is no longer needed. We are unsure how one could make a consent decree permanent.”

• 11/13/2019 – Is it a bad sign for FNMA/FMCC?

pmuolo@imfpubs.com

Alex Pollock, the man who gave Fannie Mae and Freddie Mac some competition in the form of the Mortgage Partnership Finance program, has been tapped by the U.S. Treasury Department as principal deputy director of the Office of Financial Research. Pollock launched the MPF program a few decades back when he was president of the Federal Home Loan Bank of Chicago. A sometimes critic of Fannie and Freddie, Pollock has been serving as a distinguished fellow at the R Street Institute in Washington, DC…

• 11/08/2019 – @USTreasury ordered to hand over docs to Plaintiffs In Lamberth’s court. Motion to Compel GRANTED. – it seems like a positive news. Hopefully, we can see some push for settlement. (13-cv-01053-111)

• 11/06/2019 – from Glen Richard Bradford III @DoNotLose – Calabria is working on ending NWS

• 11/05/2019 – Bill Ackman’s comments on FNMA/FMCC from 3Q earning call – he talked about the catalysts (1. capital rule by the end of year 2019; 2. preferred stock purchase agreement as early as 1st quarter of 2020; 3. a large secondary offering maybe before election; 4. emergence from conservatorship and relisting at New York Stock Exchange or a major exchange) and why common may be more attractive to pref.

William Ackman

Okay great. Our next largest investment is an undisclosed investment and we are not going to provide detail on that yet. It comprises between 8% and call it 9.5% of the portfolio that we manage. It’s not yet a full position and opportunistically, we intend to increase it. I do think we will be likely in a position to discuss it by the next quarter.

On Fannie Freddie, I guess what I will say is this is an investment we’ve held now for six years. I can’t imagine the stars being better aligned for what our original expectations are going into really the next 12 months. A few catalysts for people to think about, the so-called capital rule we hope will be finalized by year-end. We think all the parties here are motivated to get a — to advance the ball with respect to Fannie and Freddie one because it’s important for the country. These remain the least well capitalized large financial institutions in the world.

And the more time that goes by with that being the case, the more risk there’s a recession. And the taxpayer ends up holding the bag with respect to Fannie and Freddie and that would be a tragedy, obviously 11 years after the financial crisis.

But why don’t I turn it over to Anthony? Well, actually I’ll give you a couple more catalysts but that’s sort of number one, the capital rule. Number two, preferred stock purchase agreement, which money that was advanced by the government, very significant development in — really in the last weeks, where Fannie and Freddie have started retaining capital, which is a very significant development.

The economic benefit of that capital is still not accruing to the equity owners of the company or the shareholders, because the government has been increasing its senior preferred stock as the companies retain capital. So there’s no net benefit if you will to the shareholders.

But in order for these entities to be recapitalized and to go public and attract value investment from shareholders, this issue, the preferred stock purchase agreement repayment needs to be resolved. And we expect that to be achieved, as early as the first quarter of next year.

Really the next event thereafter would be some form of a large secondary offering for both companies. And I would believe and I think our kind of house view is that the huge motivation for the treasury secretary and the president in light of his stated public agenda for these companies for that to get done in advance of the election. And why take the risk, market risk? And so I think the next few quarters really next six to nine months, I think will be particularly interesting. Now I’ve probably stolen some of your thunder Anthony, but what else would you like to add?

Anthony Massaro

Thanks, Bill. I think that’s a great overview of near-term catalysts. Maybe I’ll just review some key developments that happened in September, which is a very eventful month for GSE reform. So on September 5, Treasury released their housing finance reform plan. And this plan was largely consistent with their previous communications, namely their overarching goals to end the conservatorships raise, first loss private capital and then provide ongoing government support through the existing PSPAs, which will have to be amended as Bill mentioned in exchange for a commitment fee.

All of this can be accomplished through administrative actions. So while the preference of all parties involved is to work with Congress, structurally we think there’s unlikely to be any progress made there. So all of this is likely to get done through the administration.

The next day on September 6, there was a decision from the Fifth Circuit en banc review to Court of Appeals. They found — a majority opinion found the network sweep to be beyond the powers of the FHFA, as conservator and they’ve remanded that issue to the lower court for further proceedings.

The Fifth Circuit also found — they agreed with the prior decision that FHFA structure where the director could only be fired for cause was unconstitutional. And both parties, the plaintiffs, which are the shareholders and then the defendants, the government have filed first Supreme Court review of the Fifth Circuit’s en banc decision and the Supreme Court could indicate as early as September, as to whether they’ll take this case.

On September 30, there was a letter agreement between Treasury and FHFA that increased the capital reserve amounts for Fannie and Freddie to $25 billion and $20 billion, respectively from $3 billion a piece. So these entities can now retain their comprehensive income until their net worth reaches those levels.

And as Bill mentioned, the liquidation preference on the government’s preferred goes up dollar-for-dollar for every quarterly comprehensive income dividend that’s not paid but we think that that’s likely to be unwound when the PSPAs are amended in the first half of next year.

William Ackman

Thank you. So just a couple of other comments I think are sort of interesting and have gone pretty much unnoticed by investors. This is a company — these companies have largely been perceived as hedge fund stocks that the only orders they trade in the pink sheets, et cetera.

What’s interesting is you pulled the 13 app now on both Fannie and Freddie, the largest publicly disclosed shareholder is the largest or one of the largest mutual fund complexes in the world. Capital group, they represent millions of small shareholders around the globe but also obviously, in the U.S. And I think the — what’s interesting is that the these are now becoming securities that can be owned by more conventional investors’ capital group as early vis-à-vis I would say Fidelity and others do not appear to be shareholders currently of the company.

But I expect — and actually why is that relevant? It’s relevant because one of the remaining risks for common stockholders is dilution from an IPO. And one of the — part of the bear thesis is that the stock’s going to get issued at something approximating the current share price. And therefore, there’ll be massive dilution.

What’s interesting about that is it’s incredibly reminiscent of the commentary around if you go back and look, call it 10 or 11 years ago, circa 2010 — actually nine years ago, when general growth was making its way through the bankruptcy process, which reminds me very much of the conservatorship process and the bear case. And someone actually shorted the stock and put out a public presentation.

We had fun defending the company in that circumstance. But the bare case was the company was going to do a massive equity issuance at a very low share price. And the point we made is that as we made then and that applies here is that, as each of these sort of hurdles are addressed and achieved, so for example, the capital rule was finalized, we expect the stock prices to move significantly up on that development.

More materially, the preferred stock purchase agreements, when that gets resolved, we expect the stock prices of both companies to go up significantly. When — we have an expected date for an IPO. At a certain point in time, the government will be in the best interest. I would say we’re getting very close to that time now.

The government owns warrants on both companies. And in order — the other development which we did not mention is that the government has an RFP out for a financial adviser with a target date of hiring them sometime in the relative short term mid-November I think.

Anthony Massaro

Yes, by the end of November.

William Ackman

End of November. So you’re going to have an investment bank and adviser, whose objective is to raise the required — help the government raise the required capital that’s I think the first priority but also to do it in a way that’s least dilutive to the government that owns 79.9% of both of these companies.

So you now have the government working alongside a financial adviser that has an obligation on behalf of their clients to maximize the outcome and then what we expect to be a series of positive developments as each of these hurdles get chipped away. And so what’s fascinating is about the company, both companies is the higher the stock prices go the more the businesses are worth.

What I mean by that is, since there’s a large equity offering that will get done here and we don’t — $100 billion is not the number but something in the order of we think $25 billion, $30 million, $35 billion IPO. It’s still potentially quite dilutive that as the stock prices go up, the amount of the company that remains owned by the current shareholders increases, which again makes the company more valuable, which increases the profitability of the stock going up. And you get into this sort of upward virtuous cycle. And it’s worthwhile to take a look at the experience we have with general growth, which had a very analogous situation where there was a large equity backstop that got funded once the companies emerged from Chapter 11.

So the emergence from conservatorship will be yet another catalyst. And a listing ultimately on New York Stock Exchange or a major exchange, I think will allow the securities to be owned by a much broader array of investors.

The last point I would make is what’s interesting in the last period is that the preferred stock has been actually somewhat weak. And I think what’s going on is many of the investors that own preferred are now finally realizing that the common stock is if you will the fulcrum security.

So many distressed investors always lean toward owning kind of senior securities, I think have begun recognized that the upside here all the residual benefit will inure to the benefit of the common stockholders. And we believe that some of the very large holders of preferred have now been buying common and may even be selling off some of their preferred stock in order to acquire the common, which we think offers a more attractive risk-reward and better outcome in almost every circumstance.

• 11/04/2019 – Prepared Remarks of Dr. Mark A. Calabria at SFA Residential Mortgage Finance Symposium

As I mentioned, in September, Secretary Mnuchin and I modified the PSPAs, allowing Fannie and Freddie to nearly triple their capital.

FHFA is also working on a capital rule that balances the imperative of protecting taxpayers, the mission of supporting liquidity, and the economic incentives of raising private capital.

We will soon be announcing whether or not the capital rule will be re-proposed and under what terms. We are moving thoughtfully and methodically because this may be the most important rule of my tenure.

But FHFA having a capital rule is not the same as the Enterprises actually having capital. The real work of reform can begin only after we finalize the rule.

Also, I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships.

The objectives of the new Strategic Plan and Scorecard – and the changes we have made the past 6 months – lay the foundation for Fannie and Freddie to ultimately raise private capital.

• 11/04/2019 – FHFA chief: Fannie, Freddie needs to be strongNov. 04, 2019 – 16:03 – Federal Housing Finance Agency director Mark Calabria on the future of Fannie Mae and Freddie Mac and how he will respond if Elizabeth Warren wins the 2020 presidential election.calabria talked the capital rule to be an early next year thing in the@CGasparinointerviewACG Analytics @ACGAnalyticsThe more progress @realDonaldTrumpAdministration makes towards @USTreasury plan, the more difficult it is for a new president to undo. However, @USSupremeCourt could add uncertainty to@MarkCalabria‘s term length. #GSEsHoldenWalker99 @HoldenWalker99 14hLooks like we may have found a ~6 month sweet spot where current administration can lay groundwork for release & massive SPO to avoid disrupting the 2020 election while safeguarding against a new administration stopping release & recapitalization. $FNMA $FMCC

FYI, heritage latest paper (BG3448) – In the absence of liquidation, any recapitalization plan must ensure that taxpayers remain compensated for the prior bailouts and ongoing credit risk. The liquidation preference should be paid in full before a resumption of dividends to private shareholders. Any dividend formula revisions should be constructed in a manner that respects taxpayer interests – they are very hateful to investors! Looks like we still have a lot of negative forces to try to kill FNMA/FMCC.

HoldenWalker99: Calabria pushing to get GSEs out of government control by 2021 $FNMA $FMCC

Matthew Mazurczak: @mattmazurczak: So looks like could be NWS ammedment by year end, consent decree 1H2020, Final PSPA amendment/settlement mid 2020, capital raise late 2020, release 2021. Do you think he is referencing full release 2021 ie capital already raised?

HoldenWalker99: Yes, along these lines. Consent decree would include conditions of “release” so not sure of timing pre- vs. post-election. Not sure if “release” and/or “IPO” discouraged by administration pre-election.

• 11/04/2019 – The Government Should Have Shut Down Fannie and Freddie In 2008 – They Still Can – another bash from TBTF banks, they are still striving to kill FNMA/FMCC

The Trump Administration appears ready to end the nearly 11 years of conservatorship of America’s largest government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac. However, under the current terms of the government conservatorship, these GSEs would have to raise $200 billion they owe to the Treasury and an additional $200 billion as a capital buffer. Special interest groups are lobbying to alter the conservatorship agreements to lessen this financial burden. Fortunately, another taxpayer bailout is not the only path to ending the conservatorship. The Federal Housing Finance Agency (FHFA) has the authority to place the GSEs into receivership and proceed with a structured liquidation of their assets. Although the FHFA cannot revoke the GSEs’ charters without congressional approval, it can issue new charters to new companies—with higher capital requirements, no Treasury credit lines, and no taxpayer backing. This approach will reduce taxpayer risk and gradually restore housing affordability.

Now that the FHFA is taking its job seriously and trying to get Fannie and Freddie out of conservatorship, lack of capital is a major hurdle to a smooth exit. Before they can exit, Fannie and Freddie will have to meet their capital requirements (which were suspended throughout the conservatorship), and the FHFA director will have to classify them as either: (1) adequately capitalized, (2) undercapitalized, (3) significantly undercapitalized, or (4) critically undercapitalized.

As this new paper explains, the authority of the FHFA director to intervene in Fannie’s and Freddie’s operations widens as the capital classification deteriorates. Ultimately, the director has the discretionary power to place the GSEs into receivership and liquidate their assets if they are classified as critically undercapitalized.

As the paper also shows, Fannie and Freddie are critically undercapitalized by (combined) approximately $200 billion. This shortfall is a major hurdle to exiting conservatorship, so there was a great buzz when the FHFA and Treasury recently agreed to allow Fannie and Freddie to retain some of their profits and maintain capital reserves of $25 billion and $20 billion, respectively.

• 11/03/2019 – HoldenWalker99 on “Critical capital level”“Critical capital level” was set in FHEFSSA & there doesn’t appear to be a provision in the statute that allows modification (unlike “minimum capital level” which is under consideration in @FHFA capital rule); it’s a little more than 1/2 of the existing “minimum capital level.”@FHFA @MarkCalabria at @MasonLEC on 10/10: “there is likely to become a time when we’re hitting a critically undercapitalized level… maybe… exit conservatorship… operate under consent decree.” $FNMA $FMCC
• 11/01/2019 – The deadline of response of the Supreme Court appeal filing from Treasury is 29 November. So watch out for this day!
• 11/01/2019- LifeLine$ @visualtrama Another view: En Banc already gives them legal cover because it’s unlikely to be overturned. Supreme Court filing is not designed to wait for the Supreme Court’s response but just an excuse to say we were able negotiate a better deal because of filing.
• 11/01/2019 – from Insider Mortgage finance news
  Analysis: Maybe It’s Time for Uncle Sam to Settle with the GSE Shareholders
  pmuolo@imfpubs.comIf the Treasury Department ultimately decides to place Fannie Mae and Freddie Mac into receivership as a way to re-charter the two mortgage giants and sell a new class of stock, existing shareholders would be wiped out. That’s a given.But that wouldn’t end the three dozen or so outstanding lawsuits filed against the Treasury Department over the net worth sweep and likely would spur additional lawsuits.And with that thought in mind, it’s believed the Treasury Department has an open line of communication with the shareholder plaintiffs and may move eventually to strike a universal (shareholder) legal settlement as a way to clear the decks for an eventual initial public offering of stock.
• 11/01/2019 – Meet the Policymakers Forum with Dr. Mark A. Calabria

to finish listening to this

• 11/01/2019 – Fun with Fannie, Freddie, and Friends

The Mission:

“Fannie Mae” is a leader in providing housing finance for homebuyers and renters in the United States. We serve the people who house America. Together with our partners, we make sure that homeowners, homebuyers, and renters across the country have access to affordable financing opportunities.

“Freddie Mac was chartered by Congress in 1970 with a public mission to stabilize the nation’s residential mortgage markets and expand opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market.”

• 10/31/2019 –link https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/o6DNwuqviN0

seysmont
Oct 31
Th SCOTUS appeal deals with HERA anti-injunction provision. Bloomberg published a fake news article on the nature of appeal (surprise). One of the long hedge funds petitioned SCOTUS to hear this too. This is important for post c-ship for shareholder’s rights. It’s this part of HERA that kicked all shareholder’s clams out of court based on standing. It’s not disputing relief.

• 10/31/2019 – Mark Calabria said NWS will soon end, but litigation with investors might continue. So we are not done yet, still some risks ahead.

Fannie’s Watchdog Says Focus Is on Exit Strategy, Not Lawsuits (highlighted article: Fannie’s Watchdog Says Focus Is on Exit Strategy, Not Lawsuits)
By Elizabeth Dexheimer
October 31, 2019, 11:11 AM PDT

Fannie Mae and Freddie Mac’s regulator said he is focused on helping the mortgage giants build sufficient capital to exit federal control as quickly as possible and isn’t particularly concerned with resolving investor litigation that has reached the U.S. Supreme Court.

Federal Housing Finance Agency Director Mark Calabria, speaking at a briefing with reporters on Thursday, said he intends to spur the companies’ ability to boost reserves by eventually ending the so-called net-worth sweep that sends their profits to the U.S. Treasury. Calabria said work toward that goal is proceeding without regard for whether it will address all of the concerns raised in the shareholder lawsuits.

“I don’t have any money to pay anyone damages, so that will be decided by somebody else.”

He said that it’s not clear yet whether litigation will affect the companies’ ability to attract new investors as they seek to build outside capital in the future.
“We will cross that bridge when we get to it,” he said.

Calabria said he hasn’t determined whether to issue a new rule or revise the one his predecessor began last year. Calabria will have to negotiate with the Treasury Department to end the net worth sweep.

He said FHFA is working through a list of confidential directives for Fannie and Freddie
to meet before they can be freed.

Calabria says he is also keeping in mind that to raise enough capital to exit
conservatorship, Fannie and Freddie need to be attractive to new investors. He said he
is working with the companies to ensure new rules don’t hurt their return on equity
and is also looking at cutting costs to help make them more profitable.

• 10/31/2019 – HoldenWalker99 on Tim H’s comments

A lot of good ideas & options discussed. To me, though, government doesn’t need political cover to end NWS. But they do to resolve liquidation preference issue. Strategy could be to monetize (a portion) or seek political cover to eliminate; unclear to me. $FNMA $FMCC

• 10/31/2019 – great discussion from Tim Howard’s blog – Tim Howard and ROL guy are optimistic about Treasury’s appeal, although I am still quite skeptical about it. We will see.

ruleoflawguyOCTOBER 28, 2019 AT 10:12 PM

Tim

as if the Collins en banc APA opinion by Judge Willett wasn’t strong enough, see this from FHFA Director Calabria from the new FHFA strategic plan (p. 8) regarding the mandatory nature of the conservator’s authority:

“”The Enterprises, by themselves, cannot be blamed for these results. Fannie Mae and Freddie Mac have been operating under government control throughout the conservatorships. As such, their performance is determined, at least in part, by the government policies under which the conservatorships have been managed. For instance, the so-called net worth sweep required the Enterprises to pay out any excess capital beyond a modest cushion as a dividend to the senior preferred shares. Fulfilling HERA’s statutory duty to maintain “adequate capital” at the Enterprises necessitates a different policy path that enables the Enterprises to build and earn a reasonable return on capital. Generating that return by charging adequate guarantee fees aligns with statutory mandates.

Taken together, (1) FHFA’s statutory mandates, (2) the adverse impacts of continued government control of a very large segment of the U.S. housing finance system, and (3) the enormous financial risks taxpayers continue to face from backing Enterprises with very limited capital cushions, compel a fundamental shift in the implementation of the conservatorships. FHFA will act on its statutory mandate to put the Enterprises back into operation in a safe, sound, and solvent condition.”

“statutory duty/mandate”

collins plaintiffs may now wish to call FHFA director Calabria as its first witness in federal district court as the mandate to the district court issues 10/29 for the district court to implement the en banc appellate APA opinion.

rolg

Liked by 3 peopleReply

1. jtimothyhowardOCTOBER 29, 2019 AT 10:14 AMI just got around to reading the FHFA 2019 Strategic Plan this morning, and saw this language. I agree with you about calling Calabria as a witness in the district court for Collins, although I might be inclined to do it after a couple of other witnesses convincingly establish that the “death spiral” rationale given at the time by Treasury and FHFA was a conscious fabrication, and that both parties to the agreement knew then that its real purpose was to confiscate all of Fannie and Freddie’s capital to make it impossible for them to do what Calabria now insists they must–use their financial strength to recapitalize themselves and exit conservatorship.Liked by 4 peopleReply
   1. ruleoflawguyOCTOBER 29, 2019 AT 11:07 AMTimso now we have Calabria i) not only footnoted in the Willett opinion as acknowledging that the conservator has a statutory duty to make the GSEs safe and sound (since he was a private citizen at the time, this is more informational than authoritative), but ii) also making clear now as fhfa director that this is current fhfa policy in an official fhfa strategic plan. this is not some off the cuff statement. fhfa officially agrees with the Willett opinion.perhaps I am crediting this statement in the fhfa strategic plan with too much importance, but I no longer see how fhfa can even hope to win on the APA claim even if SCOTUS were to grant cert (and given this statement in the fhfa strategic plan, it is hard to see how fhfa would justify petitioning SCOTUS for cert). such a win could only occur if SCOTUS were to agree that it is permissible for fhfa to interpret HERA inconsistently in 2012, so as to permit the NWS in 2012, but not now. and this argument doesn’t pass the red face test.if I were advising collins Ps in any negotiation of a settlement, I would hold out for a total elimination of the senior preferred stock plus a return of the approximate $20B sweep overage to treasury (which could be paid back into the GSEs over time, as a tax credit against future income taxes). if you have a winning hand, you need to play it like a winner.rolgLiked by 6 peopleReply
      1. jtimothyhowardOCTOBER 29, 2019 AT 1:36 PMAgreed.LikeReply
         1. ruleoflawguyOCTOBER 29, 2019 AT 9:46 PMTimtreasury petitions SCOTUS for cert on APA claim:https://www.supremecourt.gov/DocketPDF/19/19-563/120380/20191025201313249_Mnuchin%20FINAL.pdffocuses on the anti-injunction clause and P standing (succession clause), more so than the question as to whether fhfa had a duty to conserve (which fhfa has all but conceded in its strategic plan).Interesting question posed for Ps: whether to argue that petition should be denied as premature since no final judgment, or if confident that willett opinion is correct, call treasury and raise by asking for cert grant.rolgLiked by 2 people
         2. jtimothyhowardOCTOBER 29, 2019 AT 10:02 PMI’m a little surprised that Treasury would petition for cert here, but given that it did if I were plaintiffs’ counsel I would request that cert be granted. The APA case is going to get to the Supreme Court at some point; why not sooner rather than later, and with the tailwind of the Willett opinion?Liked by 2 people
         3. ruleoflawguyOCTOBER 29, 2019 AT 10:30 PMTimtreasury makes a big deal in its cert petition about Collins creating uncertainty for the administrative plan to get GSEs out of conservatorship, but exactly what Collins does to the plan isn’t clear until the district court proceeds with the mandate from the 5th C to consider a remedy, which is precisely why interlocutory orders usually dont give rise to SCOTUS cert grants. so this is a weak cert petition by treasury insofar as it doesn’t really explain why the Willett opinion creates the uncertainty that would cause SCOTUS to grant cert for an order that isn’t final and doesn’t specify relief.notwithstanding this, Collins Ps might just be confident enough that Willett will be affirmed by the SCOTUS “conservative” majority to call and raise, and a SCOTUS grant “should” only increase the pressure on all parties to enter into settlement negotiations. but this is all unchartered territory.rolgLiked by 2 people
         4. ruleoflawguyOCTOBER 29, 2019 AT 11:26 PMTimstill trying to understand treasury’s motivation to petition for cert…unless treasury is just following DOJ’s advice, and DOJ hates to lose cases. only reason that makes any sense is for treasury to preserve some sort of negotiating leverage (avoid an adverse district court remedy order, and another recitation of facts treasury would prefer not to have dredged up). but since the relief that Ps are seeking is precisely within the parameters of the kind of action treasury has to undertake in any event in order to implement its plan, one wonders whether this is more a show of weakness than strength on treasury’s part.rolgLiked by 3 people
         5. ruleoflawguyOCTOBER 30, 2019 AT 9:36 AMTimIf the objective of the treasury cert SCOTUS APA filing was to halt the Collins proceedings in accordance with the Willett opinion at federal district court then that seems to have failed, as the mandate has already issued and has been docketed at the federal district court5th C. rule regarding stay of mandates:41.2 Recall of Mandate. Once issued a mandate will not be recalled except to prevent injustice.rolgLiked by 3 people
         6. jtimothyhowardOCTOBER 30, 2019 AT 10:19 AMThat had been my main (and really only) theory for why the government filed for cert on the APA issue in Collins–to try to delay the hearing of the case on the facts in front of Judge Atlas. Now I’m pretty much left thinking it’s “let’s throw everything at the wall and see if anything sticks.” Unfortunately, this suggests Treasury may be reluctant to make plaintiffs an attractive settlement proposal until some further legal action adverse to defendants (beyond the en banc rulings in Collins) gives it the political cover of being able to say “we really had no choice but to do this.” Perhaps denial of cert by SCOTUS on the APA issue would be cover enough for that. If not, this could drag on for a while. The Willett opinion in Collins has greatly strengthened plaintiffs’ hand, and they have little incentive to make Treasury’s job easier by settling for much less than they could get by letting the legal processes run their course.Liked by 4 people
      2. ruleoflawguyOCTOBER 30, 2019 AT 11:04 AMTimI have found counsel for Collins to be excellent attorneys in all domains, technical, strategic etc.my best guess is that Collins counsel will determine that it is in the best interests of Ps to proceed with the district court proceedings to reach a final order and remedy. in order to proceed in this way, I also expect them to argue to SCOTUS that it should hold off in considering the treasury APA cert petition until a final district court order is issued, at which point treasury would have the opportunity to supplement its petition. treasury makes conclusionary statements in its petition about the effect of the Willett opinion on the administrations plans for the GSEs, but there is no reason to jump to conclusions when a district court is proceeding to fashion a remedy that would make the import of the Willett opinion and its effect on the administration’s plans definitive, at which point SCOTUS would be in a better position to assess the petition.I expect SCOTUS to do this…but again this is unchartered waters.rolgLiked by 2 peopleReply
         1. DanielOCTOBER 30, 2019 AT 11:51 AMROLG, is there an estimated time frame for the district court to fashion a remedy (2 months?, 2 years?). How does that work? Are they already working on it, and then they’ll announce their decision when they’ve made it? Do they schedule a court date?Like
         2. ruleoflawguyOCTOBER 30, 2019 AT 11:58 AM@Danielkeep an eye out on the Collins district court docket. I am guessing that Collins Ps will ask for a scheduling conference. if so, judge atlas can decide how she wants to proceed after that conference.rolgLiked by 1 person
         3. ruleoflawguyOCTOBER 30, 2019 AT 1:35 PMTimif SCOTUS practice remains consistent (which is to usually not grant cert re petitions regarding interlocutory orders, as SCOTUS reviews orders not opinions), its is unlikely that it grants treasury’s APA cert petition at this time…perhaps it will be inclined to do so after district court has rendered a final judgment.if treasury wanted to stop the district court from receiving its mandate to proceed on to the APA remedy, it would have filed its APA cert petition before there 5th C issued its mandate…and there was clear warning that the mandate would issue 10/29 since that date was referenced on the docket when the en banc decision was released.but treasury didn’t do so. I will leave it to others to speculate as to whyrolgLiked by 2 people
         4. jtimothyhowardOCTOBER 30, 2019 AT 3:29 PMMy speculation would be that Treasury IS looking for some legal cover to negotiate an end to the sweep. By waiting to file cert until after the Fifth Circuit District Court had issued its mandate, Judge Atlas’ process can move forward unimpeded. And filing cert will lead to one of three outcomes: cert is denied (most likely), SCOTUS takes the case and finds for plaintiffs on the APA issue (second most likely) and SCOTUS takes the case and finds for defendants (least likely). The last outcome would enable Treasury to drive a much harder bargain with existing shareholders, the middle outcome would give Treasury the excuse of giving plaintiffs the remedy they sought (unwinding the sweep, which would pay down the liquidation preference and result in more than $12.5 billion in future tax or other credits to each company), and the first could enable Treasury to say publicly, “We tried to get a definite judicial ruling from SCOTUS but it declined to review the case, so we are proceeding to settle it with plaintiffs in order to move forward with removing Fannie and Freddie from conservatorship.”Liked by 2 people
         5. ruleoflawguyOCTOBER 30, 2019 AT 3:23 PMthis will be my final speculation on the matter (which intrigues me):it may well be that the (acting) Solicitor General didn’t think the chances of SCOTUS granting cert were that good (and there would be good reason for SG to think so since there is no final APA claim order), so that the deal the SG may have made with DOJ was to file the cert petition after issuance of mandate to district court….SG needs to keep its credibility/relationship with SCOTUS on the up and up, and SG knows that SCOTUS doesnt want interlocutory appeals slowing down district court work, so that here the collins P should be able to proceed in the district court while SCOTUS considers the petitionrolgLiked by 1 person
         6. ruleoflawguyOCTOBER 31, 2019 AT 7:56 PMTimjust to put a ribbon on this speculation re treasury cert petition in collins, here is the notice that the SCOTUS clerk sent to the 5th C: https://www.dropbox.com/s/o8z0eiygb2sekhd/treasury%20cert%20pet%20in%20collins.pdf?dl=0as you can see the petition was filed 10/25 with SCOTUS clerk but docketed on 10/29. so treasury could have tried to have filed cert before the Collins mandate issued. but it failed if that was its objective.rolg

• 10/31/2019 – FNMA’s comments (on Nov 2018) on cap requirement proposal (FannieMaeCapitalRuleComment_FinalSubmitted_111518) – we are eager to FHFA’s final cap rate

• 10/31/2019 – Fannie Mae net worth rises $4B in Q3 – strong Q3 earnings

1. Fannie Mae (OTCQB:FNMA) Q3 net income of $3.96B rises from $3.43B in Q2.
2. Net worth increases to $10.3B as of Sept. 30, 2019 up from $6.37B at June 30, 2019, as a result of the September agreement with the U.S. Treasury Department that allows it to retain up to $25B of capital vs. the previous cap of $3B.

• 10/30/2019 – Trump Administration Asks Supreme Court to Back Sweep of Fannie and Freddie Profits

In a filing with the Supreme Cout, lawyers for the Justice Department asked the court to hear a case contesting a decision from a federal court that ruled in September that the Federal Housing Finance Agency exceeded its legal authority when it agreed to give all of Fannie and Freddie’s profits to the U.S. Treasury in exchange for relief from a fixed dividend that had driven Fannie and Freddie to draw even more bailout funds.

In September, a splintered en banc panel ruled for the shareholders on two points. One majority group of nine judges held that the structure of the FHFA was unconstitutional because the president could not remove its director except for cause. A different nine-judge majority held that the net worth sweep exceeded the FHFA’s authority and did not comport with the traditional duties of a conservator. Both holdings conflicted with the rulings of federal courts elsewhere around the country.

The constitutional victory was less meaningful for shareholders because the remedy assigned by the court was simply to make the FHFA director removable at will by the president. The court said it did not need to overturn earlier decisions by the FHFA, including the decision to accept the net worth sweep. Shareholders have separately asked the Supreme Court to overrule this remedy and declare that they are entitled to have the net worth sweep declared void.

• 10/30/2019 – twitterHoldenWalker99 @HoldenWalker99 1hCalculating $38B in 6 quarters: $FMCC $3B existing plus $1.8B avg. X 6 = $14B + $FNMA $3B existing plus $3.5B avg. X 6 = $24B = $38B combined. Maybe another quarter or two of retained earnings or, more likely, private placement to bridge gap after election.HoldenWalker99 @HoldenWalker99 2hGovernment needs to decide b/n prioritizing (1) squeezing more $ out of their investment in GSEs (which risks derailing housing finance / GSE reform) or (2) accepting that they’ve made enough $ in their investment (which helps move housing finance / GSE reform along). $FNMA $FMCCQuote TweetRob Zimmer @RobTVDC 2hIt’s axiomatic that IF the gov’t is serious about a secondary offering next year (as it has stated repeatedly), it will have to settle. twitter.com/carney/status/…HoldenWalker99 @HoldenWalker99 2h@FHFAcapital rule will determine minimum capital required to release GSEs from conservatorship via consent agreement & IPO. If same as capital buffer levels, retained earnings likely enough for Q4’20/Q1’21 IPO. If higher, likely need private placement to fill gap. $FNMA $FMCC
• 10/30/2019 – Transcript: Freddie Mac CEO David Brickman Discusses Third Quarter 2019 Financial Results – FMCC CEO urges to – The incentives for the GSEs to exit conservatorship / meet capital requirements as quickly as possible continue to be clear and today’s comments from
  CEO during their earnings call confirm that.
• 10/30/2019 – response from Tim Howard on Treasury’s appealruleoflawguy OCTOBER 30, 2019 AT 9:36 AM TimIf the objective of the treasury cert SCOTUS APA filing was to halt the Collins proceedings in accordance with the Willett opinion at federal district court then that seems to have failed, as the mandate has already issued and has been docketed at the federal district court5th C. rule regarding stay of mandates:41.2 Recall of Mandate. Once issued a mandate will not be recalled except to prevent injustice.rolgLiked by 1 personjtimothyhoward OCTOBER 30, 2019 AT 10:19 AMThat had been my main (and really only) theory for why the government filed for cert on the APA issue in Collins–to try to delay the hearing of the case on the facts in front of Judge Atlas. Now I’m pretty much left thinking it’s “let’s throw everything at the wall and see if anything sticks.” Unfortunately, this suggests Treasury may be reluctant to make plaintiffs an attractive settlement proposal until some further legal action adverse to defendants (beyond the en banc rulings in Collins) gives it the political cover of being able to say “we really had no choice but to do this.” Perhaps denial of cert by SCOTUS on the APA issue would be cover enough for that. If not, this could drag on for a while. The Willett opinion in Collins has greatly strengthened plaintiffs’ hand, and they have little incentive to make Treasury’s job easier by settling for much less than they could get by letting the legal processes run their course.

• 10/29/2019 – google group from Seyemont – maybe too optimistic. We need to see.This will be our protection against future overreach. It’s way better than what I expected. If SCOTUS overturns NWS and grants relief, this solidifies the rule of law and protects future investors. They also ask this to be done this term of SCOTUS.
• 10/29/2019 – Twitter comments: HoldenWalker99 @HoldenWalker99HoldenWalker99 @HoldenWalker99 36mSo either Treasury thinks that they need to take it all the way to SCOTUS for political cover or they intend to fight for liquidation preference / senior preferred. Both make sense to me. Tricky stuff. Government good at keeping us guessing. $FNMA $FMCCSeems like Treasury is going to fight for (a portion of) liquidation preference / senior preferred until SCOTUS rules otherwise. How else to read this? HoldenWalker99 @HoldenWalker99 37mThen why not just settle? Government doesn’t need to take to SCOTUS if they want to ease impact on housing finance reform. Shareholder leverage? Seems like government leverage to delay with added risk for shareholders.With regard to maximizing returns for taxpayers & 1st pass at ending lawsuits,should amend SPSPA to end NWS, convert $70b net liquidation preference / offer JPS conversion to common at market price ASAP… then see how it plays out over next year.@HoldenWalker99$70b net liquidation preference = $200b liquidation preference before last Letter Agreement less $130b in NWS overpayments above 10% dividend. For everyone that’s going to cry about this, it was Collin Ps alternate remedy in their complaint!HoldenWalker99 @HoldenWalker99 Oct 19This would be similar to what the government did with $C restructuring. Maximizes returns for taxpayers and likely ends most lawsuits. If not, government has a year or so to negotiate better terms with litigants… and $70b + warrants of cushion to make it work. $FNMA $FMCCOct 19Yes, I know what David Thompson has been saying as he anchors his clients’ preference ahead of a potential settlement, but the Collins own complaint opened the door for this resolution.
• 10/29/2019 – Treasury appealing Collins APA to SCOTUS (appeal document is here: 20191025201313249_Mnuchin FINAL)- what do treasury want to do on appealing? Will SCOTUS take this case? Do it looking for settlement? What is implication of pref and commons? Pref dropped ~10% might be caused by this uncertainty.Quote from: allnatural on Today at 05:12:42 PMTreasury appealing Collins APA to SCOTUS. http://www.supremecourt.gov/DocketPDF/19/19-563/120380/20191025201313249_Mnuchin%20FINAL.pdfNot 100% SCOTUS will agree as this wasn’t a final judgement, but Treasury claims that “… the court of appeals’ decision is of immense practical importance. The decision below raises the possibility that the Third Amendment will be set aside, with significant financial implications for the federal government, the enterprises, and market participants. In addition, legal uncertainty resulting from the decision may frustrate the federal government’s proposed And ongoing efforts to reform the housing finance system and to end the ongoing conservatorships of the enterprises. The government therefore respectfully requests that the Court grant this petition for a writ of certiorari and resolve this case this Term.”^Seems like a good reason to settle as the government is admitting they can’t move forward with housing reform with this case outstanding. First time they are openly acknowledging shareholders leverage here.Immediate implications would be accelerating the Collins case timeline (wouldn’t have to wait for lower court ruling which may take a year). Curious how both FHFA (after yesterdays language) and plaintiffs (SCOTUS is where they want to end up) respond to this petition.Is it possible (maybe unlikely?) that the government is doing this to solidify a future political response to the “enrich hedge funds” onslaught?   i.e. they are likely aware that SCOTUS won’t take the case given remedy hasn’t been decided – but being able to say “we appealed to SCOTUS and they denied and therefore we have no choice but to settle”?
• 10/29/2019 – From Fannie Mae to Warren, Here’s the Robin Hood Round-Up (details from Bloomberg news with other good ideas from Robin Hood conference From Fannie Mae to Warren, Here’s What Happened at Robin Hood)- Ackman and Tilson maybe too optimistic

Bill Ackman, Whitney Tilson on Fannie, Freddie

Pershing Square’s Bill Ackman said Treasury Secretary Steve Mnuchin and Federal Housing Finance Agency Director Mark Calabria should be even more motivated to revamp Fannie Mae and Freddie Mac, now that President Donald Trump’s re-election odds are somewhat lower.Separately, Empire Financial’s Whitney Tilson sees Fannie Mae’s intrinsic value reaching $18.50/share, more than six times its recent price. “Don’t get faked out by their congressional testimony last week that spooked investors,” Tilson said, calling it “Kabuki theater.” He also expects an IPO sometime next year, in which Fannie exits conservatorship and raises ~$25 billion, but a Democratic president could halt that plan, he said.

• 10/28/2019 – Fannie, Freddie Told to Prepare for Return to Private Sector
  Regulator updates goals for housing-finance companies in conservatorship since financial crisis

In new policy goals, the Federal Housing Finance Agency for the first time released formal objectives calling for Fannie’s and Freddie’s return to the private sector. The companies have been in government conservatorship since the 2008 financial crisis. FHFA Director Mark Calabria, who took over the agency in April, is pressing to privatize the mortgage-finance companies, which back around half the nation’s mortgage market.

“Real change has begun, and we are finally building momentum for lasting mortgage-finance reform,” Mr. Calabria said in a speech here before the Mortgage Bankers Association.

Many specific policy details remain to be ironed out over the coming weeks and months, such as how much capital the firms must raise once they eventually leave government control. Still, Monday’s outline gives the companies a loose set of guidelines they must meet before they can return to private-shareholder ownership.

• 10/28/2019 – Prepared Remarks of Dr. Mark A Calabria, Director of FHFA at MBA 2019 Annual Convention & Expo – retain capital, modify PSPAs, a capital rule that balances taxpayers, liquidity and incentives of raising private capital. This may be the most important rule of my tenure.

“I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships.”

“FHFA is in the process of reviewing potential financial advisors that can provide needed expertise to evaluate different capital raising options and help chart a roadmap to responsibly end the conservatorships.”

“FHFA is also working on a capital rule that balances the imperative of protecting taxpayers, the mission of supporting liquidity, and the economic incentives of raising private capital.”

Building Capital

In addition to tailoring risk to match capital, the Enterprises must build capital to match their risk. This is a precondition for exiting conservatorship.

Here again, change has already begun – and it is building momentum for lasting reform.

As I mentioned, last month, Secretary Mnuchin and I modified the PSPAs, allowing Fannie and Freddie to effectively double their capital.

FHFA is also working on a capital rule that balances the imperative of protecting taxpayers, the mission of supporting liquidity, and the economic incentives of raising private capital.

This may be the most important rule of my tenure. It is a prerequisite for the Enterprises to be able to raise additional private capital.

FHFA is in the process of reviewing potential financial advisors that can provide needed expertise to evaluate different capital raising options and help chart a roadmap to responsibly end the conservatorships.

I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships.

The objectives of the new Strategic Plan and Scorecard – and the changes we have made the past 6 months – lay the foundation for Fannie and Freddie to ultimately raise private capital.

But again, the path out of conservatorship will not be driven by the calendar. It will be driven by Fannie and Freddie meeting the mile markers set out for them.

• 10/28/2019 – FHFA Releases New Strategic Plan and Scorecard (2019-Strategic-Plan)

“A fundamental challenge to ending the conservatorships is the amount of capital the Enterprises require, attributable in part to their sheer size. As a result, Section 3 emphasizes the need for the Enterprises to carefully scrutinize and optimize their balance sheet exposures to focus on serving their core guaranty business with maximum capital efficiency. In addition, the Enterprises must enhance their ability to assess the returns on the capital necessary to support their assets and risks. The Enterprises must be able to assess whether the returns are commensurate with private market return thresholds, both because of the statutory mandate to do so and the imperative to transition the Enterprises to eventual private ownership.”

“The Enterprises, by themselves, cannot be blamed for these results. Fannie Mae and Freddie Mac have been operating under government control throughout the conservatorships. As such, their performance is determined, at least in part, by the government policies under which the conservatorships have been managed. For instance, the so-called net worth sweep required the Enterprises to pay out any excess capital beyond a modest cushion as a dividend to the senior preferred shares. Fulfilling HERA’s statutory duty to maintain “adequate capital” at the Enterprises necessitates a different policy path that enables the Enterprises to build and earn a reasonable return on capital. Generating that return by charging adequate guarantee fees aligns with statutory mandates.”

The three objectives of this new Strategic Plan and Scorecard are to ensure that the Enterprises:

1. Focus on their core mission responsibilities to foster competitive, liquid, efficient, and resilient (CLEAR) national  housing finance markets that support sustainable homeownership and affordable rental housing;

2. Operate in a safe and sound manner appropriate for entities in conservatorship; and

3. Prepare for their eventual exits from the conservatorships.

Links to: 2019 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and 2020 Scorecard for Fannie, Mae, Freddie Mac, and Common Securitization Solutions

• 10/28/2019 – Matt Chou Comments2 | + Follow from seeking alphaWell I only shared time stamps from what I believe were voluntary responses compared to what I believe were forced responses. To answer your question…and this is just my opinion on where I believe we are now…Options that are recently off the table:
  1) Senior preferred remains in place, and the government continues to sweep profits – because the GSE’s buffer increased on 09/30
  2) Government receivership of Fannie – because the GSE’s were re-affirmed by the director that they are not insolvent 10/23In addition, Calabria was just sworn in April 2019 as director for a 5 year term which expires April 2024. He was hand selected to work towards ending the conservatorship over the GSE’s.So since April 2019, Calabria has:
  1. Increased the capital threshold to 45B for the GSE’s and the document says another amendment is coming.
  2. Reduced the leverage of GSE’s from 1000 to 1 ratio to 500 to 1 ratio.
  3. FHFA hired a financial advisor for ending conservatorship.
  4. Stated on CNBC junior preferred shares may get par or convert to common shares.
  5. Stated on 10/23 that he will follow the law of HERA, and is not waiting for congress.I might be wrong, but this is where I stand compared to a few months ago.
• 10/27/2019 – $fnma #fanniegate from Twitlonger.comI’m curious why any attention is still on the 10/22 mandatory hearing when the 10/23 interview Calabria chose to be on resulted in:
  1) 19:45 minutes: CALABRIA CLARIFIES THAT HIS COMMENT TO WIPING OUT SHAREHOLDERS IS ONLY WHEN A COMPANY BECOMES INSOLVENT. THIS IS THE LAW.
  2) 24:30 minutes: CALABRIA SAID FANNIE WAS INSOLVENT IN 2008-2012. FANNIE IS HUGELY PROFITABLE NOW.
  3) 27 minutes: THE LAW SAYS THERE ARE ONLY TWO CHOICES…FIX AND REALEASE OR RECEIVERSHIP. SINCE RECEIVERSHIP CANNOT HAPPEN DUE TO POINTS 1 & 2, THE ONLY OPTION IS FIX AND RELEASE.refer to https://www.youtube.com/watch?v=cGIjlhnBfRU
• 10/26/2019 – Tim Howard’s answer to Pollock’s article – great disputes by Tim, however, I think Calabria might side more with Pollock than Howard

jtimothyhoward OCTOBER 25, 2019 AT 4:26 PM

This is why I did my latest blog post: to get some actual facts on the record to counter the false premises on which pieces like this are based.

Pollock’s three recommended administrative actions are:

Action 1: “Capital requirements equal to those of private institutions for the same risks.” There are no private institutions that are limited to doing credit guarantees on residential mortgages, so there is no valid reference point. The FHA is the only entity that is comparable to Fannie and Freddie, and it’s government-owned. Its statutory capital requirement is 2.0 percent, which is way too low for the FHA, but maybe not for Fannie and Freddie.

Action 2: “Pay the same fee to the government for its credit support that other Too Big To Fail financial institutions have to pay.” Here Pollock is talking about FDIC insurance. I have two responses to this: (a) FDIC insurance is not a payment for TBTF—it’s a payment for the federal government insurance program that allows banks to pay a one basis point interest rate on demand deposits and still have consumers put money into them, without knowing (or caring) what’s being done with it, and (b) if it WERE a TBTF fee (which it isn’t), each financial institution’s fee should be proportional to the risk of the entities being backstopped, and banks have far greater risks (and historical losses) than Fannie and Freddie.

Action 3: “Set Fannie and Freddie’s g-fees at the level that includes the cost of capital required for other private institutions to take the same risk.” We don’t know what that capital amount is, because there are no private companies in the residential mortgage credit guaranty business. If Pollock means banks, there is zero overlap between Fannie and Freddie’s business and that of banks, so there is no reason why their capital costs should be anywhere close to equal.

Without facts, Pollock’s three actions may seem reasonable; with facts, they’re not.

• 10/25/2019 – Did Mnuchin and Calabria cite Fannie Mae, Freddie Mac “receivership” as a threat? Receivership option could be used “to get all of the parties to cut a deal,” Cowen says – a deal with congress and also a deal with shareholders

• 10/25/2019 – HoldenWalker99 @HoldenWalker99·Oct 24@MarkCalabria FHFA at@AtlanticLIVE#AtlanticHousing: full interview 14:30-34:45… $FNMA $FMCCBuilding for a New AgeHousing has become a political flash point. Rents are rising, and homelessness is up in cities across the country. Home ownership is declining rapidly, with …Oct 24audience Q&A RE: capital reqs.: goal that mortgage finance “is not simply driven by who gets to be the most highly leveraged.” $FNMA $FMCC#AtlanticHousing, audience Q&A RE: capital reqs.: “Anybody who has a federal charter who holds a mortgage basically holds the same capital as anybody else who holds that mortgage.” $FNMA $FMCC#AtlanticHousing, audience Q&A RE: capital reqs.: ensure “level playing field; one of the reasons that Fannie & Freddie were able to dominate the market is because they required to hold so much less capital than everyone else.” $FNMA $FMCC
• 10/25/2019 – Eliminating Fannie & Freddie’s Competitive Advantages by Administrative Action – Alex Pollock proposes 4% capital requirement, FHFA’s proposed rule is 2.5%, Moelis’s is 3.00%, BASEL III (GSIB) is 3.75% ~4.00%, Calabria 5% . If it is 4%, commons will probably get crashed. Therefore, I need to plan on exit commons.

(reference: Mark Calabria proposed 5% in year 2015: Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size.  Equity of at least 5 percent of total assets should be their required leverage capital ratio.  This is the minimum for all big bank holding companies — for Fannie and Freddie it should absolutely not be less.  Given their undiversified business, something more might be prudent.  In any case, the hyper-leverage which allowed Fannie and Freddie to put the whole financial system at risk needs to be permanently ended. )

Something like a 4% capital requirement would be more like the equilibrium standard required to eliminate the capital arbitrage, which would imply a total capital for the two government-backed entities of about $220 billion. I do not insist on the exact numbers, only that the FHFA should implement the right principal: same risk, same capital.

Refer to Moelis’s plan, Figure 4 on page 13 (Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final-1)

• 10/24/2019 – Carney: Why Fannie and Freddie Shareholders May Get Wiped Out in a Recap – Carney’s recap plan does not take into account of the current litigation effects, need to settle the litigation before any sell

But that $315 billion political landmine could also become a bridge to taking the companies private. Instead of simply canceling the senior preferred shares, the government could slowly auction them off. This would provide the government a solid return on its assets, allow for capital to be raised over time rather than in a one-shot IPO, and allow for the price to adjust as market conditions change. It would also give the mortgage market time to adjust to the slow-motion privatization of the companies.

New investors would be asked to step into the place of the U.S. government as the holders of shares that are entitled to all of the profits of the companies, something that would likely make them very attractive to investors. The sales of senior preferred would not themselves recapitalize the companies but they would transfer control and ownership while retained earnings built up the required capital buffer.

Alec Mazo @Alec_Mazo 22h

Didn’t know @carney could do recapitalization mechanics. A man of many talents. One q: how will new $ invest knowing legal threat is growing given 5th Circuit en Banc decision for shareholders + Sweeney claims + Lamberth remand trial coming up? Can’t sweep under the rug. $fnma twitter.com/cgasparino/sta…

• 10/23/2019 – The White House Wants to Privatize Fannie and Freddie. It Needs Wall Street’s Help.
  The two mortgage giants would potentially have to raise billions of dollars from investors, and financial firms are laying the early groundwork

Executives at Bank of America Corp. , Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley in recent months have talked with the Treasury Department and Fannie and Freddie’s regulator about how a capital raise could work, said people familiar with the matter.

There are no indications the government has begun a formal process for hiring banks on a capital raise, and it could be a hard sell to investors. Still, several, including Bank of America, Citigroup and Goldman, have begun preparing internally to win a role in what could be a landmark event, these people said.

• 10/22/2019 – DISCUSSION of GSES AT HOUSE HEARING

*FHFA DIRECTOR MARK CALABRIA DISCUSSES GSES AT HOUSE HEARING

*SECOND OPTION IS TO PUT GSES INTO RECEIVERSHIP, CALABRIA SAYS

*FIRST OPTION IS TO FIX GSES AND END CONSERVATORSHIPS: CALABRIA

*CALABRIA SAYS HE HAS TWO OPTIONS ON FANNIE AND FREDDIE

*CALABRIA SAYS HE IS WORKING FOR TAXPAYERS AS HEAD OF FHFA

*CALABRIA HAS SAID HE’S AGNOSTIC ABOUT ENRICHING GSE INVESTORS

*CALABRIA: WILLING TO WIPE OUT GSE SHAREHOLDERS IF NECESSARY

*TRESUARY SECRETARY MNUCHIN COMMENTS AT TUESDAY HOUSE HEARING

*MNUCHIN COMMENTS ON TIMELINE FOR ENDING GSE CONSERVATORSHIPS

*MNUCHIN HOPES U.S. ABLE TO END GSE CONTROL WITHIN TWO YEARS

Trump’s Fannie-Freddie Proposal Would Cause Turmoil, Waters Says

*MNUCHIN: BY FAR HIS FIRST CHOICE THAT CONGRESS ADDRESS GSES

• 10/22/2019 – video of Affordable Housing
  Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson and Federal Housing Finance Agency Dir. Mark Calabria testify on affordable housing before the House Financial Services Committee.

House Financial Services Committee Hearings and Meetings Video

• 10/22/2019 – Fannie Watchdog Willing to Wipe Out Shareholders If Necessary
• 10/21/2019 – Glen Richard Bradford III @DoNotLose Calabria said in a couple weeks we will finally figure out if they need to repropose the capital rule or not. Great.
• 10/21/2019 – @FHFA Director Calabria’s prepared remarks for House Committee on Financial Services: “ending the Enterprise conservatorships is one of my top priorities first and foremost because it is what the statute (HERA) requires” https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-calabriad-20191022.pdf

Links to prepared testimonies by @stevenmnuchin1, @MarkCalabria and@SecretaryCarson ahead of @FSCDems tomorrow… $FNMA $FMCC https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-mnuchins-20191022.pdf…

https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-calabriad-20191022.pdf…

https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-carsond-20191022.pdf

• 10/18/2019 – Supreme Court to take on CFPB constitutionality case – hopefully SC will also take FNMA/FMCC case
• 10/18/2019 – IMF news: What We’re Hearing: Talk of a GSE Legal Settlement? / Using Consent Decrees / Goldman’s New Prime Non-Agency MBS / Fannie Exec Departs for Industry Vendorpmuolo@imfpubs.com – here is rumor about settlement.

The Treasury Department is weighing a legal settlement with the junior shareholders in Fannie Mae and Freddie Mac stock. At least that was one rumor making the rounds this week in both New York and Washington. One veteran MBS source said talks between these investors (who sued the government over the quarterly profit sweep) have taken on a new urgency ever since the Trump White House released its housing-finance reform blueprint in early September. For more on the story, see Inside MBS & ABS, now available online…By the way, we ran the settlement rumor by a very large GSE (preferred) shareholder who did not respond to our inquiry…The Federal Housing Finance Agency might use consent decrees as it moves to release Fannie Mae and Freddie Mac from federal control. That’s what agency Director Mark Calabria told an audience at George Mason University’s Antonin Scalia Law School late last week. Similarly, he told reporters in September that, after the government-sponsored enterprises exit conservatorship, they would likely operate under “some sort of consent agreement” until they accumulate enough capital to comply with FHFA’s still-to-be-released final capital rule. (Reporting by Dennis Hollier / dhollier@imfpubs.com).In a report released Friday morning, Cowen Washington Research Group analyst Jaret Seiberg noted that banking regulators have been using consent decrees for years. “Such orders also tend to include conduct restrictions on the banks,” he said…But wait. What if the two are freed? Will they start rolling out new pilot programs that encroach on the turf of established industry players or will the FHFA snuff out such activity before it develops?…

• 10/17/2019 – IMF news – FHFA Chief Suggests an Early End to the Conservatorshipsdhollier@imfpubs.comThe government-sponsored enterprises may be able to begin to move out of conservatorship under existing rules long before they accumulate the required core capital. That was a key point Federal Housing Finance Agency Director Mark Calabria made during a talk late last week at George Mason University, according to Isaac Boltansky, director of policy research at Compass Point.Calabria’s assessment appears to be based on the capital rules outlined in the Financial Safety and Soundness Act of 1992. Besides core capital levels, the rules outlined statutory minimum capital requirements for the GSEs. This more modest capital standard is the sum of 2.50% of the companies’ on-balance sheet assets and 0.45% of their off-balance sheet obligations.In the fourth quarter of 2018, the statutory capital level was roughly $22 billion for Fannie Mae and $18 billion for Freddie Mac.Once the GSEs reach their statutory capital levels, they’re considered “undercapitalized” rather than “significantly undercapitalized” under FSSA. Although the language is far from clear, Calabria seems to believe this change in status serves as a threshold for exiting conservatorship. For more details, see the new edition of Inside Mortgage Finance.
• 10/16/2019 – IMF news, FHFA GSE Advisory Contract Valued at $20 Million, At Least

pmuolo@imfpubs.com

Not only is the Federal Housing Finance Agency seeking to hire an advisor to assist in the recapitalization and release of Fannie Mae and Freddie Mac but the mortgage giants themselves are likely seeking help.

At least that’s the general consensus of several GSE watchers interviewed by Inside MBS & ABS over the past few weeks. Fannie, however, declined to comment on the matter entirely. Freddie didn’t respond at all.

The FHFA isn’t talking to the press about its advisory contract but already speculation is mounting on how much it might be worth to the fortunate investment banking firm (or firms) that win the bid.

One analyst who has written extensively on the recap-and-release topic estimates it could be worth $20 million to $30 million. “The ongoing monitoring of plan implementation may be $5 million to $10 million per year, but that seems a bit high,” he said.

Ted Tozer, a former Ginnie Mae president during the Obama administration, said, “$20 million is not unrealistic. There is a lot of work in the contract.” For more details, see Inside MBS & ABS, now available online.

• 10/15/2019 – Don Layton’s paper and comments

HOUSING FINANCE REFORM: DOWN TO TWO MODELS, BOTH BUILT ON THE GSES

After a Decade of Debates about the Right GSE Reform Model, We’re Down to Two Choices (two_models_for_GSE_reform_layton_2019)

• 10/15/2019- The following link is from the hearing this morning in the Bhatti case before the 8th Circuit. – my takeaways of this hearing are (1) judge was inpatient with Thompson; (2) defendant and Treasury’s lawyers defensed well; (3) the final statement of Thompson were strong and straight to the points.
• 10/15/2019 – from Twitlonger today: Washington Analysis report today…
  “Still expect fourth amendment to PSPAs and FHFA capital rule near year-end. We continue to expect the senior preferred shares to be deemed paid back as part of a fourth amendment to the PSPAs, despite Treasury’s stake growing as a result of the letter agreements. We expect the GSEs to receive tax credits in amounts equal to the difference between: (a) total dividend/sweep payments from the GSEs since 2008; and (b) Treasury’s capital injections + 10% interest. This would be around $20-25 billion that we think is likely to serve as a plank in the foundation of new capital at both entities. We expect the fourth amendment to end the net worth sweep, in addition to pricing a periodic commitment fee that compensates Treasury for the continued entity-level backstop of both GSEs (currently a ~$250 billion line of credit).
  Finally, we also expect FHFA to finalize its proposed post-conservatorship capital rule for the GSEs near yearend, or sometime in Q1 2020. We give the edge to the rule being finalized without having to be re-proposed, as some observers have speculated. However, either way we do not see the timing of the capital rule as critical for
  shareholders. In our opinion, FHFA merely needs to finalize the rule by mid-2020, so as to avoid restructuring risk under a potential new administration (and new FHFA director) in 2021.”
• 10/10/2019 – GSEs Might Need as Long as 18 Months to Build Capital: Calabria
  By Elizabeth Dexheimer

Federal Housing Finance Agency Director Mark Calabria says he expects Fannie Mae and Freddie Mac to spend nine to 18 months retaining earnings to build up a sufficient capital cushion. Calabria, speaking Thursday at George Mason University’s law school in Virginia, says it would be very hard for GSEs to to raise capital in a down housing market or a down equity market Calabria says finishing an FHFA capital rule for Fannie and Freddie is a prerequisite for the companies to be able to sell shares

Calabria says FHFA is currently determining whether to re-propose a capital rule or to make changes to a proposal issued by his predecessor. Fannie and Freddie don’t have to exit conservatorship at the same time.

Calabria says He says companies may have to operate under consent decrees with the government because they might reach a point where they have sufficient capital to exit conservatorships, but not enough to adhere to the FHFA’s requirements. FHFA is reviewing a host of options to make Fannie and Freddie more profitable because the companies have to be attractive to potential investors in order to have successful share offerings.

Calabria says FHFA hopes to have hired a financial adviser to offer expertise on Fannie and Freddie by the end of November, if not sooner, he says Calabria says he expects the Consumer Financial Protection Bureau to revise its so-called qualified mortgage rule before a carve-out from the regulation for Fannie and Freddie expires in January 2021 FHFA is evaluating Fannie and Freddie’s underwriting standards, Calabria says.

• 10/10/2019 – jtimothyhoward OCTOBER 10, 2019 AT 1:37 PMI don’t share Dick Bove’s view that the agreement between Treasury and FHFA to allow Fannie and Freddie to retain an additional $22 billion and $17 billion, respectively, by not making their scheduled net worth sweep payments is a “scam,” or anything the agencies are trying to slip by investors. We know that Treasury and FHFA have neither amended nor cancelled the Third Amendment to the Senior Preferred Stock Agreement; they have merely agreed to allow the companies to add the stated amounts to their capital base, while Treasury’s liquidation preference rises by an equivalent amount. That’s quite straightforward, and I think investors understand it.As for the accounting for the retained net worth sweep payments, we don’t have to guess about that, because we have a prior example to look to: the first quarter of 2018, when the companies were allowed to retain $3.0 billion in earnings by reducing the amount of their net worth sweep payment to Treasury. Then, “net income attributable to common shareholders” was reported at $3.32 billion, and shareholders equity increased by a comparable amount. Senior preferred stock outstanding did not increase as a result of the companies retaining their sweep payments.In order for the companies to be released from conservatorship and returned to shareholder ownership two things will need to happen: the net worth sweep will need to be unwound or otherwise terminated, and Treasury’s liquidation preference will need to be reduced to, or close, to zero. There are two ways these can happen–either as a result of a final court decision invalidating the net worth sweep, or through settlement negotiations between the government and the plaintiffs in the lawsuits. I do not have any insight into what terms of settlement might be deemed acceptable by all parties; that’s what they will be negotiating. But I do agree that the settlement should include some form of reassurance to potential new shareholders that what happened to existing shareholders in the companies will not occur again.
• 10/09/2019 – GSE scam? Net worth sweep remains in play after “accounting chicanery”

Here’s what could happen when earnings are reported
The bank analyst believes the accounting change will affect Fannie Mae’s and Freddie Mac’s earnings reports in four steps. He believes at the end of each quarter, the two GSEs will calculate what they owe the Treasury using the same methodology they have used since the net worth sweep was instituted in 2012.

The second step will be reporting earnings as they always have, including net income. Then they deduct from that net income the dividend that was calculated as due under the net worth sweep. The GSEs will then “report earnings per share based upon the deduction of the net worth sweep amount.”

However, the third step will be different. Instead of deducting the dividend payment from the net worth sweep on Fannie’s and Freddie’s balance sheets, there will be “a notation on the financial statements indicating that the companies owe the senior preferred holders an amount of money equal to the dividend payment.” Since the Treasury holds their senior preferred shares, this refers to the net worth sweep. Since the sweep is being accounted for as a notation instead of an actual deduction, it will appear that the GSEs’ net worth or book value is rising.

Bove describes the fourth step after the end of each quarter as this: “At some point, in order that the companies are released from their conservatorships, the money that is owed and notated on the balance sheets but not paid out, must be paid to the senior preferred stock holder – i.e. the United States Treasury. Thus, the funds that were deferred will be paid so that in real terms the retained earnings of these companies never went up.”

“Accounting chicanery”?
Bove argues that the U.S. government is essentially trying to pull one over on GSE investors, thinking they “will never figure out what is going on.” He explained that in 2008, the government forced Fannie Mae and Freddie Mac to take a “non-cash accounting entry that would destroy their capital and give the government the right to take them over,” a rule that is being contested in court.

• 10/08/2019 – How do you solve a problem like Fannie and Freddie? Not by creating more of them

1. WOULD COMPETITION AMONG GSES RESULT IN IMPROVED UNDERWRITING STANDARDS?
2. THE PROBLEM OF BANK SUPERVISION IN THE UNITED STATES
3. WARNING FROM HISTORY: THE EXPERIENCE OF FEDERAL RESERVE BANKS

• 10/08/2019 – Warren Buffett Could Own Fannie and Freddie?
• 10/05/2019 – FHFA is seeking advisory help – very encouraging news. the deadline for proposal is Oct 15, so it is coming soon. In addition, it seems like the Phase I which including PSPA mod is coming in half year?

Attachment_A_-_SOW_Advisory_Services

Phase I: Development of the Roadmap

1. Develop a work plan, timeline, and responsibilities schedule including coordination of various parties (other advisors, legal counsel, GSEs, etc.), as appropriate, to finalize the Roadmap.
2. Provide assistance and advise FHFA in assessing the full range of options for structuring an end to the conservatorships.
3. Advise FHFA with regard to potential revisions to the PSPAs.
4. Evaluate the GSEs’ business plans, financial models and management projections, including sensitivity analyses on key assumptions and stress scenarios, to inform the development and implementation of the Roadmap. Where necessary, develop independent financial models and projections to support the Roadmap.
5. Identify capital raising options and advise on their cost, feasibility, and timing.
6. Assist FHFA in the identification of all critical financial, regulatory, market or other issues that might be material to the development and implementation of the Roadmap, including the potential impact to the secondary mortgage market and conditions required to exit the conservatorships.
7. Provide FHFA with a Strategic Assessment Report (aggregating the analysis and alternatives reviewed in the items above) to assist in FHFA’s deliberative process and the final determination of the Roadmap.
8. Provide other financial advisory services during Phase I as may be mutually agreed.

Phase II:  Implementation of the Roadmap

1. Advise FHFA on all key aspects of implementation of the Roadmap, including compliance with the conditions and milestones necessary to exit the conservatorships.
2. Advise FHFA on decisions and assist in the oversight concerning the structuring, pricing, timing and marketing of any transaction(s) executed in connection with the Roadmap, including the potential selection and coordination of underwriters.
3. On request of FHFA, advise regarding the reasonableness of any transaction executed in connection with the Roadmap taking into account the mission of the FHFA and the interests of taxpayers.

The Contractor shall have advanced knowledge and familiarity with: the mortgage finance system; capital, governance and business models; asset classes; and the GSEs’ roles in financial markets. The Contractor must possess the expert knowledge of and demonstrated success in the areas of financial restructuring and capital raising for large, complex financial institutions. In addition, the Contractor or its personnel working on this matter must possess experience performing relevant work for the federal government. Except for advising FHFA as provided herein, the Contractor shall be precluded from obtaining work related to the execution of the Roadmap.

Attachment_B_-_Price_Worksheet

Combined_Synopsis_Solicitation

PERIOD OF PERFORMANCE – The contract will be for a twelve-month base period and one six-month option for Phase I and four one-year options for Phase 2, if exercised.

SUBMISSION OF PROPOSAL – To be considered for award, please submit proposals electronically to kevin.klekner@fhfa.gov no later than 10:00 Eastern Time October 15, 2019.

• 10/05/2019 – Podcast of Todd on FNMA and FMCC – I need to get ready to sell commons

1. NWS is not halted but just got transferred from cash to stocks which is disappointing even though it is a great step for recap
2. increase of liquidation preference seems to be very detrimental to commons, even though senior preferred might be declared void due to over payment. But  still, it is a risk for commons, but not so for preferred.
3. Todd thinks Bove’s comment is fair
4. Todd think after this 4th amendment, thing will go faster since Calabria has not much time left to get this done

• 10/04/2019 – Fannie and Freddie Will Need Investors. Is Warren Buffett Waiting in the Wings? pmuolo@imfpubs.comIf and when Fannie Mae and Freddie Mac are cleared to raise capital again via a stock sale, will value investor Warren Buffett and his company Berkshire Hathaway be there?A handful of current owners in Fannie/Freddie common and junior preferred, as well as consultants and analysts, increasingly believe Berkshire will be part of an investor consortium that buys upwards of $100 billion worth of stock in the government-sponsored enterprises.But whether it happens is anyone’s guess. And it’s unclear at this point whether the GSEs are even on the Oracle of Omaha’s radar screen. Media inquiries placed to Berkshire on the topic had not been returned at press time.Still, the chatter goes on. One research analyst, speaking under the condition he is not identified, said he’s been hearing the Buffett/GSE rumor since the summer. For the full story, see the new edition of Inside MBS & ABS, now available online.
• 10/03/2019 – comment on recent report from IMF Publications “The Treasury Department earlier this week waived the Fannie Mae/Freddie Mac net worth sweep until Fannie’s net worth reaches $25 billion and Freddie’s $20 billion. … In lieu of the sweep, Treasury will see its “liquidation preference” for the Fannie/Freddie senior preferred it owns increased… In other words, what Treasury gives up on the front-end, it gains on the back-end. Analyst Richard Bove of Odeon Capital has looked at this exchange, reaching the conclusion “the net worth sweep has not been eliminated.” In a new report sent to clients Wednesday, he writes: “What has been changed is how the accountants will deal with it. It is my view, they will still deduct the net worth sweep dividend from net income when calculating earnings per share for Fannie Mae and Freddie Mac but they will not deduct it from the company’s net worth. This will allow net worth to be shown as having increased despite the fact that it has not in real terms…” We asked both GSEs to comment on Bove’s theory and only one responded: Freddie. “He’s not right on it hurting our net worth,” said an official at the mortgage giant. We shall see. But the share price of GSE common has been skidding since mid-September…”.
• 10/02/2019 – Alec Mazo @Alec_Mazo @timpagliara
  outlines next steps in GSE reform. – Calabria/FHFA to set capital rule – The companies build confidence with investors – PSPA amendment (include liquidation pref writedown).Glen Richard Bradford III@DoNotLose Calabria puts the capital rule at December unless it has to get reproposed… a long slow road ahead; until PSPA mod (assuming sr liq pref write down) — equity still technically a call option … but patience will pay here.
• 10/02/2019 – TEMPORARILY ENDING THE GSE NET WORTH SWEEP: A LIMITED BUT IMPORTANT STEP TOWARDS GSE REFORM
  Wednesday, October 02, 2019 | Don Layton
• 10/01/2019 – America Is About To Do The Right Thing In Housing Finance Reform. We Have Tried Everything Else.
• 09/30/2019 – FHFA Director Mark Calabria recently visited the Federal Home Loan Bank of Indianapolis where he sat down with Indy journalist @AttyAbdul to talk about the future the GSEs outside of conservatorship. Listen here, http://ow.ly/oJAw50wx9k4

The Trump administration is putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae and Freddie Mac to private-shareholder ownership.

The proposal, which comes more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on a sounder financial footing and then release them from government control.

Indy Politics spoke recently with Micahel Calabria of the Federal Housing finance agency during a visit to Indianapolis to find out exactly what this all means for consumers.

You can hear him in the three Leon-Tailored Audio segments above. Each one runs between 9-10 minutes.

• 09/30/2019 – comments from Todd

Pretty much as expected. Just allowed to rebuild capital and not much more. The interesting part is section three. It says they “agree to negotiate and execute an additional amendment”…. singular. This also isn’t all that great for common shares as the liquidation preference is also being increased. Depending on how that is treated going forward, that may mean additional dilution of common shares in a recap scenario. If the liquidation preference is deemed paid in full, it will not matter. It could affect any “credit” the GSE’s might receive for the overpayment they have made. In that case, there would additional dilution and that would affect the common.

I’m guessing this is what the additional agreement will address.

comments from Bove

Bove this morning:

These two comments have led to some controversy as to where I stand on the preferred shares:

1. I do believe that the courts will find in favor of the preferred shareholders at some point in the next two to three years.

2. I am less certain that the Congress or President will do anything particularly now that potential impeachment issues are the main concern.

3. I think that it is quite possible that the payoff on the preferred shares will be somewhere near the $31 price indicated above.

4. I also think that the possibility exists that preferred shareholders will receive nothing.

So, the risk reward calculation would be 130% on the upside, or 40% per year; and zero on the downside. However, the payoff, if it occurs, and I believe it will occur, requires the buyer of these stocks to receive virtually nothing for two years and the whole amount in the last six months. For me, I would now prefer to stay with existing positions in the preferredsrather than adding. I continue to believe that the common should not be held.

• 09/30/2019 – tweetACG Analytics @ACGAnalytics,Key takeaways from @USTreasury @FHFA agreement1. Another example of Trump Administration following through on it’s words. Suspending sweep by end of Sept telegraphed for weeks.2. No #GSE commitment fee yet.3. Permanent agreement in line with Report, per letters.
• 09/30/2019 – Treasury Department and FHFA Modify Terms of Preferred Stock Purchase Agreements for Fannie Mae and Freddie Mac

WASHINGTON – The U.S. Department of the Treasury (Treasury) and the Federal Housing Finance Agency (FHFA) today announced that they had agreed to modifications to the Preferred Stock Purchase Agreements (PSPAs) that will permit Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion capital reserves currently permitted by their PSPAs. Under the modifications announced today, Fannie Mae and Freddie Mac will be permitted to maintain capital reserves of $25 billion and $20 billion, respectively. These changes to the PSPAs were recommended in the Treasury Housing Reform Plan (Plan) released on September 5, 2019.

“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” said U.S. Treasury Secretary Steven T. Mnuchin.

Copy of the Fannie Mae agreement.

Copy of the Freddie Mac Agreement.

• 09/30/2019 – Fannie, Freddie will retain $45B in capital in first step toward privatization
• 09/30/2019 – U.S. allows Fannie Mae, Freddie Mac to start keeping profits
• 09/30/2019 – Fannie, Freddie to Retain Earnings
  Treasury’s move is first step toward returning firms to private hands
• 09/30/2019 – Fannie and Freddie to be allowed to keep more capital
  US Treasury will no longer grab all profits from nationalised mortgage giants
• 09/27/2019 – Bove backs off Fannie Mae, Freddie Mac prefs after latest drama

this was before the new letter of agreement to stop the NWS

Positives and negatives of Calabria’s positions

The bank analyst also noted that Calabria continues to do the rounds of the financial news outlets, which is interesting because he is acting as if the recent court ruling declaring his osition as unconstitutional never happened. Setting aside the fact that Calabria may end up having zero say over what happens to Fannie Mae and Freddie Mac, Bove sees several positives and negatives with what he has been saying.

On the plus side, Calabria has been emphasizing the risks associated with the GSEs. He has testified before Congress and told the media repeatedly that their asset-to-capital ratio stands at 1,000:1. This means that if a new financial crisis were to occur, Fannie and Freddie would have to return to Congress to draw down their line of credit and/ or seek more money from taxpayers. Bove believes these are positive statements because he is forcing unconcerned lawmakers to focus on the real threat associated with the GSEs.

Another positive is the possibility that the Treasury might not collect any more dividends from the GSEs until they build their capital up from $3 billion to $20 billion. An agreement on this with the Treasury is expected this week. Calabria also believes Fannie Mae and Freddie Mac should be reprivatized, even though he no longer things it is his responsibility to do it. He also seems to believe the government owes shareholders something for taking away their rights without their consent.

Timing is the biggest negative factor for Fannie and Freddie right now, but that’s not all Bove is now concerned about. Aside from the probably delays, he’s also worried about some of Calabria’s new operational views, even though the Fifth Circuit Court says he has no real power over the GSEs.

Operational concerns for Fannie Mae, Freddie Mac

Bove notes that Calabria believes multiple companies should have the same powers as Fannie Mae and Freddie Mac, which could pose a problem for both of them. With this view and the belief that their balance sheets are too risky, Calabria is mandating that underwriting standards at both firms be tightened, which means some mortgage classes might not be underwritten in the future.

Calabria is also taking the GSEs out of the mortgage insurance business by acting on his belief that they should not be in businesses that compete with private companies already operating in them. Additionally, he is asking Congress for the right to bring more companies into the secondary mortgage market.

“In sum, he is totally committed to the view that Fannie and Freddie should be smaller companies with fewer products and that they should have multiple competitors,” Bove explained. “For those of us who have covered these companies prior to the takeover by the government, it is well known that they were aggressively seeking the right to move higher on the risk scale and to add multiple related products so that they could regain lost market share. Mr. Calabria has closed this door and he is, therefore, meaningfully reducing the potential secular growth rate of these businesses.”

For now, it seems as if investors are largely ignoring what Calabria has been saying, which is why Bove is now advising caution on the GSEs’ preferred shares.

• 09/27/2019 – Here’s what’s needed in a true net worth sweep agreement

In a note on Thursday, Bove explained why he thinks it wouldn’t really matter if the Treasury and FHFA agreed to eliminate the net worth sweep, which requires the GSEs to give all their earnings to the Treasury in dividends. He said that according to his sources, the agreement would merely be a temporary arrangement that would last for about 18 months.

The agreement will supposedly enable the two agencies to avoid another fight with the Fifth Circuit Court. The court ruled that the net worth sweep is illegal in its current form but did not state that the concept itself was wholly illegal. Bove explained a crucial point regarding the agreement.

“It appears that the document about to be released by the Treasury will not indicate that the senior preferred that it holds in both Fannie Mae and Freddie Mac will be assumed to have been paid. If that is in fact the case, the two GSEs will still owe the 10% cash dividend on that instrument.”

In other words, he said if the agreement does not actually state that the senior preferred is paid in full, the drain on Fannie and Freddie will continue. Additionally, if the agreement is merely a short-term deal to calm the Fifth Circuit Court, then the problem hasn’t actually been solved. He also said a statement about the capital required for the GSEs is needed. Additionally, he said if FHFA chief Mark Calabria continues in his refusal to negotiate with shareholders, then the agreement means nothing.

• 09/24/2019 – This Week: GSE Capital Retention After 11 Years Of Drain – this might or might not come. And capital rule might be delayed to May 2020. Remind myself to read through and understand all comments.

Retaining capital is the first step towards recapitalization. Although the net worth sweep is still in effect, the incoming letter agreement expected later this week sets the stage for ending the net worth sweep in order to exit conservatorship. There are steps to be completed before the PSPA amendment, like the letter agreement slated for this week, but eventually, Trump’s Treasury plans to amend each PSPA as part of recapitalizing the GSEs in order to end the conservatorship. Later this year, Calabria plans to finalize the capital rule unless he has to re-propose it:

If the agency goes forward with Watt’s proposal, Calabria is aiming to finalize it around December, but if he decides to re-propose the rule, it would likely be completed closer to May, he said.

Further, as part of the recapitalization process in an effort to end conservatorship before they have as much capital as the capital rule permits, Fannie and Freddie may be permitted to exit conservatorship via a consent agreement. This would allow for an initial capital raise to be the one that ends the conservatorships.

• 09/22/2019 – Fannie, Freddie Poised to Keep Profits in an Initial Privatization Move
  Forthcoming agreement would pause yearslong arrangement in which profits went to Treasury Department – please note that the possible dilution from Warrants is coming

Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion, Mark Calabria, the Federal Housing Finance Agency chief, said in an interview after touring a senior center financed in part by the Federal Home Loan Bank of Indianapolis. FHFA oversees Fannie, Freddie and the Federal Home Loan Bank system.

“We’re still in the middle of negotiations with Treasury, but I think we’re close,” Mr. Calabria said. “I hope to have it done by the end of the month.”

Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now.

tweets: HoldenWalker99 @HoldenWalker99 3hGovernment signaling intent to monetize their senior preferred/liquidation preference? Downside scenario for GSE common shares just got real. Happy Sunday. $FNMA$FMCC

• 09/21/2019 – Bove’s comments on price of preferred

• 09/21/2019 – tweets

HoldenWalker99 @HoldenWalker99 Sep 18Just in time for $100+ billion #GSE equity offering to recapitalize! $FNMA$FMCCCharles Gasparino @CGasparino SCOOP: Securities & Exchange Commission (@SEC_News

) discussing rules for a new type of fund allowing small investors to invest in private companies through a diversified portfolio of pre IPO shares. This booming market that has been dominated by institutions more @FoxBusiness

Paul Muolo@PaulMuolo FHFA director Mark Calabria tells Inside Mortgage Finance the new GSE capital rules are months away. (Cap rules needed before recap and release can occur.) 10:20 AM · Sep 17, 2019·Twitter Web App

• 09/21/2019 -story of C’s preferred conversion to commons:  Tuesday, September 1, 2009 Citi Preferred Stock Conversion: A Win-Win For Preferred Stock Investors
  Posted by Doug K. Le Du, Author of Preferred Stock Investing at 5:57 PM

During July of this year Citigroup performed one of the largest preferred stock conversions in history.

The conversion was voluntary so many holders of Citi trust preferred stocks struggled with the decision.

Holding onto their shares meant the continuation of the known, fixed quarterly dividends. But if too many of their fellow shareholders converted their shares, those who did not convert could find themselves in an “illiquid” market where there are not enough buyers and sellers left to do trades.

Unless Citi called the shares some day, an illiquid market could mean that those chosing to hold onto their Citi trust preferred stock shares, while continuing to receive quarterly dividends, would never be able to sell their shares and get their principal back.

Now that the big conversion is over, there is good news for both those who chose to hold onto their Citi trust preferred stock shares and for those who chose to convert.

The much-feared illiquid market never materialized. While enough preferred stock shares were converted for Citi to meet their financial goals, plenty of shareholders decided to continue to hold their shares. The daily trading volume of Citi trust preferred stock shares over the last few weeks has been roughly the same as it has historically been.

And for those who converted, you are in the chips as well.

Scroll down and take a look at my July 21, 2009 post on this blog titled “Know Your Citi Conversion Break-Even Point.” In that post I provided a table that shows Citi preferred stock holders the market price that Citi’s common stock has to get to before converting their shares becomes profitable.

Looking at the table, those who paid top dollar some time ago for their Citi preferred stock shares ($25 per share) would turn a profit by converting their preferred stock shares to Citi common stock if Citi’s common stock price ever exeeded $3.42 per share.

$3.42 per share; that’s been the magic number to watch for. After that price, pretty much every former trust preferred stock holder is in the black.

Citi’s common stock cleared $3.42 on August 5, 2009 and has not looked back since (closing at $4.54 today). Those who chose to convert their Citi trust preferred stock shares, while no longer receiving the nice quarterly dividends that preferred stocks pay, have now made a spectacular captial gain on their original preferred stock investment.

For Citi trust preferred stock investors, the Citi conversion has provided a very rare example of a case where both investors who chose to convert their preferred stock shares, and those who chose not to, have been left with a positive outcome.

For those who converted: in the conversion table provided in my July 21 post, find the price that you originally paid for your preferred stock shares in the left column. The right column provides the value of the Citi common shares that you received at the time of conversion. If you click anywhere on the table a new window will open on your computer screen and show you the current market price of Citi common shares. The difference is your per-share profit.

12/02/2015 – 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