Fannie Mae (FNMA)

[kthomp19]

According to Professor Richard Epstein
The Senior Preferred Stock would have been redeemed.

Richard Epstein has been a great source of information on FnF, and I respect his opinions.

On this matter, though, he is just plain incorrect. I posted the exact language of the contract:

Prior to termination of the Commitment, and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, out of funds legally available therefor, but only to the extent of (i) accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference and (ii) Periodic Commitment Fees previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference.

There are four ways that the senior pref liquidation preference can be increased. Three are in Section 8(b) on page 5 of the senior pref stock certificate (the fourth is the dollar-for-dollar increase "ratchet" as FnF retain earnings, in the September 2019/January 2021 letter agreements):

(b) “Liquidation Preference” shall initially mean $1,000 per share and shall be:
(i) increased each time a Deficiency Amount (as defined in the Preferred Stock Purchase Agreement) is paid to the Company by an amount per share equal to the aggregate amount so paid to the Company divided by the number of shares of Senior Preferred Stock outstanding at the time of such payment;
(ii) increased each time the Company does not pay the full Periodic Commitment Fee (as defined in the Preferred Stock Purchase Agreement) in cash by an amount per share equal to the amount of the Periodic Commitment Fee that is not paid in cash divided by the number of shares of Senior Preferred Stock outstanding at the time such payment is due;
(iii) increased on the Dividend Payment Date if the Company fails to pay in full the dividend payable for the Dividend Period ending on such date by an amount per share equal to the aggregate amount of unpaid dividends divided by the number of shares of Senior Preferred Stock outstanding on such date;

"Prior to the termination of the Commitment", which is the world we are in right now, FnF can only pay down increases in the liquidation preference that occurred due to incomplete or missing Periodic Commitment Fees, and incomplete or missing Dividend Payments. These correspond with (ii) and (iii) in Section 8(b).

None of those two things has ever happened. Instead, all increases (up until September 2019) to the senior pref liquidation preference have happened due to (i) in Section 8(b), which were draws from the funding commitment. (This is also why the seniors can't fully disappear if FHFA/Treasury want the funding commitment to stay; the seniors have to exist to provide a mechanism to compensate Treasury for drawn money.)

Section 3(a) specifically does not allow FnF to voluntarily pay down the increases in senior pref liquidation preference due to draws, which comprise $192B of the $193B of senior pref liquidation preference on the balance sheets. (The extra $1B was the initial liquidation preference.)


FnF do not have, and have never had, the ability to voluntarily pay down the $193B of senior pref liquidation preference on the balance sheet. This is not an opinion, it's a fact.