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Give the list of witnesses, tomorrow's hearing should be positive news, if nothing else. Below are some articles citing them or the group they represent. For the most part, they all envision some form of profitable FnF post reform.
Ms. Brenda K. Hughes, Senior Vice President, First Federal Savings, on
behalf of the American Bankers Association (ABA)
https://bankingjournal.aba.com/2017/07/idaho-banker-high-time-for-gse-reform/
Mr. Samuel A. Vallandingham, President and CEO, First State Bank, on
behalf of the Independent Community Bankers of America (ICBA)
Members of the Committee
http://www.icba.org/news/press-releases/2017/04/25/icba-white-paper-lays-out-principles-for-housing-finance-reform
Mr. Rick Stafford, President and CEO, Tower Federal Credit Union, on
behalf of the National Association of Federally-Insured Credit Unions
(NAFCU)
https://www.housingwire.com/articles/40518-nafcu-the-credit-union-perspective-on-housing-finance-reform
Mr. Kevin Chavers, Managing Director, BlackRock, on behalf of the
Securities Industry and Financial Markets Association (SIFMA)
https://www.blackrock.com/corporate/en-se/literature/whitepaper/viewpoint-addressing-housing-finance-may-2017.pdf
Both parties think there's risk but neither a Democratic nor Republican controlled congress passed legislation to do away with FnF. The bipartisan bill by Corker to do away with Fannie didn't pass. Now the GOP has expressed commitment to keeping the companies, so if anything, they'll stick around. They won't be as profitable or powerful as before, but a version of them will stay. Not the 100$ version some on this forum claim, but more likely a 12-15$ version, which is more than a nice profit for us longs.
He probably wants to strong arm housing reform. My worry is that he gets the part of tax reform that would cause FnF to record book losses (tax deferred assets) passed, then FnF need a draw from Treasury, and he uses it as an excuse to say they're broken and, again, strong arm reform. Similar to the implementation of the NWS.
Or it could be that him being the Treasury wants to milk the GSE's for all that he can while he can (Until Jan 18); after all, they spend a lot of money. I think Mel will pressure him enough to allow the GSE's to keep some capital, but to me that wouldn't be a favorable (nor unfavorable) indication. That capital would only be for short term losses.
BTW, the Moelis plan has already shown that FnF can raise tremendous amounts of capital in a few years if needed.
unHombreAlado
I don't think Mnuchin is being secretive on what he plans to do with the GSE's. I think he's not made up his mind on how housing should be reformed.
Liquidity on the market, no taxpayers at risk. Access to infrastructure by community banks. Do not cause a problem for FHA. That's what Mnuchin says.
Liquidity on the market means that there is some entity that is regulated to make sure they are taking the risk of packaging, insuring, and selling MBS securities. Not putting taxpayers at risk could mean a plethora of things. Specifically, I think Mnuchin initially thought to get rid of the government guarantee backing these securities--either implicit as it was before, or explicit as it is now. However, removing this guarantee would be antithetical to providing liquidity to the secondary mortgage market. If the govt is not providing backing to the entity that is insuring these securities, the premium charged by that insuring entity will be higher, and the investors will see them as less attractive, some parking their capital elsewhere. I think this ends up with an explicit guarantee with both (1) a fee paid to the govt, lowering net income, and (2) a first loss reserve that the entity would need to set aside--a capital intense requirement.
I think initially Mnuchin wanted to privatize the lucrative MBS insurance business given them to big banks that have the infrastructure to become MBS insurers, and allow FnF to compete in this market to 'ensure' small community banks have equal access to this market. He has said that community banks know their local markets better and are thus better equipped at making mortgage decisions than big banks. Whether he believes this, or is trying to gain political points, I think allowing big banks to run their own MBS insurance business would--unless very well regulated--disadvantage community banks.
The other functions of FnF are social goals to make sure everyone worthy of buying a home has access to a fair mortgage. If you put strict, conservative rules on the GSE's, less people will have access to mortgages; however, people would then turn to FHA loans and this in turn would go back to putting taxpayers at risk.
The current tax plan proposal is a huge tax break for the wealthy (no estate tax would save them tremendous amounts of money) veiled as a middle class tax break (there's no way to tell without the tax plan providing more specific details). The reason I mention this is because of the way it's presented and what it's actually doing is structured in a way housing reform would be as well: give more access to people to mortgages, and reduce taxpayer risk by giving community banks equal access to the secondary mortgage market, by privatizing mortgage insurance business (huge win for big banks).
Even under some of the bad or more dire scenarios, I think the GSE's will end up returning to shareholders, albeit with a smaller market share, and less profitability. I agree with Ackman on his latest assessment of teens ($12-15) of share price once all is said and done. There will probably be a spike above that in the meantime, with $17-18 the place where I'd personally sell.
The courts only provide more upside, low probability of a win, big reward if we do. That's the story of this stock
UnHombreAlado
I don't think so. That's why valuations thrown around based on current earnings make no sense when an explicit FDIC type insurance is likely the bare minimum of what the govt would change in a RRR scenario.
Even if the GSE's would be recapped and released, the govt would change the guarantee to an explicit guarantee that requires a fee to be paid to them, thus earnings would be lower. I think that's why Ackman estimates the price target to be in the teens instead of twenties now.
I'm a long, but we need to be realistic. A 161 pps is just smoke and mirrors.
Anyone?
------------------
Did any other news outlet publish on this?
http://bankingjournal.aba.com/2017/08/watt-fhfa-will-not-build-short-term-capital-buffer-for-gses/
I'd think more people would have picked up on it, so i'm questioning the validity of it.
That news is about NAR asking for the buffer, the one I posted is about Mel Watt saying there isn't going to be one. Again, I haven't seen it elsewhere, so I don't know how much of it is true.
Did any other news outlet publish on this?
http://bankingjournal.aba.com/2017/08/watt-fhfa-will-not-build-short-term-capital-buffer-for-gses/
I'd think more people would have picked up on it, so i'm questioning the validity of it.
So FnF money is used to pay for 'other' parts of government...those not funded by Congress.
trump talks to mexican president ans asks him to not tell the press about who's going to pay for the wall, because he knows Mexico won't pay for it, but things will work out from the formula (?)
where can the new FnF NWS funds be going to?
@ $2.71 right now, try again?
Govt funds are fungible! Stopping the NWS will do nothing to ACA. Thats why mnuchin never confirms the connection between the nws funds and aca, but does say that the govt was using those funds to pay for many things
It looks like investors have already taken their spots (long & short) and are now waiting for tomorrow when freddie does its call.
The reason the GSE's make their money is in great part because the MBS' they sell are backed by the govt, thus making them attractive to investors. It's hard to model a FnF type of business without the govt guarantee. I'm OK with FnF paying a fee for insurance just like FDIC insurance works. Keep the business, recognize that some of the risk lies in the govt, pay a SMALL fee for it.
My concern is that legislators may allege that they GSE's were going to go bankrupt and so this fee would not be small, even though documents show otherwise, public perception is still that FnF were bad, and most politicians flow with public perception. We shall see.
Explicit vs Implicit (7.27.17)
Right at the 2 hr mark is where Royce and Mnuchin talk about FnF. It seems Royce is focused on not re-privatizing FnF while Mnuchin is focused on not re-privatizing them without the govt getting paid for explicit backing.
Also, do you have a link to him talking about the explicit vs implicit? Have seen him talk about it before, but would like to see if anything has changed.
I believe explicit means that the government guarantees the MBS's through a contract with FnF, for which the govt will charge FnF a fee. So they will stop the NWS, but will still take some of the profits via an 'insurance fee' so to speak. Considering an implicit guarantee has been in place for ages, the charge should not be onerous--just remember the govt has tasted the pie, and wants to keep some piece of it.
Yeah mnuchin is very aware of how his words and actions affect the market, and he is choosing his words carefully when talking abou fnf. I remember him saying that the only reason the gses were alive was because of the line of credit from treasury; so he is selling the need for the govt to basically insure mbs.
That valuation is not taking into acount the fee that the govt will most likely require for guaranteeing loan performance, which is the majority of where the profits come from.
A small news outlet picked up the NYT's story:
https://www.housingwire.com/articles/40766-unsealed-documents-reveal-real-reason-for-fannie-freddie-profit-sweep
No news and no real action, charts help for looking at small movements.
FNMA just needs to break past 2.66 resistance
Slow and steady does it.
So what is the most likely outcome from this situation? In the new tax plan proposed by the White House, Mnuchin said that most deductions will be gone, except charitable contributions, and mortgage interest. He obviously wants people to borrow money for house purchases. The fact that he didn't end the NWS, and that he has repeatedly said that he doesn't want to leave taxpayers at risk, and that he does not want to privatize FnF, seem to indicate that he wants FnF to pay the government a fee for taking on the risk of having to bail them out under extraneous circumstances. That fee, however it ends up being calculated, will eat into both the risk and the profits of these companies, and will keep money flowing from these cash cows to the government. Whatever's leftover will be the basis of valuation for the new Fnf, which is definitely more that current pps, but I doubt it would be a 10x return on this investment