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Hi Kthomp19 Thanks again for taking the time and sharing your perpective. I think the public discourse is informative because of the different perspectives and knowledge bases.
Why does timing matter when interest rates are at historical lows? I am sure others have a better understanding than me but it is clear that there are both mortgage finance and capital market value considerations to drive timing decisions.
Regarding capital market timing:
If the JPS stays outstanding - why convert a 5.5% preferred when the issue could be recalled and refinanced with a 3.5% preferred? We dont know what the future capital structure will look like but at such low interest rates some type of newly issued straight subordinated preferred or a risk sharing COCO type security could make a lot more sense than converting to common or leaving it outstanding.
Furthermore - you may be asssuming that JPS shareholders will get value for pass missed dividend payments - does it make sense to have those accrue at 5-8% when they could be settled and refinanced in the 3 to 4% range?
Regarding mortgage market fundamentals:
30 year mortgage rates are approaching 3% and there will be a likely refinace boom. Perhaps UST rates approach 0% but there will be a massive refinancing boom and the GSEs will end up holding the newly issued mortgages over the next few years. Even if new competitors come into the picture in the next 5 years the mortgages that will come on the GSE balance sheets due to this refinancing boom will stay longer because there will be no economic reason to refinance in a zero interest rate environment or a rising rate environment. The result is that weighted average lifes of 30 year portfolio mortgages will extend toward 15 years and the corresponding net interst margin and periodic fee income will also extend.
The reason that weighted average lifes of mortgages matter is that the net present value of these annuities increase with longer lifes and lower interest rates. If you discount $100 for 15 years at 2% rather than 3% the net present value of the annuity discounted at 2 % is significantly higher and of course an annuity that is outstanding for 15 years is much higher than one outstanding for 8 years in a low rate environment.
I understand your point regarding the timing regarding the election and it makes total sense but possibly this low interest environment will increase the value of the GSE's by multiple billions because of better refinancing scenarios and extension of mortgage portfolio average lives.
With the 10 UST at historical lows now is the time to settle the lawsuits and start the recapitalization process.
The GSE's are likely the largest public/private partnerships in the world and any infrastructure project going forward will likely have public/private partnerships going forward. If the US Govt can stiff GSE investors then any future leglislative body going forward can stiff future public/private partnership investors by enacting emergency legisltation and allowing governmental entities to brazenly violate basic contract law principles and fundamental tenents of property law and due process.
Upholding the rule of law in public finance is one of the key principles of Alexander Hamilton and I expect Secretary Mcnuchin and President Trump to follow in his footsteps because they have a sophisicated understanding of the capital markets.
Wow!! I hope your position in FNMA and/or FMCC is a very very profitable one because you deserve it for all the work you have done.
I noticed that the solicitation for work in the last pararaph regarding the FHFA was extended from February 28th to March 4th. The description of the project also specifically mentions that the contractor is to work collaboratively with Hollihan Lokey. The FHFA is definitely moving toward the exit from Conservatorship. I just did not realize the advisor selection process was so detailed but it makes sense and it also brings context on why the timeline can slip by weeks and months.
Do you think the Conservatorship Capital framework would represent the lower end of the Risk Based Capital numbers. For example if FMCC has a $50 bn Conservatorship Capital number - a $ 75 bn Risk based capital number is in range or above range?
Does FNMA have a Conservatorship Capital number?
Of course there is the Guarantee Fee but that is another set of quesitons.
Thanks!
Thanks - do you know that or is it speculation? Does any one know what the Nomura pro-forma shares outstanding are for their recommendation. $5 seems low for a settlement with the likes of Ackman and The Growth Fund of America. It must be assuming a rights offering or warrant modification?
Thanks
Do you know what type of assumptions are being made around capital raise requirements, possible settlement damages, dividend yield, pro-forma book values before dilution?
Hi Glenn,
Can you share the logic/analysis for the $4.5 to $5.00 IPO price?
Is that for FNMA - have you seen a price for FMCC?
How would this type of price satisfy Ackman and The Growth Fund of America?
Thanks in advance if you would be willing to comment.
Thanks again for your reply. I understand your rationale for not seperating the valuation potential for FMCC and FNMA at this point. Of course once we know the capital requirements then the divergence potential would seem to become more concrete.
Would you agree that any new cash raised would be invested in the assets held by the respective GSE and earn a return?
In reality dilution is mitigated by the portfolio return of the underlying assets which becomes part of the income stream to support a dividend yield. Do you agree about that point?
Would you expect FNMA and FMCC to trade higher than the pro-forma book value after a settlement?
Perhaps the largest determinant over pro-forma book value would be the expected dividend yield?
No reason to sell. Dividends will most likely start in the next 10 years and institutional investors will continue to accumulate where they may possible own 60% of the float over the next couple of years. If the stock is $10 and you get a $0.30 dividend - why sell. The US Treasury 10 year is 1.15% today. If dividend is $ 0.40 - what is that worth?
Calabria did not say that shareholders were going to wiped out like Corker/Warner wanted. He probably just threw out the first negotiation salvo. - If the stock goes to $10 in 2 years - it is a 400% return.
As long as interest rates stay low and the housing market stays somewhat healthy - FNMA and FMCC would likely become worth more and more.
#Fanniegate tweet mentions HF Canyon Capital has JPS position. Is Canyon a LA based hedge fund? Multi-billion dollars in AUM?
Yes - Thank you Director Calabria. Thank you President Trump and Secretary Mnuchin also. As a shareholder, I am relying and confident that the ultimate resolution will be fair and respect the rule of law. Obviously the Obama Administration did not respect the rule of law and got us into this mess. Shareholders are looking forward to the new capital rules and ultimately a fair settlement of shareholder claims.
FNMA and FMCC are worth more as interest rates decline. The fee income has a higher PV with lowere interest discount rates. Mortgages will be refinanced at lower rates and mortgage holders will never have incentive to refinance if rates ever go higher over the next 15 to 30 years. This means that the annuity of fee income have longer lives and more value in PV or present value terms.
Thanks for all your analysis but I have one criticism of your analysis.
How can you come up with a per share value if you are combining both FNMA and FMCC. Do not both institutions have unique balance sheets, unique share counts, unique NWS overpayment damage potentials, unique earning potentials and unique capital requirement potentials?
I would think the range of possible outcomes for FMCC could be much higher based on a damage settlement and conversely FNMA would have a higher outcome if the capital requirements are on the low side?
Isnt it time to start to differentiate FMCC and FNMA in your analysis if you are speculating about possible share prices after potential dilution?
Things are moving more slowly than we want but to be fair I personally think that Director Calabria, Secretary Mnuchin and President Trump are doing a great service to the American people by working toward a sustainable and viable solution to US housing finance. Thank you Director Calabria, Secretary Mnuchin and President Trump!
Michael Bright is a blast from the past. Back in the Corker/Warner Senate Banking Committee Days
Thanks Kthomp for sharing. Follow up questions?:
Why half conversion of JPS and not whole?
Do you assume some discount to BV for JPS incentive to convert?
Why assume warrants shares are based on post conversion rather than pre-conversion?
Do you break down FNMA and FMCC scenarios?
Do you have estimated settlement numbers for FMCC and FNMA on a stand alone basis?
What DTA's are you assuming for FNMA and FMCC, if any?
What GAAP BV and when is the GAAP BV determined for your analysis?
Lots of questions if you wish to share. Thank you very much. For what it is worth I am assuming 6 to 10 bn fully dulited shares for FMCC and a 7.66 per share without a DTA as of 12/31/20. Just hypothetical guess of course.
Thank you to both of you for the discussions and sharing them.
Hi Louie
Have you looked at the AGC timeline? May be a good start.
Ano and Obi have put in hours of work on great posts. Ano just posted a great summary of all the litigation.
If you have the time you may want to listen to the Sweeney Hearing recording - great summary of all the players and legal issues.
We are waiting for the SCOTUS hearing, cap requirements and guarantee fee proposals in March.
Again - check out the AGC timeline for timing.
Thanks for the article - of the $55 bn - how much FNMA and FMCC? Looks like the numbers are shaping up to be $30 to $55 bn. If FMCC received $30 bn - the capital raise requirement could be quite small. UST has incentive to settle on a big number because it gets 80% back if the warrants are valid. Any settlement for FMCC is big relative to FNMA because of the lower share count.
Can we make the case that GAAP BV with JPS conversion for FMCC would be approximately 41 bn without a DTA credit?
$9bn BV + $ 7 bn 2020 earnings + $ 11 bn Collins Settlement = $27 bn or $ 8.30 per share BV
With JPS Conversion $27bn + $ 14 bn JPS = $ 41 bn
Will there also be a possibility that a DTA credit could be used for regulatory capital?
If JPS was converted at 80% of BV ( 14bn/(8.3X 0.8) then 2.1 bn new shares issued.
Pro-forma Shares outstanding after conversion = 3.25 + 2.1 = 5.35 bn
Pro-forma BV per share. $41bn/5.35bn = $ 7.66
Just a guess but close to your $7.50 number
If Regulatory Capital is more like $60 bn rather than $75 bn - Stock offering not so immense especially if instutions start buying 30 to 60 pct of the float. Just rough guess - thoughts?
Remember Poor Hank Paulson?
https://www.forbes.com/2006/06/01/paulson-tax-loophole-cx_jh_0602paultax.html#7c103dc265b8
Bloomberg wants to nationalize the GSEs. Nomura estimates that the UST will make $50bn from the sale to investors - Why would Bloomberg want to walk away from $50bn. Maybe because he can finally sale Bloomberg LP and not pay any taxes on the sale as President?
You made a great point regarding share count.
Assuming the warrants are valid FNMA has 5.76 bn shares outstanding and FMCC hAS 3.25 bn shares outstanding.
This means that the book value per share of FNMA will increase by $0.1736 for every $1 of good news - whether it is a settlement, judgement payment or earnings.
FMCC book value per share will increase by $ 0.3077 for every $ 1 of good news.
Currently the BV is $ 2.53 for FNMA and $ 2.80 for FMCC.
I understand that the preferred settlement discussion is something like $30 billion - the question is how that will be split up.
Also - FNMA has more earnings power.
What will the BV per share on the Share offering. How do we get a higher offering price than BV given the massive amount of new capital that may be raised.
What do you think about a Pro-Forma BV Valuation for FMCC?
FMCC GAAP BV is $9 bn
NWS Overpayment is $11 bn
2020 Earnings est $7 bn
12/31/20 est BV with $11 bn settlement is $27 bn or $8.30
12/31/20 est BV is $4.92 without settlement
Today $2.77BV - with $0.30 increase in BV with every $1 bn of earnings or net settlement proceeds or DTA adjustment.
Add DTA of $6 bn - FMCC 2020 adj BV is $10.15
Wouldnt potential SPO be at least at BV - more likely at a multiple. Right now FMCC is earning approximately 15% ROI on Conservatorship Capital.
Hi Kthomp
Did you see this quote in the FMCC Earnings Release in the discussion about Conservatorship Capital and returns on Conservatorship Capital?
. In addition, the company believes that returns post-conservatorship would mostlikely be lower than the levels calculated below, assuming the same portfolio of risk assets, as it expects that it would hold capital above the minimum required regulatory capital levels and that it would be required to pay feesfor federal government support, thereby reducing its total comprehensive income.
The part that stuck out was ".. as it expects that it would hold capital above the minimum required regulatory capital levels.."
Do you think the reference is greater than the $51 bn of Conservatorship Capital?
Hi Navy
Check out the bio on Motley Fool - who has higher rank you or Brent Nyitray. Thank you both for your service.
Letgo - who can scrum better?
https://www.reverbnation.com/musician/brentnyitray
This article is full of common unnuanced opinions. It explains why the common and preferred is trading so far away from intrinsic value.
My money is with the CIO of GFA, Ackman and the other institutions who are buying
Have you seen the text of the Budget? Looks like it will be publicly released today?
Will be interesting if warrant sales profits are included and if so what are the amounts and timing?
Thanks for the perspective. That timing seems like a resonable wait. My thoughts are that there are great fundamentals if the UST and FHFA follow through on the end of Conservatorship even without the potential of extreme upside with legal damages.
As Nats said - we need the capital ratios as soon as possible and then let the courts and the settlement scenarios play out in a just and reasonably expedient way.
Thanks Donotunderstand
The assumption is that FNMA will become NYSE listed again prior to the stock offerings. Once it is listed it will become investible and will be included in the S&P 500 because of its size and because it is so important to the US economy.
Check out the Fidelity ownership summary for Citicorp "C" to look at the ownership by larger index funds.
It looks like Citicorp has a market capitalization of about $170 billion and FNMA could have a market capitalization of $125 billion depending on capital requirements. If this is the case, institutions like Fidelity.
Citicorp's dividend yield is approximately 2.5%. Could FNMA trade at 2.5 to 3.5% dividend?
Here is the C ownership link:
https://eresearch.fidelity.com/eresearch/evaluate/fundamentals/ownership.jhtml?symbols=C
Yes you are right regarding regarding capital requirements and lawsuits.
My thoughts are assuming that Nomura is right, capital is $125 bn, warrants are valid and UST will sell stock over time and investors settle via shareholder votes or exchange offers rather than wait for lawsuits. Index funds are not going to buy if there is material litigation risks and public offerings may not happen either. Early purchases by major institutions are probably just a very minor first step because the Portfolio managers have little to gain and a lot to loose if they do not follow the pack.
My point is that if this all can be settled there probably is a lot of upside either way and maybe shareholders will want to settle early rather than late.
Fidelity may have to purchase $ 600 million of FNMA just for its S&P500 index fund which has approximately $240 bn in assets. Probably a lot more for all of its funds. Vanguard may be even more for its idex funds.
If FNMA has a market cap of approximately $125 bn it will have a S&P 500 weighting of more than 0.25%. $240 bn times 0.25% = $600 million. The question is when and what price.
Better early than late? Nomura estimated fully diluted divident of $0.50 may make it likely to be early and at least not too late.
Nats - Thanks for the perspective.
Another thing we may consider is the impact of Index and Tracker Fund investors since FNMA AND FMCC will have significant market capitalizations. These investors will need to purchase FNMA and FMCC on the public offerings or take basis risk since their mandates are to make returns equal or better than the S&P 500 or other tracker indicies. The S&P500 is a market capitalization index so if a fund is a 100 billion in assets under management the fund will probably have to purchase about 750 million of FNMA and FMCC on the open to avoid the basis risk.
JPM is approximately 1.5 pct of the S&P 500 with a market cap of about $500 billion. FNMA and FMCC will have a joint market cap of around $ 200 to $250 bn so they will be rather large entities with attractive dividend yields JPM dividend yied is approximately 2.6% so as you mentioned the index funds will probably like the dividends of FNMA and FMCC also.
I think the general rule is that index funds will purchase around 30% of the market cap of index components. So if FNMA and FMCC are $200 bn, they will purchase $60 bn - the quesiton is probably the timing.
Thanks for the follow up.
I was wondering if the UST could use the Securities Act exemption to justify actions that other investors would be subject to prosecution for.
Going forward I think it is going to be interesting how the special federal status of the FNMA and FMCC and the roles of corporate and shareholder law in Delaware and Virginia are going to impact the restructuring of FNMA and FMCC. I am thinking that a settlement is more likely going to happen by shareholder vote rather than waiting for the courts to make a determination.
Do you have any thoughts on this. A shareholder can be a holdout and look to a court or state remedy or vote for a settlement vian an exchange offer or proxy vote? How will Ackman and GFA realize their value - waiting for the courts or negotiate a settlement with the FHFA/UST and put it to a vote?
It will be hard for me not to do the same as Ackman and GFA if I have the opportunity to do so. They seem like bold and smart investors.
Does the fact that FNMA is exempt from the registration requirements of the Securities Act of 1933 have any bearing? Didnt Fannie and Freddie comply with the Securities Act voluntarily?
I think this became an issue with FMCC when they were raising equity prior to the Conservatorship because they had not filed 10-Ks or S-1s before 2008.
Here is a summary of the issue. Perhaps it has no bearing but FNMA and FMCC may be exempt issuers.
https://www.everycrsreport.com/files/20030711_RS21263_70674d4701c0a5a940bd3963010f5bbe1960aab4.pdf
Thanks again! According to AGC - the current equity of FMCC is $6.7 bn - could you add the $11 bn to this amount and assume equity of $17.7 bn as part of a plausible settlement?
How much is the face of the FMCC preferred - $14 bn? If the capital requirement is $50 bn - do you think a capital raise of approximately $20 bn (50-14-17) would meet the requirements for full exit for FMCC?
UST has about 2.8 bn shares exercisable assuming warrants are valid? Would the market support a price of $7.15 a share (20bn/2.8) or higher for a EPS of around $0.80?
Assuming a reasonable settlement - the capital raise seems workable?
Thanks again! Do you know what the NWS overpayments are for FNMA and FMCC respectively assuming UST was only entitled to the 10% on advances?
What is that on per share basis for each share of common based off of current public float of shares outstanding?
Great Post! FMCC has already hired McKinsey & Co. to advise on capital structure - shouldnt McKinsey be done with advice to FMCC by April 1?
Wow! Thanks for such a detailed response.
I am under the impression that Ackman and GFA will expect common and preferred will do well since they are long both securities - thoughts?
Regarding the FMCC and FNMA relative prospects - why do you think GFA has been adding FNMA and not FMCC? Doesnt FMCC have much less outstanding shares and warrants than FNMA? If there is some settlement wont FMCC shareholders have a greater claim on settlement proceeds since they will require less capital and are currently holding a higher percentage of likely pro-forma capital requirements?
Which entity is likely to be released from conservatorship first - FNMA or FMCC?
Thanks again
Hi Possum336
Thank you for the perspective.
What I am trying to understand is what will make common holders like Ackman and The Growth Fund of America satisfied. I would want to believe that these two have evaluated possible scenarios for resolution and they continue to hold or inclease their common holdings.
Obviously the UST can exercise their warrants and sell their holdings for a profit but how could large common shareholders be satisfied so not to continue to litigate and possibly bring enough legal uncertainty to stop or defer the GSE resolution process?
Regarding the preferred, will the resoluton be on a series by series basis? I know the GFA owns a lot of preferred also and possibly they already have controlling posisitons in certain series. Maybe they have a plan to use their common and preferred stakes as negotiating points?
Thanks again.
Great point - really highlights the massive earnings of FNMA
Thanks for the insight and perspective.
Assuming a $5 6o $8 price - what is your EPS and Dividend assumptions. Didnt Nomura come up with fully diluted EPS after a pro-forma recap of $0.80 to $ 0.90. $5 to 8 would implie a 10 PE and a dividend yield of around 6% Is this what you are thinking