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Thanks for the knowledge as always, obit! Actually learning something sure beats watching the daily pissing contests on here.
philipmax. I think what you're asking is how FnF fit into the QE3 picture? Somebody correct me if I'm wrong but:
1) Banks write mortgages to home buyers.
2) Banks don't want to keep these mortgages on their books for 30 years, so they package them as mortgage-backed securities which are sold to companies like FnF.
3) The government then issues bonds which purchase these MBS from said companies (e.g. FnF).
4) The government then sells these bonds to investors like Goldman, Lehman, etc.
5) The bonds are then sold to main street through the market/index funds.
The money trail is all pretty tightly linked. Remove that buying pressure from the top and you can see what happens...
As somebody just stated, even when the QE taper does occur, the projected bond buying will be cut approximately in half. Even at that rate, FnF would be churning out ~4-5B in profits per quarter. These are still incredible margins. When QE finally ceases, profits could drop to 1/10 or so of what they are currently but that is still a very profitable and sound company. Unfortunately, DeMarco can't play a guessing game with the finances until some financial stability has been shown even in the presence of a taper (to do otherwise would be occupational suicide). He'll then have a much stronger argument (and solid data) backing up his declaration of FnF's solvency.
In my opinion, there's no way that the FHFA conservator can reliably claim financial solvency of FnF until the government begins to taper their quantitative easing policy.
As it stands now, the government is dumping $85B (with a B!) a month into bond-buying, much of those bonds go toward purchasing repackaged mortgage-backed securities from FnF. The QE policy also likely explains the sudden rise in profitability of these companies.
I'm by no means saying that FnF's return to profitability isn't impressive, the profits are outstanding, and their book of business is clearly improving. But I just can't see how anybody could have the lack of foresight to declare solvency at this time. Take that $85B stimulus per month away and then see how they fare... As a long shareholder, I hope very well!
Thanks for the quality, factual DD! Your post persuaded me to look at the 10Q a little more in depth and I found this excerpt particularly interesting (page 6, bottom):
It's a nice passage stating that although according to the SPSA, FnF portfolios will be wound down over 5 years, they still expect to maintain the same revenue stream through increased G-fees. Basically saying "wind us down and we'll still make bank!"
----
"Treasury Agreements—Covenants under Treasury Agreements,” we are required to reduce the size of our retained mortgage portfolio each year until we hold no more than $250 billion in mortgage assets by the end of 2018. As we reduce the size of our retained mortgage portfolio, our revenues generated by our retained mortgage portfolio assets will also decrease. As a result of both the shrinking of our retained mortgage portfolio and the impact of guaranty fee increases, we expect that, in a number of years, guaranty fees will become the primary source of our revenues.
We expect that, if current housing market conditions continue and if we are not required to sell more of our retained mortgage portfolio assets than we currently anticipate selling, increases in our revenues from guaranty fees will generally offset the expected declines in our revenues generated by our retained mortgage portfolio assets. Any future increases in guaranty fees will likely further increase our guaranty fee revenue. The amount of our guaranty fee revenue in future periods will be impacted by many factors, including adjustments to guaranty fee pricing we may make in the future, the life of the loans in our guaranty book of business and the size of our guaranty book of business.
Because loans remain in our book of business for a number of years, the credit quality of and guaranty fees we charge on the loans we acquire in a particular year affects our results for a period of years after we acquire them. Accordingly, we expect the improvements in the credit quality of our loan acquisitions since 2009 and the increases in our charged guaranty fees on recently acquired loans to contribute significantly to our revenues for years to come, especially because these loans have relatively low interest rates, making them less likely to be refinanced than loans with higher interest rates."
So, would one expect to see another big pop tomorrow as shorts try to cover before Fairholme starts buying large quantities? Then again another push on Monday as Fairholme actually begins buying?
Anybody care to speculate where the buying pressure is coming from? Comparatively, the volume is pretty low today to trigger the upward trend.
Short squeeze? Hedge fund buying? Others?
Unless huge volume returns, which I don't see today...perhaps in the coming week?
Nice 100k buy block at 1.22! Buys coming in big chunks...
Somebody sure likes those 1.20s...
Right, no one knew except the institutional holders who inflated the price just to flip on the Obama news, once again leaving retailers holding the bag.
I think the theory that Obama ruined the predicted run is less accurate than whoever is "controlling" this stock to play on the hopes of those holding expensive shares from the last run. I think it's equally likely that FnF are now being shorted by those same entities to get weak hands out to load the boat at lower pps. Rinse and repeat at $0.5 pps gains with a huge amount of shares is big money.
Of course, all IMO...
I was wondering that myself. I think it may have something to do with that 1.47 bid sitting at the top making it look like every trade is below the bid. Otherwise, I have no idea. Watching the L2 is pretty useless as you can't tell the buys from the sells! Albeit, you can still see the bid/ask stacking.
Hmm. I didn't realize the article was printed 6 days ago. Apparently it was just updated today and popped up as newly released news tied to the stock.
I have no idea what those "updates" are...
It doesn't appear that there is any earth-shattering news on this stock today to cause a large sell-off, so I'm not sure why the big dip. Perhaps all those buyers with impatient hands didn't get their anticipated immediate big run and are now getting out.
News, WSJ article: Obama to Seek Limited U.S. Mortgage Role
http://online.wsj.com/article/SB10001424127887323420604578650472166427406.html
If somebody has access to WSJ could you post the entire article? TIA.
I completely agree with your assessment mefence, with one exception: I think Fannie still has ~$8B in DTAs left to take. I'm not sure if they can be used more than once per year though.
Does anyone think the reason that Freddie did not take DTA this quarter is so that they WILL be net zero next quarter? If they had taken it this Q then they would have been a few B shy.
Also, I'm wondering if the decision was not a "f*ck you" to the Treasury. The national debt limit will be reached by Labor Day so Congress is going to have to deal with that decision soon. Had Freddie taken the DTA, that extra $30B would have likely delayed talks on the debt ceiling further. Again, if Congress is busy fighting over budget decisions, less time to worry about housing reform. And before we know it, whoops, net zero!
News! Ideology drives debate on mortgage reform.
http://www.marketwatch.com/story/ideology-drives-debate-on-mortgage-reform-2013-08-08?siteid=yhoof2
Nice balanced article stating how big banks were the root of the housing bubble via poor lending standards. Ultimately states that FnF aren't going anywhere in the near future.
Agree with you Reasonable. I believe Fannie's prior earnings release was May 9th. If you look on the chart, it was actually red that day. A few days later, it took off to $5+.
Maybe...but so was the last run and look what happened. The truth is, unfortunately none of us know...
News on Bloomberg.com:
http://www.bloomberg.com/news/2013-08-06/how-s-obama-going-to-get-u-s-out-of-the-mortgage-market-.html
Nice article supporting the sentiment that Obama's speech was heavy on rhetoric and hope and little on plan and potential action. Above his goal to "wind down" FnF, was the strong notion to retain the 30-year fixed mortgage for middle class Americans. Article points out that for the 30-year to exist, government needs a strong role in housing.
I think we're sitting nicely in the 1.50s given the "bad news" yesterday. I also anticipate the price to drop further on earnings with a big run starting somewhere around the 19th. Just my opinion based on the chart, last run, and prior earnings release.
I totally agree mrfence. He deliberately used the words "as we know them" when talking about ending FnF. I get it, having the private sector guarantee loans is fantastic because it does take taxpayers off the hook and brings in private capital. What Obama forgot to mention were the precise mechanisms as to how this would take place. Private capital can't soak up $5 trillion worth of mortgages (or they would have already).
The whole reform debate is ironic to me. Fannie Mae was born out of the Great Depression because interest rates and down payments were ungodly high. The government stepped in so that the middle class could afford to own a home again. The government essentially took loans "off of the books" of private banks, allowing them to free up capital to make more loans and investments. And so the cycle continued until poor lending practices became more common.
Now there's a push to go away from that model. My guess is that as the mortgage-backed securities market is weaned from FnF, private capital won't be able to or willing to keep up with demand (or the public will complain of increasing interest rates and down payments) and then politicians will be arguing for more government intervention in housing.
All in all, big gap down tomorrow and then maybe run after earnings late next week.
Not sure if this has been posted yet:
http://video.cnbc.com/gallery/?play=1&video=3000188291
Bottom line: FnF will be scaled back but not abolished. As I stated previously, even a 15% reduction over 5 years (75% total) would leave FnF with a value $1.25 trillion (assuming they have $5 trillion worth of assets today). That's assuming 15% off yearly from the current value. If it's 15% off of the reduced yearly value, then that leaves FnF with $2.2 trillion in assets.
I like this article: http://thehill.com/blogs/on-the-money/1091-housing/315637-obama-set-to-take-up-housing-in-phoenix
"The idea is that in a new system, the "government should continue to provide robust, explicit, and targeted support to help ensure access to affordable and sustainable mortgage products for low-wealth, first-time homebuyers and borrowers in historically underserved communities."
That includes the government ensuring a deep and liquid financing market for the development and rehabilitation of multifamily housing.
Obama also will suggest non-legislative steps to start a gradual transition to the new system and to facilitate the wind down of Fannie and Freddie by decreasing investment portfolios by 15 percent a year, knocking them down to a manageable balance by 2018...
...That plan includes streamlining refinancing for borrowers with government-insured mortgages, waiving closing costs for borrowers who refinance into shorter-term loans to more rapidly rebuild equity, while expanding eligibility to borrowers who do not have government-backed mortgages by creating special programs through the FHA and Fannie and Freddie."
If you believe the context of this article, FnF may get smaller over time but they're not going anywhere. A 15% per year reduction from their current estimated net worth over 5 years, still leaves them as a $1 trillion company.
Very true. As many others have pointed out, FnF will be lucky to get $40-50B of the sought amount. You are also correct that most of the money gets swept to Treasury.
However, every dollar (or billion) earned is another step closer to net zero. I think hitting that mark will be a huge psychological switch in the way the public, Congress, and the market perceives FnF. You can argue that in the end, those figures don't matter but there's a distinct reason the amount "borrowed" vs amount paid in dividends is always reported.
I love it.
'Sen. Mark Warner (D-Va.), a lead co-sponsor of the Senate's bipartisan effort to overhaul mortgage giants Fannie Mae and Freddie Mac, called the House measure an "ideologically pure exercise that will never have a single Democrat support it." The comment led bill-partner Sen. Bob Corker (R-Tenn.) to jokingly scoot his chair away from Warner during a housing event at the Bipartisan Policy Commission.
Warner gave House Financial Services Committee Chairman Jeb Hensarling (R-Texas) credit for an "exercise that lays out a coherent approach" but hammered a stake into the heart of the GOP-crafted measure. He is not expecting the plan to gain any traction outside of House panel because it "upends" the housing finance system by ending the government guarantee and the 30-year fixed-rate mortgage.'
Read more: http://thehill.com/blogs/on-the-money/1091-housing/311645-warner-deems-houses-mortgage-finance-bill-doa#ixzz2ZJxLOVZK
Thank you, Daxxer. Somebody needs to clean up this overly optimistic trash talk. I appreciate insight, comments, speculation from intelligible sources but unreasonably throwing out such ridiculous numbers clearly demonstrates lack of knowledge (or relentless pumping).
As somebody already stated, most of that $58B was due to release of DTAs. Remember though, Fannie still has about $8.3B in DTAs left to realize and Freddie has about $30B. Depending on the true quarterly earnings, net zero COULD be reached as early as this quarter. Probably not likely, but certainly by Q3.
Watt was not speaking today. However, the Senate did push back his nomination vote until Thursday, because of a lack of the voting quorum needed.
Yeah, when I started watching it I thought it sounded way too familiar...
because it was!
Important for DD. Please read.
For all of those people posting on the Watt hearing "this morning", I believe you were watching the Senate Banking Committee hearing from Jun 27th. Today's hearing was a closed executive session, followed by Oversight for the Defense Production Act.
Therefore, anything you saw "this morning" was really just a rebroadcast of what was already said on Jun 27th. Think about it: Watt's confirmation was being voted on today (now pushed back until Thursday) and that vote was based on how he performed at the hearing last month.
Look here for a list of the Senate Banking Committee meetings:
http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=213643c9-d99f-4791-a90e-3598bad2e17e
Mel Watt DOES NOT appear on today's video, but instead on the video from 6/27. The link on the homepage http://www.banking.senate.gov/public/ is a bit misleading but links back to the 6/27 meeting.
Please tell me if I'm incorrect...
Nevermind...
News! Watt confirmation vote delayed until Thursday.
http://www.reuters.com/article/2013/07/16/usa-congress-housing-regulator-idUSL1N0FM0IT20130716?feedType=RSS&feedName=financialsSector&rpc=43
The political landscape in this country is disgusting. The republicans have blocked Obama's appointment of Richard Cordray to head the Consumer Financial Protection Bureau for over 2 years! In better news, as of a few minutes ago it looks as if the Senate has moved forward with his nomination. Possibly a positive sign for Watt's vote in.
"As of Tuesday, Cordray has been waiting 730 days for a vote on his nomination. Gina McCarthy, tapped to head the Environmental Protection Agency, has waited 134 days."
http://www.huffingtonpost.com/2013/07/16/nuclear-option-filibuster_n_3603570.html?utm_hp_ref=tw
Let's see the bounce off of 1.50
Weird. On L2 I see ARCA with 3800 shares on the ask. Must be a disconnect between the trade and the L2.
I agree with you. With close to 1 billion shares outstanding and FnF retaining $3B in profit per year (and steadily shrinking over time), the pps should be at $3 minimum. Way undervalued in my opinion...
This is not even considering the huge profits they've been putting up as of late.
Why do you think this is true? Remember, the second run didn't get started until 4 or 5 trading days after the earnings report was published.
I assume you can take this in two ways:
1) It took some time for the earnings report to disseminate down to the retail level.
2) Hedge funds pumped in big money for an engineered run that they flipped for huge gains.
In either case, I'm not quite sure we can say the Q2 earnings are 'baked into' the price quite yet...
Ha. WORL is stuck at 1.45.
Holy crap. 400K block at 1.45
There it goes!
Actually, I just looked it up. It's $8.3B left to take.
Total DTAs were reported as $58.9B, but they only used $50.6B of that last quarter. Therefore, they have another cool $8.3B saved up for a rainy 10Q day.
Correct me if I'm wrong, but I think Fannie still has about $10B left in DTAs too...
Looks like somebody gave ARCA his ball back and let him play again.