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Friday, March 08, 2019 12:04:08 AM
When I say “old system’ I don’t mean that everything will be the same, just the general structure. This is where Regulation comes into play and where the debate will really be. Capital requirements and Government Guarantee will be at the top of the list. Some type of guarantee is required for the GSEs to accomplish their mandated affordable housing mission. The better the guarantee from the government the higher premium on MBS and larger profit margin for the GSEs, thus easier it is to raise the capital. The lower the government guarantee, the lower the profit, and the harder it will be to raise capital. Bare minimum they need enough capital and enough of a guarantee to keep their credit rating or the whole thing fails.
How much capital? IMHO, I doubt that they will put the same capital requirements on the GSEs as the banks. It should be formula / risk based. End of the day they have really become insurance companies with servicing fees. With that said, anyone that tells you it should or will be a % of the outstanding MBS. Look at it this way, if you have a 30 year mortgage and you are on year 20 with 70% equity in your house how much capital should FNMA have to have in the bank… Answer should be 0. Brand new mortgage with 3% down 36-50% DTI and a fluctuating market, better have some cash. Obviously, the whole point of pooling into a security is to further reduce risk. Age of mortgage, equity, DTI of barrower, stability of market, interest rates. Complex always changing formula. Short answer, my best guess, $35 - $135. How they raise the capital will be its own thing.
How long? Another unknown. Trump does not have to complete recap and release, he just needs to kill the Senior Preferred Shares. Look at it this way, they could forgive the preferred shares, exercise warrants, leave them in conservatorship for 10 years till they have capital. This is actually great for commons compared to a plan like Moralis (That plan favors Jr. Preferred and throws Commons enough of a bone to make sure all the FNMA longs are aboard). Selling stock, common or preferred is another way. And the extreme, undo the bailout, the whole enchilada.
“screw over past investors” – If they straight up take your current shares. They purposely tried to bankrupt this thing. “hey open market, I have this thing I sold back in the 60’s, I took it back and kept the money, I would now like to sell it to you, don’t worry I wont take it again.”
2029 – worst case, warrants expire in 2028, if they take the long slow route to build capital, it could take this long.
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