Fannie Mae-No Politics (FNMA)

[FOFreddie]

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.