Fannie Mae-No Politics (FNMA)

[kthomp19]

I think the public discourse is informative because of the different perspectives and knowledge bases.

As do I. Thank you for the civil and informative back-and-forth.

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.

This part is simple: when the comparison is only between converting the existing prefs and redeeming them (with the intention of issuing new, at-market-rate prefs afterward), the conversion option costs FnF $33B less. That's $33B less that they would have to raise from private investors. Conversion absolutely dominates redemption from a game theory (and practicality) perspective.

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?

The easiest and cheapest way to get the juniors those past dividend payments (assuming that's necessary to get the lawsuits settled) is to just give them a more generous conversion. That costs no cash, which is far preferable to any outcome involving an outlay by FnF at a time when they need to be building capital.

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.

I see your point here, but it doesn't enter my calculations because I don't think FnF will have credible competitors in the short-to-medium term anyway. Calabria likes to talk about chartering new competitors, but that both requires Congress (which already makes it really iffy) and assumes Calabria does not eventually realize that FnF, along with any competitors, will be so highly correlated (to each other and the housing market as a whole) that having 2 or 10 market participants won't make a downturn any less severe.

One of the worst outcomes for the housing market is to have regional GSEs, who would each be far more likely to fail in any downturn than ones with a national footprint.