Fannie Mae-No Politics (FNMA)

[Golfbum22]

ACG call notes from M L on google board...good stuff. FYI

https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/z7NHNvzwI1g

My typed notes while listening to ACG's Q&A today. Please excuse and grammatical errors, typos, etc...

Overview before Q&A...
-The progressive community is for housing.
-The hire of Milbank is very important, they start this week.
-Calabria hired Houlihan Lokey but the weakness at fhfa is general counsel, gentlemen was there long time and even mel watt frustrated
-calabria not getting clear insight with litigation, frustration with arnold and palmer
-this is real non political serious legal advice and that can't be ignored, when Milbank says this is the reason they should settle or this should be in PSPA that recommendation will be taken seriously.
-RFP focuses on pspa and what needs to be taken care of before raising capital, do it once so get on recap path.
-timing is good, people forget two teams on field, mba team who has number of characters fought hard to continue obama policies
-path of recap but interesting moment, calabria says need to be counter cyclical
-we believe strongly lawyers and advisors looking and understand how to fortify balance sheet in a hurry, not tomorrow but milbank and houlihan lokey know what they're doing
-balance sheet is stronger than people expect, overpament to treasury if NWS not there would have been 10% dividend, if you run numbers on how much swept above it is around 25-30B, counting Q4 last year is about 23b now thanks to letter agreement from september
-3 steps to take: (1) stop sweep permanently, (2) deem senior repaid, (3) credit the overpayment. This results in above 50b core capital with credit added to balance sheet
-stroke of pen can get this done to beef up balance sheet and bring closer to regulatory captial and make capital raise much less than what we hear is needed. -calabria very vocal about difference of ginnie, fha, and F&F. F&F have been very careful for which mortqages on their books... 740 avg fico score which is very high.
-The problems flowing less into F&F than they are into ginnie.
-Really depends which mortgages they have and F&F have very strong mortgages.
-mba lighting up washington very vocal, world burning down
-calabria stickler for hera mandatory recap but don't have to help servicers
-jay powell watching this segment, washington view it to see where they are in 4-5 weeks before doomsday scenario
-mba talking 30-50% forbearance, gaby doesn't see it happening as in low single digits.
-task force at treasury but data doesn't show need to extend liquidity
-if gets into political we are in counter cyclical time it would be nice to already have all that capital, but haven't been capitalized for this moment so if anything shows why F&F need to be recap for moments like this.
-calabria stickler for statute.
-believe cap rule out later in may
-enterprises hiring own fin advisor by july 4, work on balance sheet, Calabria strengthens his ability to be regulator and make sure enterprises have control to comply with standards the regulator puts out.

Q&A...
-settlement odds between now and june 1?
nothing short term, litigants not there yet, I've spoken to some of them, everything on table now though which wasn't the case 3 weeks ago, Milbank on team makes it much easier for Calabria to do cost-benefit analysis of litigation, makes no sense to defend sweep while ending sweep at same time and pay Arnold and Palmer 20m per year to do so.

-Receivership happen here?
Receivership not happening and not really worth the time now to discuss it. Receivership would be worst policy for government because you have to run it down and then there's no plumbing in the housing system. Receivership is not remotely possible.

-Treasury have manpower to get this done?
They are underwater with personnel, but essentially there's a merger of UST and Fed right now, domestic policy worked well, don't need a lot of UST's time to get this done. Calabria, Mnuchin and Powelll have a very good relationship, one team, no distance, no friction.

-If Biden wins, what happens?
He put out minor housing position calling for more affordable housing in primary season, go to urban institute website and look for housing day panel with jim parrot, he stacked the panel with guests against the enterprises, he invited Elizabeth Warren's staffer but couldn't make it so subbed with Jared Bernstein (Biden advisor) and he said he is not for blowing them up at all and that GSE's are important part of economy. Bernstein very important advisor to biden. progressive democrats are for recap, won't compromise on duty to serve, want larger affordable housing trust funds.

-crisis change landscape?
it hasn't but if it goes for longer and complete meltdown then that could change it as forbearance astronomical and home prices plunge, 8 weeks from now we'll be ok, could be pushed back couple months if earnings hit, doesn't need to happen through retained portfolios, should reopen happen then this whole thing doesn't impact prospects.
The Philosophy for recap is validated by crisis, were 1000 to 1 leveraged, now 240 to 1. Private in front of taxpayer = validated. example for companies that we're getting involved in as a country, go in reform and release.

-Settlement negotiations already happening?
I don't think so but amenable to them in not too distant future but everybody focused on other things, Milbank needs marching orders to do litigation analysis, Calabria frustrated with cost of litigation, it's illogical to defend something trying to end.

-Once gse reach 25b fannie, 20b freddie, can they release by consent decree?
That is the hope released by consent decree and start having new capital coming in be comfortable.
Everyone is focused on next 90 days, statutory capital in Fall and consent decree and pspa in Fall is still intact, but recognition that private is the answer. PSPA is most important thing to move the ball here, and then consent decree later, houlihan and milbank really helps move that forward and it puts manpower behind it when they decide they want to to do it.

-CRT impact?
Nobody buying CRT for awhile. Seen as weakening capital and balance sheet.

-Seila vs cfpb impact timeline?
Seila come down by june 1st, we were hoping regrant cert in 5th circuit to create political cover for settlement but that didn't happen, so if seila law comes down and calabria removable at pleasure of potus then we have to see if scotus takes 5th circuit at that point, all of these cases are catalyst for settlement: atlas, selia, etc. lot of noise and suspense, so we do think they are catalysts to start getting sides to talk settlement. if unconstitutional and retroactive, that possibility is a stretch but would be big.

-Will we need a settlement to raise capital?
Yes. First thing Houlihan told them, and second is we need to relist on NYSE.

-Go on NYSE before re-ipo?
Yes. good public policy, more capital in market, certain investors can't buy pink sheets, encourage retail to get in, broader policy reasons.

-Will current common be wiped out?
Aligned with gov't when own common have 79.9%, cleanest way to do this isn't wiping but deem senior pref paid back, don't see common completely wiped out.

-Incenvtives for plaintiffs to settle below par to get things moving quicker?
We have no clients that are litigants but friends are litigants, depending on terms and conditions they might take discount but don't know.

-Why worry about political cover when have 11,000 docs?
Govt been on losing end of document production. prez privilege request exceds fast and furious southern border, lamberth ordered UST to turn over 11,000 docs and they pushed back but lamberth ordered them to do it saying your signature is on 3rd amendment you will turn them over. gov't on losing end, wheels grind slowly and it's expensive but we have a public policy reason now to settle, country has lots of needs, ensuring stable housing without drawing on govt is excellent reason to settle.

-Do you see junior prefs riding common appreciation after conversion?
Yes, incentivize to convert is you get to ride as common goes up with earnings and upside.

-Calabria visited banks on ipo a year ago, has appetite for offering changed at all?
No, other work to be done, calabria meeting investment bankers, he is a phd economist but not financial background, said largest ipo in history maybe yes maybe no, right offering as part of conversion maybe, that's down the road, more an education process first which is where we are, getting there and convinction is unaltered and need to do it is now completely evident to all policy makers.
UST and FHFA reasons to waste time why not cancel pspa right now? Just put milbank in and houlihan just started, using both political cover of outside firm helping and fresh eyes, want to do it right and only once, don't feel rushed to do it today, calabria said do it in fall as originally planned when hit statutory capital at fannie, that timing may change now, don't think UST detractors would spend more than 5 minutes on it, that's the work milbank and houliahn are thinking about right away, not that it will happen but should it need to they have the work done.
Ginnie has extended line of credit to servicers for loans it guarantees, fed and ust team looking at it but want to see how mgmt puts it together.

-Timeline for relisting?
Fall, not a difficult thing to do, politically irritant to opponents for example the letter sent by Warner and senators to half of govt complaining about danger to servicers, classic tactic of other team to send letter to hill then senators sign it, so there can be a reaction for every action, relist doesn't need to be done now, but hopefully before end of year.