Fannie Mae (FNMA)

[Fully Diluted]

Calabria-Reform Done

Mark Calabria's goal is to transform FHFA into a "world class regulator" before he ends the conservatorships and releases the companies, which he sees as his primary task. Yesterday, I believe he completed this FHFA internal process.

After the capital rule and an addition to it, yesterday Calabria presented a new rule that strengthens FHFA's authority in its role as supervisor. The goal of the rule is to create a way for the FHFA to wind down Fannie and Freddie in the form of a Limited-Life Regulated Entity if they are broke. This is intended to protect taxpayers.
The approach is not new and is already in the HERA law. Now Calabria is laying down the procedure, i.e. how to proceed if the companies go bust. It also requires Fannie and Freddie to provide the FHFA with regular insights into specific relevant business areas, which the firms must now also evaluate - a kind of early warning system. Furthermore, very specific capital requirements - and in particular their level - are aimed at protecting Fannie's business partners, the creditors and debt-holders. This is because they can no longer rely on the government to bail out the companies in case of doubt.

What does this mean for us?
1. This was probably the last part of FHFA reform that Calabria felt needed to end conservatorships. Back in 2012, he wrote:
"The law is quite clear. FHFA would continue to run the GSEs, with the option of a good/bad bank model to resolve bad assets, and the only way FHFA can terminate the receivership is to sell the charters back into the marketplace (see Section 1367(i)(6)(C) "Termination of status as limited-life regulated entity").
So let's get the facts straight. Receivership would not end the GSEs. The fundamental difference between receivership and the current conservatorship is the ability to impose losses on creditors. The sole reason that Paulson and crew chose conservatorship was to protect the debt-holders and stick the taxpayer with the tab. There were options to do otherwise."
https://www.cato.org/blog/receivership-does-not-end-gses


2. It means for us that Fannie will be saddled with even more regulations. But this is all playing out within a workable framework. And the capital requirements are high. Both were to be expected.

3. Downgrading of Fannie's MBS by the rating agencies is imminent if there is no more Treasury credit line at all. But let's wait for the 4th amendment first.
a. Fannie still has its congressional Charter.
b. Downgrading would be quite tricky for global financial markets.
Calabria and Mnuchin are most likely in close contact with the rating agencies right now to avoid a downgrade. Fortunately, the FED has already given the green light. The rating agencies always have some "leeway." This is being explored right now.
A rating downgrade could be turbulent. But Fannie would contain the downside to it via its pricing policy, to the detriment of homebuilders.

The new rule would not directly lead to a lower rating. But the risk to investors in Fannie's securities MBS would increase. Of course, Calabria wants to take away the "implicit government guarantee" from them. Keyword: moral hazard.

4. A 4th Amendment is imminent. The FHFA is now ready. Calabria is ready.


Calabria has balls. You have to hand it to him. He's following through with his ideas as hard as nails. Thank God he is convinced that he is legally obligated to end the Conservatorships. He'll go through with it, I'm even more sure of that now!


GLTA



Reference:
https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/Resolution%20Planning%20NPR%20TO%20FR_for%20website.pdf