Fannie Mae-No Politics (FNMA)

[kthomp19]

I think best case scenario is that this is resolved through executive branch directive. It just takes Treasury and FHFA to be in alignment on how to release, which means they need to be TOLD to fix it. If they built agreements in the past with no Congressional action or law needed, they can just as easily remove the shackles.

I agree.

1.) Lower the capital requirements to something more in line with adverse scenario stress test

This isn't possible. The base minimum (leverage) capital requirement in the ERCF is 2.5% of adjusted total assets, which is about 105% of balance sheet assets for Fannie and 116% for Freddie, but the lowest possible minimum capital requirement in 12 USC 4612(a) is 2.5% of balance sheet assets.

Outside of conservatorship, i.e. once FHFA is forced to give FnF capital classifications as required by HERA, FnF will have to be classified as "significantly undercapitalized" by 12 USC 4614(a)(3)(A)(ii) if they don't meet the minimum capital requirement. That in turn gives FHFA many authorities over FnF outside of conservatorship that they wouldn't have if FnF had enough core capital, like hand-picking the boards of directors and dictating the amount and form of capital raises.

Note that none of this has anything to do with the DFAST stress test numbers.

While a sensible capital requirement for FnF is far lower than what HERA demands, the law is the law.

- What amount of SPS or LP remains. Is the LP necessary in case of future financial hardship or bailout? Do they really need dividends on the LP amount (feels like a guarantee fee)

Leaving too much LP in place diminishes the economic value of the juniors and commons. Treasury will want their own common shares to have value. I think the LP will be reset to $1B, the original amount in the SPSPAs, after conversion or cancellation of the rest. There's a clause in the original SPSPAs that increases the LP dollar for dollar for every draw FnF take; that's what got the LP from $1B up to $193B. I expect that clause to stay, and it shouldn't spook new investors because the only way FnF will take a draw in the future is if all other shareholders get wiped out first.

- What they will do with warrants, either plan to exercise or not so the market can determine value of the remaining equity.

Yes. What Treasury does with the seniors and warrants has to be decided before FnF can exit conservatorship. Not least because Treasury will need buyers for their common shares, however Treasury acquires them, and those buyers won't want either the warrants or more than $1B of the LP in front of them.

3.) Provide progress reports during the GSE quarterly calls

I don't see the need for this before conservatorship ends, and it will be moot afterwards.