Replies to post #630014 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Interesting, relying solely on gfees seems like it will be their bread and butter revenue producers for awhile

Yes, I believe this is true. There was a huge backlash against FnF having such big portfolios and using their borrowing and lobbying power to make tons of extra money. Those who FnF had bullied for such a long time finally got their revenge when Treasury imposed such draconian terms in the SPSPAs.

Those terms (non-repayable seniors, 10% dividend rate, 79.9% warrants) could easily be called unfair, but no plaintiff has sought to have any of them overturned so I think they will all stand. Getting FnF out of conservatorship under those terms was supposed to be a Herculean task, and I think that's why it's taking Calabria as long as it has to get the ducks in a row.

He has accomplished quite a lot in his 16 months as FHFA director: hiring Milbank as legal advisor, hiring Houlihan Lokey as financial advisor, compiling a very detailed capital rule (no matter what we think its flaws are, it took a ton of work), plus a lot of behind-the-scenes work at FHFA.

Assuming management will hold 10% to 30% above all the minimums required by their regulator (doesn't JPM do that) to assure shareholders that future dividends will likely keep flowing:

I think this is a safe assumption, but 10-30% above a 4% ratio (i.e. 4.3-5.2%) is very hard to square with a competitive ROE. I do think Calabria will back off from the 4% number somewhat, most likely by lowering the buffer.

(1) Haven't the GSES over the last 50 years had a much lower total capital ratio?

I don't think this is relevant. Calabria has his own ideas, and he thought FnF didn't have enough capital when conservatorship started, even though they technically were in compliance with the standards at the time.

(2) What do you think are the positive and negatives associated with holding say a TOTAL of 3% v 4% Capital?

Personally, I think 3% is plenty. 3% of $6T in assets is $180B, and $20B per year of annual earnings gives an 11.1% ROE which should certainly be good enough.

I guess 4% could be better than 3% in some specific narrow circumstances, where FnF end up not needing to raise capital when they would have otherwise done so? I'm reaching here.

(3) Do you think MCs stated philosophy of "more competitors in the Secondary Mortgage Market, the better", has contributed at all in his decision as to how high or low the TOTAL capital ratio should be?

Yes, I think this has something to do with his high capital requirements. He is an ideologue through and through, which isn't a good thing for FnF. But he's the FHFA director we have, and I'm much more focused on what I think he will do than what I think he should do.