Replies to post #198654 on Fannie Mae-No Politics (FNMA)

[andydub]

I had also noticed that. I don't have the numbers in front of me but I do recall that it was not quite 40 billion left of LP for Fannie if the excess of the 10% were to have paid down the LP. So about a billion would be next quarter's dividend due for Fannie. I didn't run the numbers for Freddie so I can't comment on that side.

[obiterdictum]

1. why are you considering 10% dividend payment on the full Srs. balance after 01/2014? Isn't this draft considering payment of principal to the excess paid in 2013? Then, 01/14 and thereafter would be 10% on remaining balance.

2. Isn't that much less than 18+bill or so from your figures?

3. And since those would be much smaller nominal figures there would new excess to continue to pay down principal. Did I miss something?

1. No it is not. The bill is not enacted so, the bill cannot have or present clear dates for when non-repeatable events can happen or will happen. There is the enactment of the bill and then various things happen within the first year or five years of enactment. Then, five years after the enactment of the bill, another set of actions are begun like ceasing all new business operation of the GSEs. So pointing to a date is not possible.

2. No it is not, though it maybe more or less. For one, if the net worth sweep continues (since it is still continuing) it will be much more than that. But, what I did, as is explained below in detail, was to take into account a more realistic timeline and situation while considering, hypothetically, that Waters' bill passed in the future one or more years hence.

3. So yes, you may have missed a few things. The bill allows the Third Amendment to be amended (Sec. 2(15)), but it is not amended in fact. Also, how the the 3rd amendment will be amended later and how monies will be treated retroactively by date, time and method is not given. The assumption of a specific date is not probable.

There is only our speculations. I try to speculate as realistically as possible. For example, there are no dates in the bill other than December 31, 2014 and the dates of the PSPAs. There are 30 day, 60 day, 4 quarter, 12 month, 1 year and 5-year periods. There is no certainty of bill enactment and no date when the bill will be enacted. The outcome of the injunctive lawsuits and relief given may be before or after.

For example, below is what I speculated about in the previous post but without presenting all the underlying reasoning and details.

The total US Treasury investment was approximately $189.4 billion in both GSEs. This was completed in the 2nd quarter of 2012. No more draws were taken since then.

The total dividends to be earned (by December 31, 2013) and to be paid to the US Treasury according to the 10% dividend rule (without the net worth sweep amendment) for those draws on the Treasury from the beginning of the conservatorship till March 31, 2014 were supposed to be $78.93 billion.

However, because of the net worth sweep, an additional $124.1 billion in dividends from net earnings made by 2013 was paid to the US Treasury. This brings the total amount of dividends paid to the US Treasury to be approximately $203 billion. All of it earned by the end of 2013.

There was no redemption of the Senior Preferred during this time. Only dividends paid on the $189.4 billion drawn from the beginning of the conservatorship totaling $203 billion.

With the arrival of Waters' bill and its TITLE V—WIND DOWN OF FANNIE MAE AND FREDDIE MAC SEC. 501. TRANSITION (b) provision ((501(b)), the Senior Preferred are to be paid from net earnings in contradiction to the Third Amendment to the PSPAs. The bill allows the Third Amendment to be amended (though it is not yet so.). In any case, the amount that remains to be paid to equal draws taken and dividends owed is the difference between the $189.4 billion in draws and the $124.1 billion in excess of the dividend paid due to the net worth sweep.

As of March 31, 2014, that difference amounts to 65.3 billion dollars by the reckoning of the Waters' bill. This brings us to the present and the very near future.

Now we move into the near future with speculations.

The Waters' bill is not passed and if it were to pass, it would take till 2015 or later given the extreme and polarized position it takes in relation to Hensarling's bill in the Republican-run House.

So during this present time to the future, the Third Amendment, if not vacated and set aside by the injunctive lawsuit, will remain in force and the redemption of the Senior Preferred will not occur. So, the net worth sweep will continue and the Senior Preferred will remain unredeemable. That is how it is at the moment.

Hypothetically then, I reckoned my figures to go along with the future backtracking that Waters' bill's 501(b) demands. At some point, after the bill's enactment and before ceasing new business, the US Treasury and the FHFA would have to deal with distributing net earnings to the $189.4 billion unredeemed Senior Preferred liquidation preference and 10% dividend according to the 501(b) and 502 (c)(2) that states:

10 (2) MAXIMUM RETURN TO SHAREHOLDERS.—
11"The wind down of each enterprise required under
12 this section shall be managed by the Director of the
13 Federal Housing Finance Agency, in consultation
14 with the Administration and the Secretary of the
15 Treasury, to obtain resolutions that maximize the
16 return for the senior preferred shareholder

Before that happens in 2015 or later, the GSEs would have had their net earnings swept.

So, the US Treasury and the FHFA, that are in charge of this, would have to backtrack to the beginning of the conservatorship and come forward to the present moment of reckoning to reconcile the $189.4 billion in Senior Preferred and the 10% dividend that applies until all is even. But when is it even? Is it when there is a total of $189.94 billion and 10% of that or $18.94 billion for a total of $208.34 billion?

In any case, the rate to be applied until the liquidation preference must be finally considered paid and the 10% dividend can be stopped is a rate of $2.93 billion in dividends per quarter for Fannie Mae and $1.81 billion per quarter for Freddie Mac for a total of $18.96 billion per annum for both. That would continue in the reckoning until the $189.4 liquidation preference was paid in full and the 10% dividend end satisfied by 2015 to 2020 or...

What do with the excess over $208.34 billion?- follow 501(b)? Who knows what the US Treasury will decide with its mandate to maximize for itself (502 (c)(2))? Waters' gives the GSEs a 5 year period before all new business is ceased.

This Waters' bill process is messy because if the $189.4 billion is unredeemable until the Waters' bill is enacted, the 10% dividend (or net worth sweep) could theoretically yield to the US Treasury $18.96 billion per annum (or more) in perpetuity. Obviously, we are on the cusp of that right now, just $5.34 billion more and the GSEs will have paid in the $208.34 billion.

What will happen? We do not have a date when the conservatorship ends in the bill. We do not know when and how the net earnings in the 5 year transition period will be distributed under the supervision of the US Treasury, NMFA and the FHFA.

A totally abstract financial analysis with numbers alone was not performed. What was done was based in the concrete reality of the current situation that was thrust forward into Waters' world of housing finance charted in her bill.

When one digs into the proposal, the are more questions than answers. That is a usual political way to avoid the hard questions until the last moment.

Those who believe in her can ask her what is the likelihood of getting more than what one has invested before and after Fannie and Freddie are wound down and eliminated.

Sources:
Waters' Discussion Draft Bill
http://democrats.financialservices.house.gov/FinancialSvcsDemMedia/file/003%20Maxine%20Waters%20Legislation/GSE%20Bill/WATERS_046_xml.pdf

Fannie Mae’s and Freddie Mac’s Financial Status: Frequently Asked Questions
http://www.fas.org/sgp/crs/misc/R42760.pdf

Fannie Mae Form 10-Q 3rd Quarter
http://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2013/q32013.pdf

Fannie Mae Form 10-K 2013
http://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2013/10k_2013.pdf

Freddie Mac Form 10-Q 3rd Quarter
http://www.freddiemac.com/investors/er/pdf/10q_3q13.pdf

Freddie Mac Form 10-K 2013
http://www.freddiemac.com/investors/er/pdf/10k_022714.pdf

[Donotunderstand]

Rosen

I do see a model in that bill that smells like a DECLINING balance loan set of math - and yes in the years of the SWEEP the balance drops hard .....

The bill - going no where - but setting up a counter to REPS

has mystery language about who is ahead of equity

and "the ability to shift assets" (may not be exact words) to the new entity - which is one scary sentence until defined