January 7, 2019 Could Sea Change GSE Investors – Fannie Mae (OTCMKTS:FNMA)

The final Federal Housing Finance Agency appearing director, Edward Demarco, instituted the Third Amendment internet value sweep. Since Trump gained the election, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) have remained in conservatorship run by an Obama holdover, Melvin Watt. Watt’s time period expires in lower than three weeks at which level Trump could have somebody on either side of the Senior Secured Purchase Agreement. Right now, he simply has somebody at Treasury. Joseph Otting has deep ties with Mnuchin from beforehand working collectively at OneWest so you’ve gotten a scenario the place the pinnacle man of Treasury has labored earlier than with the subsequent head man from the FHFA. Previously, Mnuchin has complained that he wanted somebody operating FHFA that may work with him. Problem solved.

Investment Thesis

The announcement of Joseph Otting was in step with my expectations for appearing director at FHFA. If the Trump administration needed to attend for Calabria to get by means of the affirmation course of earlier than taking motion, they actually may let one among Watt’s folks proceed to run the FHFA whereas Calabria will get confirmed. Otting’s first day is January seventh, 2019. I’ve been concerned on this commerce for the reason that center of 2012 and I count on this to materially change my life this subsequent month. The stock market is a voting machine within the quick time period and I count on that after the online value sweep is put to mattress with a view to permit Fannie and Freddie to exit conservatorship, the fairness junior to the Senior Preferred ought to soar in anticipation of the federal government liquidating its stake. I believe the lawsuits make case for recharacterizing the Senior Preferred paid again. The most well-liked shareholders have contract claims and out of doors the Senior Preferred getting declared paid again, frequent shares do not actually seem to have a authorized declare. I’m betting that most well-liked get wherever between 65% of par to par plus on the time the GSEs go to capital markets to lift new cash. If the popular get par, it is doable for the commons to outperform them. Optically, it certain appears to be like simpler for the frequent to go to $3 than it does for the S collection most well-liked stock to go to $21, and from present costs these returns are equal. I personal most well-liked as a result of I believe they’ve the perfect worst case funding state of affairs. Security evaluation is the career right here and I worth the safety the popular provide, whereas the frequent nonetheless really feel a bit speculative, however hey, they may go away me within the mud this subsequent month or so. I do not know and like to not actually speculate. My worst case as a most well-liked shareholder is that I get to maintain my shares and when the businesses are recapitalized and exit conservatorship, dividends would resume.

Treasury’s GSE Reform Guy On Moelis Plan

Craig Phillips is the person overseeing the GSE reform parade over at Treasury. He’s actually on twitter and he follows a bunch of individuals from the #fanniegate group, which is a gaggle of buyers who aggressively tweet about something housing associated and complain about shareholder rights violations. Bloomberg reported Craig Phillips was amenable to elements of the Moelis plan:

Phillips appears eager about letting Fannie and Freddie construct up capital buffers after which be launched from conservatorship:

Mnuchin mentioned he desires to repair Fannie and Freddie for the subsequent 50 years:

What Does The Price Say?

I’m not likely one to learn charts however this one could inform a narrative:

Long story quick, the ratio of most well-liked to frequent was roughly 2:1 till late final yr. My guess is that this mirrored a traditional recapitalization and launch with previous capital necessities. Instead, FHFA appears to have adopted the capital necessities outlined by the Moelis plan in order that they will say that the quantity of capital that the GSEs will maintain with a view to exit conservatorship would have prevented the necessity for conservatorship within the first place.

As the ratio above will increase, it could appear that buyers are betting for a decrease IPO worth or maybe conversion mechanics that occur earlier than the warrants are exercised. I do not actually know, however it does appear that they’re more and more conscious that within the raging debate of most well-liked vs. frequent, the popular have been profitable for the final yr.

What I am unable to let you know, as a result of I do not know, is whether or not it will reverse or not. Lots of individuals ask me for my ideas on frequent and it is robust as a result of I believe that they could possibly be the true winner from right here, however they may additionally get left within the mud. If you personal them, good luck, I hope you win massive. The authorities runs the present right here and actually the one class of share with negotiating leverage for the settlement is most well-liked due to the breach of implied covenant of fine religion claims going to trial. The remainder of the lawsuits are simply in regards to the internet value sweep, which it looks as if could possibly be taken care of and nonetheless go away frequent shareholders massively diluted.

Summary & Conclusion

I personal 4050 FMCCH, 8094 FMCCI, 9856 FMCCL, 400 FMCCN, 12608 FMCCP, 1210 FMCCS, 5042 FMCCT, 9085 FMCKP, 200 FNMAM, 11132 FNMFN and 5 FNMFO. These are all most well-liked shares. Commons could also be higher and I hope they’re however I do not personal them and I like to recommend doing what I’m doing in the event you’re new to this.

The prevailing rumor mill is that the commons will soar when the online value sweep is stopped. That could also be true and if it does go that approach, it could appear to push the popular in a path of changing after the warrants are exercised. I’m undecided if it is affordable to count on some sort of authorized settlement together with the online value sweep being stopped or not.

I do count on the federal government to take its internet value sweep on the finish of this month. In principle, the Senior Preferred could have handed the 10% second for each Fannie and Freddie when Otting takes over FHFA.

Congress has completed nothing for everything of conservatorship and now the home is split. Administrative motion is on deck and shareholder John Paulson has the ace within the gap and it is par for the course. May the nice work that was IndyMac/OneWest proceed to raise capital ranges and create security and soundness on the GSEs.

Disclosure: I’m/we’re lengthy FMCCH,FMCCI,FMCCL,FMCCN,FMCCP,FMCCS,FMCCT,FMCKP,FNMAM,FNMFN,FNMFO. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Seeking Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.