Yesterday, Bill Ackman spoke about the long case for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) at the Ira Sohn Conference. We told readers we would likely be getting the slides.Since the document was around 110 pages and Ackman only (officially) had 15 minutes to speak the slides are useful for those interested in the pitch.

 

See our full Ira Sohn 2014 coverage here.

Below is the full 112 pages of them, enjoy!

Full PDF for download here 

It’s Time to Get Off Our Fannie Mae

Ira Sohn Conference

May 5, 2014

Fannie Mae & Freddie Mac (GSEs)

 

 

 

 

 

 

Ticker:

“FNMA” & “FMCC”

 

Recent stock price:

 

FNMA: $3.98 FMCC: $3.98

 

 

 

 

 

Provide a guarantee on the credit risk of ~$5 trillion of U.S. mortgages

 

~50% share of outstanding mortgages

 

~60% share of annual originations

 

 

Combined equity market cap of ~$36bn including Treasury warrants

 

Combined 2013 pre-tax earnings of ~$39bn

 

~$72bn of deferred tax assets

 

 

f Operating in conservatorship since September 2008

 

 

Currently required to pay 100% of earnings to U.S. Treasury

 

 

U.S. Treasury owns warrants on 79.9% of the common stock 

History of the GSEs

Prior to the Great Depression

 

 

 

 

Mortgage availability was limited, with 5-to-10 year terms, floating interest rates, and ~50% loan-to-value ratios

 

 

 

 

Mortgages were primarily originated and retained by local thrifts, commercial banks, and insurance companies

 

Banks would lend at floating interest rates for a short term to match the structure of their deposit funding sources

 

Supply of mortgage credit was limited and required large initial down payments

 

Availability and pricing of mortgage credit varied widely across the U.S. due to localized funding

 

Homeownership rate was ~45% 

The Great Depression

 

 

 

 

During the Great Depression, the U.S. mortgage market was paralyzed and required significant government involvement to eventually recover

 

Unemployment rate was nearly 25%

 

 

Housing prices declined as much as 50%

 

 

~25% of mortgages were in default and ~10% of homes were in foreclosure

 

Homeowners were unable to satisfy their principal payments and were unable to refinance their short-term mortgages

 

The banking system was near collapse and was unable and unwilling to provide a meaningful amount of mortgage credit 

Government’s Response to the Great Depression

 

 

 

 

During the Great Depression, the government undertook a series of mortgage-related initiatives that culminated with the creation of Fannie Mae

f 1933: Created Home Owners’ Loan Corp

 

Issued government-backed bonds to fund the purchase of defaulted mortgages from financial institutions

 

Converted short-term, variable rate mortgages into long-term, fixed-rate mortgages

 

1934: Enacted National Housing Act, which established the Federal Housing Administration

 

Provided credit insurance on long-term, fixed rate mortgages made by approved lenders

f 1938: Created Fannie Mae as a government agency

 

Purchased FHA-insured loans to provide liquidity for mortgage lenders

Fannie Mae was chartered to support liquidity, stability, and affordability in the secondary mortgage market

Evolution of the GSEs

 

 

 

 

The GSEs have evolved significantly since the creation of Fannie Mae in 1938

 

1948: Fannie allowed to purchase loans insured by the Veterans Administration

 

Provided liquidity to long-term, low-down-payment mortgages issued to veterans returning from WWII

 

1954: Fannie converted into a “public-private, mixed-ownership” company

 

 

1968: Fannie converted into a for-profit, shareholder-owned enterprise

 

Fannie allowed to buy non-government backed mortgages

 

 

1970: Freddie Mac created to securitize mortgages issued by the savings and loans institutions

 

1971: Freddie issued the first conventional loan MBS

 

 

1989: Freddie converted into a for-profit, shareholder-owned enterprise

 

…………………………………………

The GSEs’ Role in the Marketplace

 

 

The GSEs were chartered by Congress to support liquidity, stability, and affordability in the secondary mortgage market

 

 

Fannie and Freddie’s role in the mortgage market

 

 

Convert long-term, illiquid mortgages into highly-liquid mortgage backed securities (MBS)

 

Provide insurance on the credit risk on the underlying mortgages of the MBS

 

Facilitate the sale of MBS to the global capital markets 

The GSEs Allow for the 30-year Mortgage

 

 

Fannie and Freddie facilitate widespread access to the 30-year, prepayable, fixed-rate mortgage at a low cost

 

 

f Widespread access to credit

 

The global capital markets provide a much larger and more consistent amount of credit than local lending institutions

f Long-term, fixed-rate financing

 

Lenders are willing to originate a high proportion of long-term, fixed-rate mortgages because they can be converted into liquid investment securities that can be retained or sold

f Low-cost financing

 

When interest rates decline, borrowers can refinance, lowering their monthly payments

The high level of liquidity for GSE MBS lowers mortgage interest rates

Fannie and Freddie

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees

 

(Ongoing: ~$5 trillion guarantees)

 

f   High-quality, low-risk

 

f   Does not require an implicit government guarantee

 

f   Serves a vital purpose for the mortgage market

 

 

 

 

 

Fixed-Income Arbitrage (FIA)

 

(Run-off: ~$1 trillion assets)

 

f   Low-quality, high-risk

 

f   Requires an implicit government guarantee

 

f   Does not serve a credible purpose for the mortgage market 

 

Fannie Mae via Pershing Square Presentation
Fannie Mae via Pershing Square Presentation

Full PDF for download http://ify.valuewalk.com/wp-content/uploads/2014/05/Ira-Sohn-Final.pdf

Ira Sohn Final Bill Ackman