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.
Will likely be getting #SOHN2014 Ackman & Einhorn slides tomm, will post asap send any comments, questions, complaints to @Nonrelatedsense
— Jacob Wolinsky (@JacobWolinsky) May 5, 2014
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
f Provide a guarantee on the credit risk of ~$5 trillion of U.S. mortgages
~50% share of outstanding mortgages
~60% share of annual originations
f Combined equity market cap of ~$36bn including Treasury warrants
f Combined 2013 pre-tax earnings of ~$39bn
~$72bn of deferred tax assets
f Operating in conservatorship since September 2008
f Currently required to pay 100% of earnings to U.S. Treasury
f 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
f Mortgages were primarily originated and retained by local thrifts, commercial banks, and insurance companies
f Banks would lend at floating interest rates for a short term to match the structure of their deposit funding sources
f Supply of mortgage credit was limited and required large initial down payments
f Availability and pricing of mortgage credit varied widely across the U.S. due to localized funding
f 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
f Unemployment rate was nearly 25%
f Housing prices declined as much as 50%
f ~25% of mortgages were in default and ~10% of homes were in foreclosure
f Homeowners were unable to satisfy their principal payments and were unable to refinance their short-term mortgages
f 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
f 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
f 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
f 1954: Fannie converted into a “public-private, mixed-ownership” company
f 1968: Fannie converted into a for-profit, shareholder-owned enterprise
Fannie allowed to buy non-government backed mortgages
f 1970: Freddie Mac created to securitize mortgages issued by the savings and loans institutions
f 1971: Freddie issued the first conventional loan MBS
f 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
f Convert long-term, illiquid mortgages into highly-liquid mortgage backed securities (MBS)
f Provide insurance on the credit risk on the underlying mortgages of the MBS
f 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
Full PDF for download http://ify.www.valuewalk.com/wp-content/uploads/2014/05/Ira-Sohn-Final.pdf
