December 4, 2020 Update: Treasury Secretary Steven Mnuchin appeared before the House Financial Services Committee this week to talk about Fannie Mae and Freddie Mac. He said they hadn’t made any firm plans about the future of the government-sponsored enterprises, but they could be released from their conservatorships before they reach their required capital levels.
Editor’s note: This page is updated frequently with the most crucial news on Fannie Mae, Freddie Mac, GSE reform, the conservatorship and other housing finance related issues. Please make sure to bookmark this page and check back on a regular basis.
The Federal Housing Finance Agency set the capital rule for Fannie Mae and Freddie Mac last month. The GSEs will be required to hold tier one capital at 4% to avoid restrictions on bonuses and capital distributions. That means that as of the end of June, the GSEs would have had to maintain $207 billion in common equity tier one capital, $265 billion in tier one capital and $283 billion in adjusted total capital.
According to Housing Wire, Mnuchin told the House committee that Fannie and Freddie could be released before they reach those required levels of capital. He talked about the possibility of a consent decree, which has long been expected and would allow Fannie Mae and Freddie Mac to operate without the required levels of capital for a time after exiting conservatorship.
Capital rule for Fannie Mae, Freddie Mac finalized
November 24, 2020 Update: The Federal Housing Finance Agency has finalized the capital rule for Fannie Mae and Freddie Mac. The final version of the rule requires the government-sponsored enterprises to maintain tier 1 capital of at least 4% to avoid restrictions on discretionary bonuses and capital distributions.
That means that, based on their size as of earlier this year, Fannie Mae and Freddie Mac will have to hold a combined $283 billion, according to The Wall Street Journal. However, they currently have only $35 billion, which means they have a long way to go before they can meet that capital requirement. The GSEs will have to make up the difference by retaining earnings and selling more stock.
The finalization of the capital rule is a major step toward privatizing the GSEs. Sources told The Wall Street Journal that the Trump administration may push to remove Fannie and Freddie from their conservatorships before Joe Biden enters the White House.
Questions raised about Fannie Mae’s Q3 earnings
November 5, 2020 Update: Analyst Dick Bove has some questions about Fannie Mae’s latest earnings report. In a recent note, he pointed out calculating the government-sponsored enterprises earnings based on net income instead of income available to common shareholders brings a result of 72 cents per share, compared to the estimate of 50 cents and the 69 cents per share reported in the year-ago quarter.
However, calculating Fannie Mae’s earnings in regular GAAP fashion brings a result of 0 cents per share in the latest quarter and in last year’s third quarter, and this is what the company shows on its income statement. The difference between the reported number and the net income number is the dividend paid to the U.S. Treasury. As required for GAAP accounting, it is shown on the income statement, but it isn’t shown in the net income earnings number or on Fannie Mae’s balance sheet.
Instead, the dividend paid to the Treasury is shown in the notes on the financial statement. Fannie Mae reports its common equity as -$119.3 billion and total equity at $20.7 billion. Bove sees two big problems here.
Problems with Fannie Mae’s earnings numbers
First, it reports $19.1 billion in junior preferred shares, but it is arguing before the Supreme Court that those shares have no value. Second, the balance sheet lists a request to check Note 1 to the financial statements. The new reveals that as Fannie Mae owes the Treasury $22.4 in unpaid dividends, and presumably, if those dividends had been paid when they were earned and shown on the income statement, the amount should have been reflected in retained earnings.
“I continue to be confused as to why the SEC allows the Fannie Mae treatment of its equity as shown on its balance sheet,” Bove wrote. “Presumably, it is done so the company can argue that it has common equity, and this is the base of making a new stock offering. Based on every set of financial statements I have analyzed since I started doing this in 1965, this treatment is one of a kind. It appears to me that there is something very wrong being done here, and shareholders are being misinformed.”
Fannie Mae reports Q3 2020 earnings results
October 29, 2020 Update: Fannie Mae reported its third-quarter earnings results before opening bell this morning. The government-sponsored enterprise reported $4.2 billion in net income, compared to $2.5 billion for the previous quarter.
Fannie Mae attributed the increased net income to higher amortization income driven by an increase in mortgage prepayment activity, a decrease in fair value losses, an increase in net investment gains and a shift to credit-related income from credit-related losses in the previous quarter.
The company reported earnings per share of 0 cents. Net revenue climbed from $5.54 billion in last year’s third quarter to $6.75 billion this year. Credit-related income amounts to $430 million, compared to $22 million in credit-related expenses during the previous quarter and $1.76 billion in credit-related income last year.
Fannie Mae’s net worth increased from $16.5 billion at the end of June to $20.7 billion at the end of September. The GSE can retain earnings until its net worth reaches $25 billion. It continues to expect COVID-19 to negatively impact its financial results, bringing lower net income this year than last year.
As of the end of September, 4.1% of Fannie Mae’s single-family guaranty book of business and 0.5% of its multi-family guaranty book of business based on unpaid principal balance was in forbearance. The company provided $982 billion of liquidity to lenders during the first nine months of the year.
Fannie Mae: only half of buyers think it’s a good time to buy a home
October 12, 2020 Update: Interest rates are near record lows, but despite that, only 54% of buyers think this is a good time to buy a home, according to a survey conducted by Fannie Mae. Citing data from CoreLogic, The Motley Fool reports that home prices are up 6% year over year as inventories remain low, and bidding wars are common. As a result, despite the low interest rates, it might not be the best time to buy a home. Nonetheless, that hasn’t kept people from buying homes right now.
Fannie Mae Chief Economist Doug Duncan shared some forecasts about the housing market for next year. At a HousingWire Annual last week, he projected that unemployment will be at about 6% at the end of 2021.
He also said there are signs of a partial recovery so far. He said during the second quarter, about $1.7 trillion in national income was lost, but by the third quarter, he believes about $1.2 trillion will have been recaptured.
He also pointed out that many more people are working from home, while others have fled the big cities and moved to the suburbs. This has been good for housing trends, and it could be one reason bidding wars for homes have apparently become common. Duncan expects home prices to continue rising because inventory is limited, and he looks for existing home sales to rise a percent or more next year. He added that new homes are being turned over quickly this year.
Panel says Fannie Mae, Freddie Mac pose a risk to the financial system
September 29, 2020 Update: The Financial Stability Oversight Council issued a statement on Friday in which it supported the controversial capital rule as it was proposed for Fannie Mae and Freddie Mac. However, that’s not all the council said. Federal Housing Finance Agency Director Mark Calabria, who oversees the GSEs, also thanked the council for recognizing that they could pose a risk to the nation’s housing finance system.
The FSOC’s support of the capital rule as it was proposed is significant because it is the only voice to come out in support of it. Everyone else, including Fannie and Freddie themselves, has opposed the rule as being too strict.
The FSOC is made up of the heads of all the nation’s financial regulators, including Calabria, Treasury Secretary Steven Mnuchin, the chairman of the Federal Reserve, and every other regulator that oversees every aspect of the nation’s financial system.
The fact that every other expert who has addressed the proposed capital rule is against it presents a new quandary for Calabria, who must decide whether to go with the rule as it is written or whether to tweak it before it is finalized. Either way, Fannie Mae and Freddie Mac are now another step closer to exiting conservatorship.
Fannie Mae, Freddie Mac won’t face as much competition as some think
September 22, 2020 Update: One of the big debates over Fannie Mae and Freddie Mac is whether they will face stiff competition after they exit from their conservatorships. Analyst Dick Bove of Odeon Capital has repeatedly said that the GSEs will be left with only the worst-quality mortgages because the big banks will take the rest of them.
However, Tim Pagliara of CapWealth Advisors says that’s not the case. He told ValueWalk in a recent interview that it was the big banks that caused the housing crisis, not Fannie and Freddie. He said much has been learned since then, and the big banks can’t actually compete with the GSEs.
He added that the banks can’t hold 30-year mortgages on their books anymore because of Dodd Frank, and they don’t want to. According to Pagliara, mortgage bankers and organizations like the Mortgage Bankers’ Association and similar interests would prefer for the GSEs to remain in conservatorship for perpetuity because they don’t have to compete and they’re “getting rich” as things currently stand.
He said the Federal Housing Administration is the one that holds the low-quality loans, while the average credit score of borrowers with Fannie and Freddie is currently 740.
Fannie Mae, Freddie Mac could be treated as utilities if Biden wins
September 15, 2020 Update: As the presidential election approaches, there’s a lot of talk about what will happen to Fannie Mae and Freddie Mac if Joe Biden wins the election. It’s clear that President Donald Trump’s administration is working on getting them out of conservatorship, but many believe Biden will keep them under the government’s purview for as long as possible if he is elected.
In a note late last week, Cowen Washington Research Group Managing Director Jaret Seiberg suggested that Biden will keep the GSEs in conservatorship. However, he doesn’t expect that in perpetuity. He believes the Democrats will want to prevent a future Republican White House from deciding what the GSEs’ fate should be.
Thus, he suggests they could release Fannie Mae and Freddie Mac from conservatorship under a utility-like structure. That would place restrictions on their pricing and profitability. He noted that former Freddie Mac CEO Don Layton has also suggested a utility-like structure for the GSEs.
Tim Pagliara of CapWealth Advisors disagrees with the view that Biden will keep Fannie Mae and Freddie Mac in conservatorship. He noted that the government must still deal with the pending litigation over the preferred shares, and to settle those issues, a logical part is to bring them out of conservatorship.
PIMCO: Fannie Mae, Freddie Mac shouldn’t be released now
September 8, 2020 Update: As efforts to recapitalize and release Fannie Mae and Freddie Mac from their conservatorships continue, one firm is arguing that they shouldn’t be. Bond giant Pacific Investment Management Co., better known as PIMCO, is one of the largest buyers of mortgage-backed securities from the GSEs.
The firm wrote a letter to Federal Housing Finance Agency Director Mark Calabria recently saying that if Fannie and Freddie are released from conservatorship without input from Congress, it would harm the housing finance industry.
PIMCO executives argue that investors would see releasing Fannie Mae and Freddie Mac by executive action as an end to the government’s guarantee on their mortgage-backed securities. They said that would increase mortgage rates and “force some investors to sell the bonds.”
They also said that homeownership will likely take a hit, and the national mortgage rate won’t exist any longer. The national mortgage rate allows lenders to offer the same interest rates to homebuyers with similar credit scores and down payments across the country instead of rates being localized.
Fannie Mae, Freddie Mac delay refinancing fee
August 27, 2020 Update: Fannie Mae and Freddie Mac have been at the center of controversy since they announced a new fee for refinancing applications. That announcement raised an uproar throughout the industry as many claimed it would cause mortgage payments to increase.
However, the Federal Housing Finance Agency ordered the government-sponsored enterprises to delay that fee until December after pressure from the rest of the housing finance industry. The fee is aimed at paying for losses due to the COVID-19 pandemic.
Fannie and Freddie said earlier this month that they would start charging an “adverse market” fee of 0.5% on all refinances starting on Sept. 1. Now that fee will be pushed off until December.
The FHFA also told the GSEs to limit which refinances would be charged that fee. Loans less than $125,000 will be exempt from that fee because almost half of those loans are held by lower-income borrowers.
The fee also won’t apply to loans that are made through Freddie Mac’s Home Possible refinance program and Fannie Mae’s HomeReady refinance program. Both programs target first-time homeowners and low-income Americans.
Fannie Mae, Freddie Mac defend new fee on refinancing
August 21, 2020 Update: Fannie Mae and Freddie Mac announced last week that they would be adding another fee amounting to 50 basis points to refinances starting Sept. 1. That triggered widespread criticism from organizations claiming that the fee would cause mortgage payments to go up.
However, Fannie Mae Chief Executive Hugh Frater and Freddie Mac Chief Executive David Brickman addressed those criticisms in a joint letter on Thursday. In response to the National Association of Realtors, the Mortgage Bankers Association and other organizations that criticized the move, the GSEs’ top executives said the extra fee will not cause mortgage payments to go up.
Within 24 hours of launching a campaign opposing the new fee, the National Association of Mortgage Brokers gather over 10,000 supporters to reverse it. Those opposed to the fee called it “untimely” during a time of economic pressure.
Fannie Mae’s and Freddie Mac’s CEOs said the fee only applies to borrowers who are refinancing, and they almost always refinance to reduce their monthly payment. They also said the 0.5% guarantee fee is a one-time charge instead of an increase of 0.5% on the annual mortgage interest rate.
Fannie Mae reports Q2 2020 earnings results
July 30, 2020 Update: Fannie Mae released its second-quarter earnings results before opening bell this morning. The firm posted $2.5 billion in net income, compared to $461 million for the first quarter and $3.2 billion in the second quarter of 2019. The government-sponsored enterprise cited a decline in credit-related expense in the second quarter for the increase in net income.
The increase in credit-related expense in the first quarter was driven by a significant increase in allowance for loan losses due to the economic disruption caused by the coronavirus pandemic. The allowance for loan losses was fairly flat in the second quarter.
Net interest income amounted to $5.78 billion, compared to $5.35 billion in the first quarter and $5.23 billion in the year-ago quarter. Fee and other income was $90 million, compared to $120 million in the first quarter and $113 million in the second quarter of 2019.
Fannie Mae earnings
Fannie Mae reported $5.87 billion in net revenue, compared to $5.47 billion in the previous quarter and $5.34 billion in the year-ago quarter.
The firm continues to support borrowers impacted by COVID-19 through forbearance. As of the end of June, 5.7% of the firm’s single-family guaranty book based on loan count and 1.2% of its multifamily guaranty book based on unpaid principal balance were in forbearance. Most of them were due to the coronavirus.
The firm’s net worth climbed from $13.9 billion at the end of March to $16.5 billion at the end of June. The Treasury Department is allowing Fannie Mae to retain earnings until its net worth hits $25 billion. Fannie Mae continues to expect the pandemic to negatively impact its earnings numbers, resulting in a year-over-year decline in net income for this year.
FHFA sets 2021 housing goals for Fannie Mae, Freddie Mac
July 23, 2020 Update: The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, set benchmark goals for 2021. Due to the economic uncertainty caused by the coronavirus pandemic, those goals are the same as they were for 2018 through 2020. Further, the FHFA is only setting goals for 2021 instead of the next few years because of the pandemic.
In a press release, the agency said 24% of mortgages bought by Fannie Mae and Freddie Mac must be for low-income borrowers. For refinancing, 21% must be for low-income borrowers. Additionally, 14% of the mortgages bought by the GSEs must be in low-income areas, and 6% of loans must be for very-low-income borrowers.
Under multifamily lending, 315,000 rental units that are financed must be made affordable for low-income families. Of those units, 60,000 must be for very-low-income households.
FHFA may halt Fannie Mae’s, Freddie Mac’s CRT securities
July 10, 2020 Update: The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has tightened the bond market that once held the key to the futures of the government-sponsored enterprises.
According to Bloomberg, credit-risk-transfer securities have been the main way for Fannie and Freddie to transfer the risk of mortgage defaults to private investors. The market has increased to about $50 billion, and hedge funds, mutual funds and real-estate investment trusts have been buyers of the bonds.
Some former officials and executives in the housing finance industry thought the growing CRT market could mostly eliminate the possibility that taxpayers would ever have to bail out the GSEs again like the way they did during the 2008 financial crisis. However, the FHFA has proposed a new rule that would greatly reduce Fannie and Freddie’s incentive to keep selling the bonds.
Opponents to the proposal say the move would essentially cause the GSEs to continue holding as much risk as they did when the housing market collapsed in 2008. Former Freddie CEO Don Layton said in a blog post earlier this week that the rule would essentially kill CRT and that the FHFA may be trying to purposely make the program uneconomical.
The regulation that has triggered this new controversy for Fannie Mae and Freddie Mac is a plan the FHFA suggested in May to increase capital standards for them by tens of billions of dollars. The proposed capital rule is aimed at ensuring the GSEs have enough capital to absorb losses after they are released from their conservatorships.
However, it would also greatly reduce the capital relief Fannie and Freddie receive in exchange for issuing CRT securities. The GSEs have sold CRT securities since 2013, and they’ve been quite popular. Earlier this week, Freddie announced it was issuing its first single-family CRT since March. The offering was so popular that the firm doubled the size of it.
Clock is ticking on Fannie Mae, Freddie Mac before election
June 19, 2020 Update: If Joe Biden unseats President Donald Trump in the White House, Fannie Mae and Freddie Mac’s progress in exiting conservatorship could be undone. Fox Business reports that housing analysts with ties to Biden’s economic advisers said a Biden presidency could definitely detail the recapitalization and release of the government-sponsored enterprises.
The sources also note that Fannie and Freddie’s fate isn’t a major issue for Biden and his campaign. Instead, he’s more focused on choosing a running mate and strategizing a response to the COVID-19 pandemic, policing and racial equality.
However, they also said that affordable housing is important to the Democratic presidential candidate. Biden reportedly wants to expand the GSEs’ mandate and probably keep them under the control of the government. Thus, his financial advisers suggest that if Biden wins the election in November, he will undo most of the work done by Trump’s housing team, which is headed by Federal Housing Finance Agency Director Mark Calabria and Treasury Secretary Steven Mnuchin.
For one thing, they said if Biden enters the White House, he will try to terminate Calabria and scrap the public offering that would allow Fannie and Freddie to operate as private companies. They said the GSEs would remain in conservatorship and be used to grow homeownership among the low-income population.
It would mean that more Americans would be able to get mortgages, but the net worth sweep could continue, which would be a negative for preferred share holders. One factor they didn’t talk about was the lawsuits that were filed over the preferred shares. If the courts have anything to say about the net worth sweep, the government could be forced to repay what it took from shareholders when the sweep was instituted.
Calabria: Fannie Mae’s forbearance rate is “manageable”
June 12, 2020 Update: One of the big concerns for Fannie Mae and Freddie Mac as they move toward exiting conservatorship has been forbearance. When the COVID-19 pandemic hit, homeowners whose mortgages are owned by a government-backed agency or enterprise like Fannie or Freddie were allowed to enter forbearance.
Borrowers whose loans are in forbearance are able to hold off on making payments for up to a year. Mortgage servicers must keep making those payments on their behalf for up to four months. After that, it falls on the government-sponsored enterprises to provide support for the loans.
One concern is whether Fannie Mae and Freddie Mac would be able to manage if a large percentage of borrowers took their loans into forbearance. However, so far, the percentage has plateaued at around 6.6%.
Federal Housing Finance Agency Director Mark Calabria describes that percentage as “manageable.” He told the Senate Banking Committee earlier this week that the GSEs are seeing “just as many borrowers canceling their forbearance programs as you see rolling on.” Responding to a question from committee chairman Mike Crap, he said he had been worried that the forbearance rate would jump, but he no longer expects it to increase further.
He said approximately one-third of borrowers who receive a forbearance agreement are still making payments, which he added is “a positive.”
Complications in Fannie Mae’s, Freddie Mac’s new capital rule
June 2, 2020 Update: The Federal Housing Finance Agency proposed an updated version of the capital rule for Fannie Mae and Freddie Mac, pushing their exit from conservatorship forward. The new rule would require the government-sponsored enterprises to have about $240 billion total between them. That’s much more than what was previously proposed, which was about $180 billion.
Although that larger cushion is good for those worried about risk for taxpayers, The Wall Street Journal reports that it could complicate Fannie’s and Freddie’s public offerings when the time for them comes. The newspaper notes that the new plan for the GSEs could be accomplished without Congress doing anything if lawmakers refuse.
However, it could mean that investors in their public offerings might expect the GSEs to have capital levels sufficient enough to withstand almost any downturn on their own without another bailout from the government. The Journal also notes that it will be difficult for Fannie and Freddie to raise that much capital, especially if their earnings are low due to a recession.
Additionally, higher capital levels come with costs that reduce potential returns for investors. Keefe, Bruyette & Woods analysy Bose George told the WSJ that the return on equity for the GSEs with $180 billion in capital would have been in the low double digits. However, at $240 billion, the return drops closer to 8%, based on certain assumptions about their economic model.
Reaching a 10% return will depend on market conditions and other variables like the commitment fee that would have to pay to the government for its ongoing guarantee. The lower the fee, the more money Fannie and Freddie could earn per mortgage, but then that comes at the expense of taxpayers.
Fannie Mae and Freddie Mac could increase their guarantee fees charged to originators, but that could conflict with their purposes of providing affordable housing.
Updated timeline on Fannie Mae, Freddie Mac exiting conservatorship
May 21, 2020 Update: A firm that’s been following the Fannie Mae and Freddie Mac saga for a long time has updated its expected timeline for the government-sponsored enterprises to exit conservatorship. The update comes after Fannie and Freddie both released request for proposals to hire financial advisors. The move means the GSEs are still moving toward exiting conservatorship despite the setbacks due to the fallout from the coronavirus pandemic.
The new timeline includes moves that have been made since the first timeline was released. Some of these moves include the hiring of Houlihan Lokey as financial advisor and Milbank as legal advisor for the Federal Housing Finance Agency.
It also updates the date of the proposal of the new capital rule and expected dates for when Fannie Mae and Freddie Mac will hire their own financial advisors. The date of the capital rule proposal is now given as between May 19 and May 26. The comment period on the rule will end between Aug. 17 and 25, and the rule will be finalized in November.
The new timeline moves Fannie and Freddie’s exit from conservatorship to January 2021. The previous timeline put the exit between March 31 and June 30 of 2021. The equity offering is now expected between June 2021 and June 2023, so that window is still quite wide.
AGC’s new timeline is here:
New GSE fund will invest in Fannie Mae, Freddie Mac
May 12, 2020 Update: Mountaineer Partners is raising capital for a fund to invest in Fannie Mae and Freddie Mac. The firm is seeking to gather $100 million to invest in the government-sponsored enterprises. The new fund will be called the Mountaineer Partners GSE Opportunity Fund.
The firm believes it could see a return of 50% to 100% in the next 12 to 18 months if Fannie and Freddie are released from conservatorship next year. The bear case is for a 50% loss, while the bull case suggests a 200% return.
Most or possibly all of the gain will come from the GSEs’ junior preferred shares, which are in the middle of litigation regarding the net worth sweep. The junior preferred shares were trading close to four-year lows, based on a presentation sent by Mountaineer’s placement agent, Hawthorne Lane Capital.
Mountaineer management believes the Federal Housing Finance Agency, which oversees the GSEs, can end control of them via a consent decree. This is the same thesis many others have for Fannie Mae and Freddie Mac, including experts like Tim Pagliara of CapWealth Advisors.
The coronavirus is expected to delay the GSEs’ release from conservatorship, although experts disagree about how long of a delay could be possible.
Fannie Mae reports first-quarter earnings
May 1, 2020 Update: Fannie Mae released its first-quarter earnings results before opening bell this morning. The government-sponsored enterprise reported $461 million in net income for the first quarter, compared to $4.4 billion in net income for the fourth quarter. Fannie said the steep decline was mostly due to a change from credit-related income to credit-related expense due to the “economic dislocation caused by the COVID-19 outbreak.”
Net interest income amounted to $5.35 billion, compared to $4.8 billion for the same quarter a year ago. Fee and other income rose to $308 million from $134 million a year ago. Net revenue was $5.655 billion, compared to $4.93 billion a year ago.
The GSE also said it is providing “substantial liquidity” to lenders during the crisis and fulfilling its “mission to stabilize the housing finance market and provide liquidity, support and access to affordable mortgage financing in all U.S. markets in all economic cycles.”
Fannie Mae boosted its allowance for loan losses to accommodate the losses it expects to incur due to borrowers entering forbearance. As of the end of April, the company estimates that about 7% of the loans in its single-family guaranty book were in forbearance. Fannie Mae expects the number of loans in forbearance to continue rising.
The GSE’s net worth fell from $14.6 billion as of the end of December to $13.9 billion as of the end of March. It took a $1.1 billion charge to retained earnings due to implementation of the Current Expected Credit Loss standard at the beginning of the year. Fannie Mae provided $204.6 billion in liquidity to the mortgage market during the first quarter.
COVID-19 impacts Fannie Mae’s, Freddie Mac’s conservatorship plan
April 29, 2020 Update: Fannie Mae and Freddie Mac are scheduled to release their first-quarter earnings results this week. Bloomberg reports that their plan to exit conservatorship could be in jeopardy because they may have to set aside large amounts of money to cover the risk of mortgages that go sour due to coronavirus-related job loss.
The GSEs’ first-quarter earnings reports will provide a small peek at the impact the COVID-19 pandemic is having on them. Analysts say weak earnings results or disappointing commentary about the state of the mortgage industry would be a major setback for the White House. Regulators and administration officials have said that Fannie Mae and Freddie Mac need the U.S. economy to be healthy so they can raise tens of billions of dollars to survive outside conservatorship.
Cowen analyst Jaret Seiberg said the pandemic is “dashing hopes for a quick exit from conservatorship.” He also said it’s hard to imagine the market providing the $100 billion in capital they will need to raise if the GSEs don’t provide clarity on their losses or capital positions.
Freddie Mac is scheduled to report its earnings on Thursday, while Fannie is set to report on Friday.
Fannie Mae and Freddie Mac give mortgage servicers a break
April 22, 2020 Update: Fannie Mae and Freddie Mac will allow mortgage servicers to take a break on payments for accounts that are in forbearance. Pressure on the GSEs to extend some kind of support to nonbank servicers has been growing, and now they have answers.
The Mortgage Bankers Association said almost 6% of all the mortgages in the U.S. were in forbearance as of April 12. That amounts to about 3 million borrowers. Forbearance allows borrowers to skip payments or make reduced payments for a set time period. The CARES Act allows homeowners with mortgages backed by Fannie Mae, Freddie Mac or another government agency to request forbearance for up to one year if they are experiencing financial hardship due to the COVID-19 pandemic.
The Federal Housing Finance Agency said on Tuesday that mortgage servicers must only make payments covering principal and interest for loans in forbearance for four months. After that, they won’t have to continue making payments while the borrower isn’t submitting payments to them. The move should reduce some of the pressure on nonbank mortgage servicers, which normally have to keep making payments on loans that are in forbearance.
Fannie Mae: longest expansion “likely undone by COVID-19”
April 16, 2020 Update: Fannie Mae said in a press release that the longest economic expansion in the U.S. has likely ended due to the COVID-19 pandemic. The Economic and Strategic Research Group is now projecting back-to-back quarters of real GDP declines in the first half of this year, which technically means a recession.
Even though the housing industry started the year on a strong note, Fannie Mae and the ESR Group expect it to slow significantly in the coming months. They’re seeing problems with both supply and demand due to a sudden increase in unemployment and the fact that many sellers are pulling their homes from the market. Sellers may hesitate to let strangers in to see their home or worry that they won’t get as much money for their home as they would have otherwise.
Although some sellers are worrying about lower prices, Fannie Mae still expects the median price for an existing home to increase from $272,000 last year to $275,000 this year.
Fannie Mae, Freddie Mac won’t bail out nonbank lenders
April 9, 2020 Update: The head of the agency that oversees Fannie Mae and Freddie Mac says the government-sponsored enterprises won’t bail out nonbank lenders. In fact, Federal Housing Finance Agency Director Mark Calabria doesn’t believe the industry is in as dire straits as he thought it was just weeks ago.
He told The Wall Street Journal earlier this week that he doesn’t believe Fannie and Freddie will have to bail out nonbank lenders amid the coronavirus pandemic. He said he hasn’t seen any evidence indicating “a systemic crisis across the nonbank servicers.” He added that if the pandemic lasts a year, then the GSEs may have to do something, but not anytime soon.
The big concern for nonbank mortgage servicers has been the offering of forbearance for borrowers affected by the COVID-19 crisis. Mortgage companies must still make payments to investors while their borrowers are delaying payments, so liquidity is a concern.
However, Calabria said they haven’t seen widespread use of forbearance. Only 2% of borrowers whose mortgages are owned by the GSEs had requested forbearance as of Apr. 1. He also emphasized that the GSEs don’t have the capital needed to provide financial support to nonbank lenders right now. Fannie Mae and Freddie Mac are trying to build capital so they can be recapitalized and released from conservatorship.
Calabria also told Housing Wire this week that he doesn’t consider any nonbank mortgage servicers too big to fail. That means they shouldn’t expect the government to bail them out if they do get into a liquidity crunch.
Bill Ackman on Fannie and Freddie
April 6, 2020 Update: In a letter to investors published on April 6th, Bill Ackman wrote:
Fannie Mae and Freddie Mac have already proven themselves essential to the U.S. housing fi nance system, which is a critically important bulwark for the U.S. economy. The current disarray in the non-agency residential and rental housing mortgage market, which has recently occurred as a result of the crisis, will remind the Congress and the American people of the critically important function that Fannie and Freddie perform during periods of economic stress.
The crisis has also made manifestly clear the need to recapitalize Fannie and Freddie so that the private sector becomes the first loss capital in the housing finance system, which should provide even greater urgency for a recapitalization and privatization of the two companies. While we wait for the necessary steps for this to occur, both companies are quickly rebuilding needed capital through retained earnings. For these reasons, we believe that Fannie and Freddie will emerge as even stronger and more essential enterprises after the crisis.
Another bailout for Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac could need a bailout if the coronavirus pandemic lasts more than three months. That’s according to Mark Calabria, director of the Federal Housing Finance Agency, which oversees the government-sponsored enterprises.
He made the comment in an interview with the Financial Times. He told the news outlet that Fannie and Freddie have enough resources to survive a lockdown of approximately 12 weeks. However, after that, Fannie Mae and Freddie Mac would need a bailout from Congress or the Federal Reserve. He said if the lockdown lasts more than two or three months, the mortgage market will undergo extreme stress along the lines of what happened during the Great Recession.
One other thing that could cause Fannie Mae and Freddie Mac to require a bailout is if 25% of people need to ask for forbearance. He said the system doesn’t have that level of liquidity. Congress recently passed the CARES Act, which allows homeowners whose mortgages are backed by Fannie, Freddie or another government agency to request forbearance for up to a year.
Calabria said that as of the beginning of this month, about 300,000 borrowers had requested forbearance on mortgages backed by Fannie and Freddie. He estimates that about 700,000 borrowers will request forbearance.
Fannie Mae-backed borrowers in better position than FHA loans
April 2, 2020 Update: Mark Calabria, director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, warns that the U.S. mortgage industry will undergo major strain if the coronavirus pandemic lasts at least six months. Mark added in his interview with CNBC that if it only lasts two or three months and most workers are rehired at their old jobs, then the industry will be able to weather the storm.
Calabria believes some borrowers will be disproportionately affected by the crisis. He said those with loans backed by Fannie and Freddie are probably in a stronger financial position than those whose loans are backed by the Federal Housing Administration. He believes the FHA market will be “the first canary in the coal mine… in terms about what the broader implications are going to be.”
There’s no conspiracy about Fannie Mae, Freddie Mac
March 30, 2020 Update: One of the running themes about Fannie Mae and Freddie Mac has been a conspiracy theory about their accounting procedures. The big problem is that the net worth sweep is over, but the two government-sponsored enterprises have reported share payments to the government on their balance sheets.
Tim Pagliara and Grant Stark of CapWealth Advisors told ValueWalk that there is no conspiracy. They said the government, Fannie and Freddie and all other stakeholders involved are working together to get the GSEs out of conservatorship. Pagliara called the claims of accounting chicanery “irresponsible.”
“One of the points I made too is that the same people that now own a lot of the common shares and own a lot of the preferred shares, they are the same source of capital they will be relying on to reprivatize these companies,” Pagliara told ValueWalk in an interview. “So everybody is working together on this, and again, the conspiracy theory that the accounting is wrong is just not true.”
Stark also said that the common shares do have value, and the preferred shares are worth $25, even though they currently trade much lower than that.
“This isn’t a conspiracy,” he emphasized.
They also said there can be no conspiracy with Fannie Mae and Freddie Mac because all stakeholders must win, including those who own common shares. Pagliara said the government owns nearly 80% of the common shares of the GSEs, so it is incentivized to benefit common shareholders.
“This has to be successful,” he said. “Everybody has to win, so the 20% of non-government shareholders have to win. The government taxpayers have to win. Preferred shareholders have to win.”
“When you put it in that kind of context, and you try and say the government is going to be doing bad accounting or trying to trick somebody, it’s like shooting yourself in the foot,” he added. “They want to get it done. They have stated that this is an objective.”
March 24, 2020 Update: Both the common and preferred shares of Fannie Mae and Freddie Mac have taken a beating alongside the rest of the stock market. Both issues are also soaring today with the rest of the market. However, analyst Dick Bove of Odeon Capital notes that there are some distinct differences between the common and preferred shares.
In a note on Monday, he argued again that investors should buy the preferred shares and avoid the common shares. He believes the value of the common shares is driven by the outlook for both government-sponsored enterprises and the actions taken by the Trump administration to free them from their conservatorships.
Bove also believes the Trump administration’s actions will cause both GSEs to lose market share and reduce the profits on the units they sell. He also believes the administration won’t do anything to release Fannie and Freddie from conservatorship in less than two to five years. He argues that the common shares “have little if any value.”
However, Tim Pagliara and Grant Stark of CapWealth Advisors told ValueWalk in an email that the common shares do hold value. They believe the outlook of Fannie Mae and Freddie Mac is good and that no other company can do mortgages as well as the GSEs have been doing them. They do prefer the preferred shares of Fannie and Freddie, but they still see long-term value in the common shares as well.
On the other hand, Bove notes that the value of the preferred shares of Fannie Mae and Freddie Mac is driven by the court cases. The courts have been increasingly siding with shareholders. Plaintiffs argue that the government took their private property without just compensation and that they should receive something for their investment.
Fannie Mae, Freddie Mac preferreds are oversold
March 16, 2020 Update: Unsurprisingly, shares of Fannie Mae and Freddie Mac have been plunging along with the rest of the market. Both the preferred and common shares have been tumbling, but bank analyst Dick Bove of Odeon Capital said on Friday that the preferred shares are oversold.
He again reiterated why he believes the preferred shares of the government-sponsored enterprises are valuable and why he sees no value in the common shares. He said the courts seem to be moving in favor of the holders of preferred shares. Bove believes Fannie Mae and Freddie Mac will eventually start paying dividends to shareholders again.
Although Bove has said repeatedly that he doesn’t believe the common shares of Fannie and Freddie are worth anything, Tim Pagliara and Grant Stark of CapWealth Advisors do see value in them. In a recent interview with ValueWalk, they explained why the common shares do have value.
This timeline shows what to expect when in Fannie Mae, Freddie Mac
March 12, 2020 Update: Tim Pagliara and Grant Stark of CapWealth Advisors shared this timeline for Fannie Mae and Freddie Mac. It was put together by ACG Analytics.
The timeline starts when Mark Calabria was confirmed as director of the Federal Housing Finance Agency in April 2019. It includes the court decisions that have been made so far. The timeline also shows the settlement window, which is the period of time the U.S. government has to settle the court cases that are running against it.
The timeline predicts the finalization of the capital rule in the second half of this year and the final version of the amendment to the preferred stock purchase agreement in the last quarter of the year. It assumes that Fannie Mae and Freddie Mac exit their conservatorships and operate under a consent decree for three months in 2021 and then hold their equity offering in late 2021 or early 2022, followed by the end of the consent decree in late 2022 or early 2023.
We’ve received permission to share the timeline here:
March 9, 2020 Update: The coronavirus is having a sweeping impact on the global economy. In the U.S., the coronavirus is already affecting the housing market, including home finance giants Fannie Mae and Freddie Mac.
24/7 Wall Street explained how the coronavirus could hurt Fannie Mae, Freddie Mac and the rest of the housing industry. In response to the virus, the Federal Reserve cut the target for the federal funds rate by 50 basis points. This is impacting the mortgage-rate. For 30-year mortgages, the rate declined to a 52-week low of 3.13%. However, the rate has risen a bit to 3.19% since then.
Mortgage rates have been trending downward since November 2018, although they do bounce around a bit. Because of the other impacts the coronavirus is having on the housing industry, it seems like mortgage rates could remain suppressed, although it’s too early to know for sure.
The coronavirus has weighed the heaviest on China, so building materials imported from the country are impacted. Cargo traffic coming into Los Angeles declined by about 25% last month as ships canceled their plans. Total container volume could fall by up to 15% year over year for the first quarter.
Approximately 20% of building materials in the U.S. come from China. Such materials include drywall, flooring and lighting materials. Since the supply is being cut, prices for these materials are expected to rise.
As the prices of building materials rise, so do the prices of new homes. Higher prices also mean lower demand from first-time home buyers. Some building projects could be canceled or delayed, which will reduce the inventory of hoes for sale while raising prices.
Home builder Toll Brothers reported that it couldn’t sell 11 homes because there weren’t enough building materials due to the reduced supply from China. That isn’t a lot as the company sold more than 1,600 homes, but that number will likely rise as the full impact of the coronavirus is felt.
Fannie Mae transfers credit insurance risk on $31B in loans
March 5, 2020 Update: Fannie Mae announced that it has finished two Credit Insurance Risk Transfer transactions. They are the first such transactions of 2020, and they cover $30.7 billion of unpaid balances on 21- to 30-year single-family loans. The loans were previously acquired between July and October 2019.
Together, the two transactions transferred almost $1 billion of mortgage credit risk. The transactions are part of the government-sponsored enterprise’s push to reduce risk for taxpayers by transferring it to private hands. So far, Fannie Mae has agreed to acquire about $11.6 billion of insurance coverage on $435.2 billion in single-family loans through the Credit Insurance Risk Transfer program.
With the first of this year’s transactions, the GSE retains risk for the first 35 basis points of loss on $18.5 billion in single-family loans. If that $64.6 million is exhausted, 23 insurers and reinsurers will take the risk on the next 300 basis points of loss on the loans up to $553.6 million.
With the second of the transactions, Fannie Mae retains risk for the first 40 basis points of loss on $12.2 billion in single-family loans. Beyond that first $48.8 million, 17 insurers and reinsurers will take over the next 350 basis points of loss up to about $427.2 million.
Coverage for the two transactions lasts 12.5 years. The coverage may be reduced after one year and every month after depending on the paydown of the loans being insured and the amount that become significantly delinquent.
Canyon Capital dove in on Fannie Mae, Freddie Mac
Feb. 27, 2020 Update: Preferred shares of Fannie Mae and Freddie Mac are one of Canyon Capital Advisors’ top five holdings in their Canyon Distressed Opportunity Fund III. According to the fund’s fourth-quarter letter to investors, which was reviewed by ValueWalk, the fund’s management expects the net worth sweep to be eliminating, thus benefiting the GSEs’ preferred shares.
They note that the GSEs issued new senior preferred stock to the U.S. Treasury when they entered conservatorship during the global financial crisis. The terms of the senior preferred stock calls for the Treasury to sweep up all of Fannie Mae’s and Freddie Mac’s net income via quarterly dividends. That leaves the GSEs with very little equity capital to absorb losses and puts taxpayers on the hook for any losses. It also wipes out the economics for junior preferred and common shareholders.
Canyon Capital built a position in the junior preferred shares because the government has been focusing more and more on housing finance reform and ending the conservatorship. The fund’s management believes this could bring an end to the net worth sweep and a recapitalization of Fannie Mae and Freddie Mac, which they believe could benefit the junior preferred shares.
Feb. 26, 2020 Update: Investors in Fannie Mae and Freddie Mac have been hoping for a nice payout when they finally exit conservatorship. However, Federal Housing Finance Agency Director Mark Calabria said they shouldn’t expect any such windfall.
In an interview with Bloomberg on Tuesday, he warned that the capital raise will significantly dilute the holdings of anyone who owns shares in the government-sponsored enterprises. He also pointed out that shareholders haven’t been paid a dividend in over 10 years.
Calabria again said he thinks investors should’ve been wiped out when regulators took over control of Fannie Mae and Freddie Mac during the financial crisis. He added that if such a situation happens again, investors could be wiped out.
Calabria also said when Fannie and Freddie do finally return to the public markets, it could be the “largest equity offering ever.” Officials are working with investment bank Houlihan Lokey to determine guidelines for the offering. For example, one thing being considered is whether Fannie Mae and Freddie Mac should go public at the same time or whether they should go separately.
Treasury answers key questions about Fannie Mae, Freddie Mac
Feb. 25, 2020 Update: Questions about what the federal government will do with Fannie Mae and Freddie Mac continue amid the battle between shareholders and the government. However, the government is apparently planning to make it more difficult for the government-sponsored enterprises to do business while also trying to convince shareholders to provide capital for them.
Lawmakers sent a letter asking questions about plans for the GSEs. Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria answered those questions in a letter of their own this month.
He said Fannie Mae and Freddie Mac will likely continue to see “limited and tailored government support” after they exit conservatorship. He believes the government will have to offer confidence that the GSEs will be able to meet their financial obligations.
The answers to the questions appear to guarantee that Fannie and Freddie will still be able to support the $5 trillion in mortgage bonds they already do. However, the answers may not be good for the GSEs’ shareholders. Rather, some of the responses indicate continued plans to remove the advantages that set them apart from other companies in the mortgage industry.
Shareholders may not be pleased to hear that the government plans to make it easier for competitors to come in and take business from them. The question now is how the government will be able to convince investors to provide capital to Fannie Mae and Freddie Mac even while taking some of their business away.
Fannie Mae reports Q4 and 2019 earnings
Feb. 13, 2020 Update: Fannie Mae released its fourth-quarter and full-year earnings report before opening bell this morning. The firm posted $4.4 billion in net income for the fourth quarter, bringing its full-year net income to $14.2 billion.
Net revenue came in at $6.2 billion for the fourth quarter, comfortably beating the consensus estimate of $5.35 billion. In the third quarter, Fannie Mae reported $5.6 billion in net revenue. Full-year net revenue for 2019 came in at $22.1 billion, compared to the $21.9 billion that was reported for all of 2018.
The firm’s net interest income came in at $5.9 billion, compared to $5.2 billion for the previous quarter. Management cited higher amortization income due to an increase in mortgage prepayment activity caused by declining interest rates.
Fannie Mae’s net worth rose to $14.6 billion as of the end of the year. The firm provided over $650 billion in liquidity to the mortgage market last year, facilitating the purchases and refinancing of more than 3 million homes.
The firm held about 37% of the single-family mortgage-related securities from the secondary market last year, making it the largest issuer. Fannie Mae financed about one in four single-family mortgages in the country. It also provided $70 billion in multi-family financing last year, enabling the financing of 726,000 units of multi-family housing.
Fannie Mae and Freddie Mac are being “strangulated”: Bove
Feb. 12, 2020 Update: President Trump released his 2021 budget recently, and there is an item in the budget that concerns Fannie Mae and Freddie Mac. Congress passed the Temporary Payroll Tax Cut Continuation Act in 2011. The law ends in 2021 and requires the government-sponsored enterprises to charge consumers 10 basis points on every mortgage they guarantee.
According to Odeon Capital analyst Dick Bove, Fannie Mae is estimated to have paid $2.4 billion to the Treasury in 2019 under that law. Freddie Mac is estimated to have paid $1.6 billion last year. He said Trump has now asked Congress to extend the law for another five years. This could add another $20 billion to the Treasury’s income, according to Bove, although he said some put that estimate at $24 billion.
Reducing Fannie Mae’s ability to make money
He said in his note on Tuesday that the reasoning given for continuing the payment is that it would make Fannie Mae and Freddie Mac less competitive while increasing the ability of other companies to take some of their business.
Bove also pointed out that the Trump administration has been emphasizing its desire to hold new initial public offerings for the GSEs. Despite that, he believes the administration is “totally focused on reducing the money-making capabilities of these two companies.” In fact, he argues that officials have already “taken steps that may eliminate 75% of GSE business.”
For example, he said the government has eliminated Fannie Mae’s and Freddie Mac’s ability to make Alt A loans. Officials have also suggested that the QMR “patch” might not be renewed on new mortgages and halted cash-out loans. The government also stopped second family home lending and redefined multi-family loans to include only the building.
He said the biggest problem for the GSEs is that the administration has directed the Federal Home Bank System to help other companies get into the same business.
More obligations for Fannie Mae and Freddie Mac
If the GSEs hold new IPOs as has been planned, the government has said they will have yet another obligation to the government. First, they will have to pay taxes. Second, they will have to pay a commitment fee, and third, they will have to pay funds to the Treasury for the general use of the U.S. government.
“Anyone who thinks that these companies can raise tens of billions of dollars in private capital must also think that selling air conditioners at the north pole is a good idea,” Bove wrote. “These companies are being strangulated and it is likely to set back housing and the economy.”
Here’s what plaintiffs want in the GSE court cases
Feb. 10, 2020 Update: In a note today, bank analyst Dick Bove provided details of two events Odeon Capital Group held last week to discuss Fannie Mae and Freddie Mac. Based on conversations with one of the lawyers for the plaintiffs in the cases against the government-sponsored enterprises and an industry consultant, Bove said the plaintiffs want several things if they win all the major court cases.
For example, they want the Senior Preferred stock issue to be eliminated. They also want the courts to rule that the dividend requirements pertaining to the Senior Preferred shares have been met and no more payments are required. They also want to keep Fannie Mae and Freddie Mac from having to pay commitment fees that were suspended. Additionally, they want a $30 billion fee to be paid to the two GSEs over time by eliminating taxes up to that amount or eliminating future fees up to that amount.
Bove noted that litigants are not demanding any payments be made to shareholders. The view is that if the Senior Preferred shares are gone, Fannie and Freddie will be able to produce significant earnings. From those earnings, the GSEs can then pay dividends and hold a new initial public offering.
He expects the Federal Housing Finance Agency to produce a new capital rule soon. He also looks for a consent agreement to allow Fannie Mae and Freddie Mac to return to the public market outside their conservatorships. The agreement should also allow them to operate without the required capital until the desired level is achieved.
Bove notes that advisors close to the Treasury secretary are being put in place, and the GSEs themselves must make plans for their own initial public offerings. He doesn’t expect anything to be rushed through before the election. Recapitalization and release from conservatorship still seem to be two years away.
Feb. 7, 2020 Update: The Federal Housing Finance Agency awarded a contract to Houlihan Lokey Capital to help figure out a timeline for the privatization of Fannie Mae and Freddie Mac. The move signals the agency’s plan to keep moving forward despite the cases that are pending in the nation’s court systems.
Privatizing Fannie Mae
Appointing an investment bank to work on a plan is just the first step of many required to recapitalize and release the GSEs from conservatorship. The Wall Street Journal notes that one key next step will be to propose and then approve new capital guidelines. The guidelines will dictate how much capital Fannie Mae and Freddie Mac will have to maintain when they become independent.
In 2019, the Treasury Department started allowing the GSEs to retain some of their earnings. However, the size of their balance sheets means they will need more capital than just what is being retained from their earnings.
Other important questions that must be answered relate to how the federal government will remain involved in Fannie Mae and Freddie Mac after they are released from conservatorship. Anyone who invests in the companies after they are recapitalized will want clarity on how the government will back the mortgages they supply. One possibility is that the GSEs will have to pay some kind of fee in exchange for the government’s commitment to backing their mortgages. However, such a fee would impact the flow of earnings to investors, so it will be a key issue.
Jan. 28, 2020 Update: Bank analyst Dick Bove published details on a presentation given by home finance expert Ed Pinto about the status of the mortgage industry and details about Fannie Mae’s and Freddie Mac’s business. Pinto’s views highlight the challenges both government-sponsored entities will face if or when they finally exit conservatorship. The big concern for investors is how Fannie and Freddie will survive in a difficult business.
Pinto believes the housing industry is stressed due to supply side issues related to finance and building practices. He also said Fannie Mae and Freddie Mac are currently being stripped of the products that have generated more than 75% of their business. If the GSEs were placed in the private market, he believes they would lose market share in a troubled industry.
If ignoring the housing issues and focusing on the investment cases for Fannie Mae and Freddie Mac, Bove feels that Pinto’s argument is much different from the view held by most investors. He doesn’t believe the senior preferred shares in the GSEs have been paid off, and he sees problems if the net worth sweep is eliminated, but the senior preferred shares are not.
“While this view is almost violently disputed by investors, it should be noted that every Treasury Secretary in the past 11 years agrees with Mr. Pinto,” Bove wrote. “The current Secretary has publicly stated that Fannie and Freddie have an obligation to the United States government.”
Bove suggested that one solution to the problem facing Fannie and Freddie is to leave all investors with common shares, whose value would be tied to the outlook for the housing industry and their positions in housing finance. He warned that neither of these outlooks suggests the stocks would be worth very much.
Jan. 14, 2020 Update: It sounds like the Supreme Court might refuse to hear the case involving Fannie Mae and Freddie Mac. The court didn’t take any action on the Collins case this past Friday, either positive or negative. Another conference is set for Friday, so it’s possible it will still agree to hear the case. However, bank analyst Dick Bove of Odeon Capital decided to take up the issue as if the Supreme Court chooses not to hear the case.
In a note this week, he said the Collins case focuses on two main issues. The first is whether the position of the Federal Housing Finance Agency’s director is constitutional. Even the constitutionality of the agency could be called into question. The second issue is whether the net worth sweep, which diverts almost all of Fannie Mae’s and Freddie Mac’s earnings to dividends paid to the U.S. Treasury, is valid.
According to Bove, if the Supreme Court ignores the Colins case, it is generally assumed that it will be because it wants to hear arguments on the constitutionality of the FHFA and the position of its director. Arguments on that issue are scheduled for March in the Seila case, which involves the Consumer Financial Protection Agency.
A lower court already ruled that the agency and its director are unconstitutional because they violate the separation of powers called for in the U.S. constitution. If the court upholds that ruling, it will impact the FHFA because the Fifth Circuit Appeals Court ruled in another case that the FHFA and its director are also unconstitutional. A ruling on that matter is expected in June, and after that, the Supreme Court may be able to decide on the net worth sweep.
Fannie Mae and federal court
The Collins case was already returned to the Houston Federal District Court, where the judge is being asked to review it a second time after initially dismissing it and siding with the government. If she changes her mind and sides with the plaintiffs, it will return to the Fifth Circuit, where the plaintiffs are expected to prevail over the net worth sweep.
Two other cases involving Fannie Mae and Freddie Mac are before the Federal Court in Washington D.C. and the Federal Claims Court. The trial in front of the D.C. Federal Court has been pushed back to March 2021, and the judge requested 70,000 documents to review. In the Federal Claims Court case, both sides are expected to set the terms of the debate and trial by Jan. 20, but it will likely take at least a year to review the discovery documents and arguments, so no ruling in the GSEs’ cases is expected for quite some time, barring a decision from the Supreme Court soon.
Jan. 10, 2020 Update: Although Fannie Mae and Freddie Mac remain in conservatorship for the foreseeable future, that isn’t keeping investors from thinking about what must happen for the GSEs to start offering public shares. Bank analyst Dick Bove published a list of several barriers they must overcome for their stock offering to be successful when they exit conservatorship.
Settle the lawsuits
Perhaps the most obvious barrier is all the lawsuits that were filed over the GSEs’ preferred shares. There are currently three major lawsuits pertaining to Fannie Mae, Freddie Mac, the Treasury Department and the Federal Housing Finance Agency. There are also many other cases that aren’t as important.
The GSEs could owe tens of billions of dollars in penalties, fees and repayments, but it’s too early to know what the courts will decide. New investors certainly aren’t going to invest new funds without knowing how much money they will owe. However, Bove maintains that the plaintiffs will win the lawsuits over the preferred shares, so he wants to buy and hold those preferred shares of Fannie Mae and Freddie Mac.
The Fifth Circuit Appeals Court has already ruled that the FHFA director position is unconstitutional. The one thing that remains up in the air as far as the lawsuits go is the net worth sweep, which also must be settled before new capital will be invested. If the net worth sweep is ruled to be illegal, the government will probably appeal the ruling. A series of appeals means it could take years to settle just one of the lawsuits.
Bove believes the judge in the case in front of the Federal Claims Court has already ruled that the plaintiffs can sue the Treasury on behalf of Fannie and Freddie to recover the dividend payments that were made under the net worth sweep. However, the judge continues to try to force the government to hand over discovery documents, although those that have been turned over appear to suggest the government lied to the federal courts.
Documents made available in the Federal District Court also seem to suggest the government lied, so things do look good for the plaintiffs in the cases involving Fannie Mae and Freddie Mac. The Supreme Court has been asked to submit an opinion on the matter, and Bove believes it will also find in favor of the plaintiffs if it decides to review the case.
Get rid of the net worth sweep
Bove explained that many believe the net worth sweep has already been eliminated by the Fifth Circuit Court, but that’s not true. Fannie Mae and Freddie Mac are still paying almost all their profits to the government, although they are supposedly allowed to rebuild their capital. The problem is that it’s unclear how they can rebuild their capital if they continue to pay all of their earnings in dividends. It’s hoped that the lawsuits will force the end of the net worth sweep, but for now, it remains in play.
Bove also believes the GSEs must get rid of their senior preferred stock without having to make a large payment. If they don’t get rid of it, they will continue having to make large payments to the Treasury and won’t be able to earn enough money to be good investments.
Other issues include creating a capital rule that allows the GSEs to grow and defining their business model. Bove also believes they must straight out their balance sheets, which he describes as “fraudulent,” and obtain a consent decree allowing them to operate without the required amount of capital. He thinks they also require Congressional approval to allow for government backing on certain products, must eliminate special program payments to the Treasury, and must raise a lot of money.
Jan. 8, 2020 Update: When it comes to investing in Fannie Mae and Freddie Mac, much of the attention has been on the junior preferred shares, especially as the related lawsuits make their way through the court system. However, looking at the government-sponsored enterprises’ as businesses through the lens of the mortgage market is less encouraging than the probable outcomes of the lawsuits filed over their preferred shares.
Bank analyst Dick Bove released a report this week about the mortgage origination forecasts for this year, which were released in December. He cited numbers from Inside Mortgage Finance.
Forecasts do expect mortgage rates to rise over the next two years, so homeowners will not be incentivized to refinance. It’s predicted that mortgage refinancing activities could fall by much more than 20% this year and next.
The view of home purchase mortgages is better than the refinancing outlook, but it still isn’t great. Experts expect home purchase mortgages to grow 4% this year and 5% next year due to demographics.
Banks not selling their loans
Another problem for Fannie Mae and Freddie Mac is the fact that the nation’s biggest banks with over $100 billion in assets aren’t selling the mortgages they originate. Instead, they’re holding onto them. Additionally, the Federal Housing Finance Agency is restricting the loans the GSEs can buy, which further reduces their potential market share. Bove calls this combination “a relatively doleful take for investing in the GSEs based on fundamentals.”
Dec. 30, 2019 Update – A new year is dawning, and the future of Fannie Mae and Freddie Mac remains undecided. However, 2020 brings a number of important events that will have an impact on what happens to the GSEs. Bank analyst Dick Bove complied a list of key events that will impact Fannie and Freddie in 2020.
Those who have been watching what happens to the GSEs will be especially paying attention to what the courts have to say about them. In the middle of January, the Supreme Court is expected to rule on whether it is willing to hear the important cases related to Fannie Mae and Freddie Mac. If the Supreme Court refuses to hear the cases, their shares will likely decline quite a bit. However, Bove expects the court to agree to hear them.
It will be a while before any major developments come from the Federal Claims Court. However, many will be watching the case there as arguments could begin in January. Washington’s Federal District Court probably won’t have any results until October.
Congress isn’t expected to make any meaningful movements on the GSEs in 2020 either. However, Bove said the Democrats could continue pushing for the status quo to be continued rather than bringing Fannie Mae and Freddie Mac out of conservatorship.
It’s expected that impeachment activities will overshadow major developments in the GSEs except for trade news. Much of the attention will be focused on the Federal Housing Finance Agency (FHFA) as it works on amending the capital rule.
The main event
Perhaps the most important event surrounding Fannie Mae and Freddie Mac during the first quarter will be the release of the new capital rule. Bove explained that the two main issues to be determined in regard to the capital rule are what constitutes assets and what constitutes capital.
According to him, “The FHFA has already indicated that it is willing to play fast and loose with those definitions. For example, its willingness to accept, as retained earnings, a dividend obligation of both companies leads one to believe that whatever the capital rule produced it is likely to extend, beyond credibility, generally accepted accounting principles.”
Bove also said other important things to note include whether assets should be assessed in bulk or according to the mortgage category they fall into and whether market considerations should be part of the computation. He also noted that the rule should indicate whether the capital that’s held should be procyclical or as a reserve.
It should also state whether the actual capital ratio should be variable or fixed and whether it should be set at levels consistent with the traditional banking industry, the mortgage industry or hypothetical stress tests.
The capital rule should also indicate whether other operational considerations should be factored in and if the ultimate ratio assumes government backing of the companies’ debt or guarantees.
The ultimate ratio
Addressing these issues in the capital rule will determine just how profitable Fannie Mae and Freddie Mac will be. They will also influence the three biggest variables as the GSEs look to exit conservatorship. The variables include whether they will be able to offer value to investors, whether investors will be willing to put up the extra funds that are needed, and whether the build-up of retained earnings will meet the needs of the companies.
Bove emphasized once again that for those who care only about the preferred shares of Fannie Mae and Freddie Mac, only the outcomes of the court cases matter. However, those who want to profit off the common shares will care more about the outcome of the capital rule issue.
Dec. 19, 2019 Update: The future of Fannie Mae and Freddie Mac continues to hang in the balance amid debate over what should happen next.
Investors who hold the government-sponsored enterprises’ junior preferred shares are depending on the court system to uphold their rights and eliminate the net worth sweep. However, Democratic lawmakers want everything to remain the way it is.
Democrats scrutinize Fannie Mae, Freddie Mac plan
A number of Democratic senators sent letters to the Federal Housing Finance Agency and the Treasury Department about the GSEs. The letters reveal that the senators don’t want anything to change with Fannie’s and Freddie’s status in conservatorship. Bank analyst Dick Bove offered insight into the senators concerns in a note this week.
For example, they expressed concern that the secondary mortgage market will shrink under the current plan for Fannie Mae and Freddie Mac, and Bove believes it will. They are also worried about there being less funding for affordable housing, and Bove also believes there will be.
The senators were also concerned about a lack of clarity about whether the debt issuances and guarantees provided by the GSEs will be continued. They also wanted to know what Fannie’s and Freddie’s capital requirements will be and whether they will be released from conservatorship before they achieve those capital levels. Bove expects the requirement to be 2.5% of designated assets and that both GSEs will be released before they reach that level under a consent decree.
The senators also wanted to know whether the net worth sweep would be maintained, but Bove believes that is unlikely if they are released from conservatorship.
Depending on the courts
Because the Democratic senators want Fannie Mae’s and Freddie Mac’s status to be maintained, Bove believes it will depend on the courts to move forward the issue on when they will be released from their conservatorship. He added that despite “a great deal of brave talk” from the FHFA, he doesn’t believe the GSEs will be released and recapitalization without several requirements.
He said the courts will have to take care of the lawsuits that are pending over the issue and get rid of the net worth sweep. Additionally, he also believes the courts will have to eliminate the senior preferred shares, which are owned solely by the government. Bove believes the 30-year fixed mortgage must also have a guarantee backed by the government and that “the atrociously improper account standards” put in place must be eliminated.
“These letters to the Treasury and the FHFA are clear indications that the Democrats will resist the elimination of any of the above,” Bove wrote. “Thus, as we have argued, the only place where one will find a solution to the current deadlock is in the court system.”
He continues to expect the courts to eliminate the net worth sweep, which will begin negotiations anew. Investors who hold junior preferred shares have already seen signs of progress on their behalf as one of the courts declared the net worth sweep illegal. However, Bove has made much of what he calls the “accounting chicanery” going on at Fannie Mae and Freddie Mac, as both GSEs have had to pay the net worth sweep in the form of new shares to the government while stating on their financial reports that no dividends were paid.
Previously: There has been plenty of talk about Fannie Mae and Freddie Mac and the government’s proposal to recapitalize them and release them from conservatofrship. However, not everyone may be familiar with the history of these two government-sponsored enterprises (GSEs) and the issues that face them. Bank analyst Dick Bove of Odeon Capital released a primer on Fannie and Freddie this week to help investors understand them and everything that’s happening with them.
Fannie Mae and Freddie Mac: the basics
According to Bove, Fannie Mae has 1.158 billion outstanding common shares owned by the public, and another 131 million shares could be issued related to a convertible preferred stock, which also trades publicly. He estimates that 4.6 billion additional shares could be issued if the U.S. government converts the warrants it holds. The warrants do not trade because they are owned only by the federal government.
Freddie Mac has 650 million outstanding common shares. He estimates that another 2.6 billion shares could be issued if the government converts the warrants it holds.
Fannie has 16 outstanding preferred issues. The government owns the senior preferred shares, which do not trade. Ten of the junior preferred shares have rates between 4.75% and 8.375%. The Preferred S shares yield 8.375% and trade more than all of the other preferreds put together. The Preferred S shares have ranged in price from $5.23 to $14.30 per share over the last 52 weeks. Four of Fannie’s preferred shares are variable rate, while one is a convertible preferred. Par value for nine of the junior preferreds is $50, while five have a par value of $25. The par value of the Preferred S shares is $25.
Freddie has 26 outstanding preferred issues, including a non-trading senior preferred issue owned only by the federal government. Twenty of Freddie’s junior preferred issues have rates between 5% and 8.375%. Like Fannie’s 8.375% issue, Freddie’s also trades more than all the other preferred issues put together. The 8.375% issue has been trading between $5.23 and $14.30 per share over the last 52 weeks. Five junior preferred issues are variable rate. The par value of six of Freddie’s junior preferreds is $25, while 18 of them have par values of $50 per share. There is no available data on one of the junior preferred issues, and the 8.375% issue has a $25 par value.
The U.S. Treasury’s role in Fannie Mae and Freddie Mac
Bove said Fannie Mae borrowed $119.8 billion from the Treasury and has paid $181.4 billion in dividends. The GSE has a $113.9 billion open line of credit with the Treasury. Freddie Mac has borrowed $75.6 billion and paid $119.7 billion in dividends. Freddie’s open credit line with the Treasury is $140.2 billion.
Both Fannie and Freddie guarantee mortgages originated by other firms. They both own mortgages, some of which are secured by the government, and they both own investment securities. Fannie reported $4.321 billion in pretax earnings for the second quarter, while Freddie reported $1.898 billion.
The U.S. Treasury recently released a list of its proposals to bring both GSEs out of conservatorship. The proposals include ending the collection of the current dividend based on sweeping earnings and establishing a plan to recapitalize and release them. The plan also includes guarantees on debt service payments on mortgage-backed securities they issue and some type of ETguarantee on payments for the 30-year fixed rate mortgages. The Treasury must also receive payment for the services it provided.
The Federal Housing Finance Agency agreed to end the profit sweep into the Treasury and wants to establish capital requirements for the GSEs which are well above current levels. The agency also wants to authorize more firms like Fannie Mae and Freddie Mac.
Congress could become involved at some point, but for now, the House of Representatives has no pending bills. While the Senate does have one outline for recapitalizing and releasing the GSEs, it doesn’t have any legislation in the works.
Court rulings on the GSEs
Complicating everything with the GSEs is some court cases filed over the net worth sweep of Fannie’s and Freddie’s profits into the Treasury. The Fifth Circuit Court in New Orleans ordered a lower court to reconfigure the basis of the Treasury dividends and declared the FHFA to be unconstitutional. The Supreme Court may step into this case.
The Federal District Court in Washington, D. C. has requested 70,000 documents from the government to be used in discovery. The court also requires a new trial on whether the FHFA and Treasury acted illegally by commandeering the GSEs’ profits. If so, then penalties should be established in this case.
The Federal Claims Court has scheduled a hearing for Nov. 19 to hear the case about the government taking private property without just compensation.
Bove has said in other reports that he recommends buying Fannie’s and Freddie’s junior preferred shares because he believes the courts will side with shareholders. Because of his expectations, he believes buying the preferred shares now will be like getting a discount on common shares because they will likely be converted as part of the recapitalization process. Several hedge funds have benefitted from the steady increase in Fannie’s and/ or Freddie’s preferred shares, including the top-performing hedge fund of last week.