FNMA: my take on recent headlines

The resolution of Fannie/Freddie will be complicated and messy. The political nature of this situation will ensure that words are carefully chosen, news is advantageously leaked, and developments are framed in the best possible light. The key will be separating the tremendous amount of noise from what actually matters. If investors are solely focused on news headlines, the next 12 months will be a confusing mess. This is why my original post instead focused on Administration incentives. And if you solely focus on incentives and ignore the noise, my conclusion is that a swift global settlement between the FHFA/Treasury/shareholders makes […]

FNMA: developing a recapitalization framework

My original FNMA post was focused on understanding the GSE model, why it failed, what happened, and where we go from here. It tried to explain how Administration incentives and legal constraints could shape the sequence of events over the next 15 months. I suggested that the junior prefs offer a superior risk-reward vs. the common shares in most recapitalization scenarios, but I didn’t fully walk through how that math could change based on different assumptions. The goal of this post is to lay out the analysis in a bit more detail and better understand the range of potential outcome […]

FNMA: new capital agreement

As expected, FHFA and Treasury announced their negotiated letter agreements allowing Fannie and Freddie to retain more capital. The Fannie and Freddie modifications can be found on the FHFA’s website: https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Mark-Calabria-on-Letter-Agreement-with-Treasury-to-Increase-Fannie-Freddie-Capital-Retention.aspx I’ll provide a few observations. (1) As opposed to allowing unrestricted earnings retention, the agreements instead increase the capital reserve buffer to specific thresholds – $25bn for Fannie and $20bn for Freddie. The most recent capital buffers were $3bn for each entity. Nevertheless, this will immediately suspend dividends to Treasury. (2) As suggested in the press, the increased capital reserve buffers will also increase Treasury’s senior preferred liquidation preference […]

Fannie Mae (FNMA): preferred shares are attractive at ~50 cents on the dollar

This wouldn’t be much of a special situations blog if I didn’t discuss Fannie Mae and Freddie Mac (the “GSEs”) at some point. I’ve followed the GSEs at a high level and recently decided it was worth developing an updated and refined view. This situation has dragged on and consumed a considerable amount of the event-driven community’s time and patience, yet most investors have little to show after a decade. Investors have been disappointed countless times over the years, however I do think this specific moment is unique and different for a variety of reasons. Fannie and Freddie securities have […]