The Case For Fannie Mae: Unpacking The Motions For Summary Judgment
- Numerous plaintiffs have filed suits challenging the lawfulness of the Sweep Amendment which requires Fannie Mae to quarterly transfer its net worth to the US Treasury.
- This article is a summary of the primary legal arguments from both sides in the motions to dismiss and motions for summary judgment in cases filed by Perry Capital and Fairholme.
- After reviewing 556 pages of complaint and briefs, the plaintiffs have the stronger arguments and should win the motions.
Fannie Mae And Freddie Mac: The Bill Ackman Perspective And Huge Return Potential
- What to do with Fannie Mae and Freddie Mac is an extremely polarizing and stratified topic in Washington.
- Pershing Square's Bill Ackman has concluded, with extensive research to support it, that a private entity isn't viable without a significant increase in cost to insure MBS.
- Even with the dilutive effect of exercising warrants, the Government stands to rake in approximately $600 billion on $190 billion invested. Estimated fair market value of $23-$47 a share.
- Lawsuits are progressing through the courts. Positive strides for the investors, but far from winning their freedom from the government.
- $5.4 billion in dividends from the Second Quarter, 2014 will be paid to the U.S. Treasury.
- Expect increased regulations on GSEs and all financial companies.
- Betting on Fannie and Freddie remain a high risk/high reward investment.
Fannie Mae Q2 Earnings Down, But Credit Quality Up
Blackstone Plan Proves Value Was Taken By Treasury
- Treasury received Blackstone's recapitalization plan.
- Recap plan proves that the equity shares had some value.
- The 3rd Amendment of the PSPA was designed to destroy value.
- Mario Ugoletti's sworn testimony is contradictory to this document.
Fannie Mae & Freddie Mac: A Risk Worth Taking
- Fannie Mae and Freddie Mac seem much more likely to remain operational, as governmental regulators have indicated that they have no superior alternative.
- The Fannie Mae and Freddie Mac investor lawsuit against the Treasury Department is already strong, and seems even more promising as it attracts national attention and rallies prominent lawyers, activists.
- Our self-learning algorithm has a strong bullish signal for Fannie Mae and Freddie Mac in the 3-month and 1-year time horizons.
- Their diminishing risk and huge potential make Fannie Mae and Freddie Mac attractive investments.
- Proposed insurer rules by the FHFA help to ensure that the government will not need to bail out the mortgage giant.
- The confirmation of Julian Castro as HUD Director has depressed the shares lately, but efforts to reform the GSEs do not have the political backing to do much harm.
- Reaffirm my previous price target of $14 per share on higher G-Fees and a recovering housing market.
Fannie Mae Has Adequate Capital To Be Released From Conservatorship
- Evidence seems to suggest that the GSEs can exit Conservatorship as-is.
- Existing legislation provides capital requirements.
- Fannie Mae may have enough capital for release from government control.
- Fannie and Freddie are the best solution for low-cost American home ownership.
- Nobody will question the legitimacy of the warrants until the third amendment is reversed.
Carl Icahn Joins The Fannie Mae Common Stock Gang, Should You?
- Carl Icahn is the newest investor in Fannie Mae and Freddie Mae and joins investors such as Bruce Berkowitz and Bill Ackman.
- The common stock becomes increasingly popular with high-profile investors.
- Fannie Mae's stock price has shown great resilience after extreme levels of volatility in March.
Fannie Mae: Icahn And Ackman Actually Agree On Something
- Shares could be worth $14 each on current fee structure.
- Potential for higher fees mean value could be as high as $23 to $47 per share.
- Short-term catalysts including an end to the Net Worth Sweep or re-listing could boost shares.
- The Third Amendment Net Worth Sweep is illegal.
- Fannie Mae and Freddie Mac have paid back more than they borrowed.
- The largest investor in Fannie Mae and Freddie Mac is the American taxpayer.
- The largest beneficiary of Fannie Mae and Freddie Mac is the American taxpayer.
- Fannie Mae and Freddie Mac saved America during the crisis and are the best solution going forward.
Solutions For Fannie And Freddie's Future, But Profits Still Go To The Government
- No timeline for a resolution will continue to push all profits to federal government.
- Congress halts efforts on bills for mid-term elections.
- 20 lawsuits continue with no end in sight.
- Investor hopes spur the buying and selling.
- Fannie Mae reported $5.3 billion in income yet pays Treasury $5.7 billion in dividends.
- Freddie Mac reported $4.0 billion in income yet pays Treasury $4.5 billion in dividends.
- Both stocks have traded above $1.00 per share for over a year and should re-list.
- The Federal Housing Finance Authority is failing in their fiduciary responsibility to shareholders if they don not permit re-listing.
- Retail investors need institutional support to free the GSEs from Treasury's vampire-like gripe and allow them to recapitalize and rebuild shareholder value.
- Fannie Mae remains a speculative equity investment with a massively tilted risk/reward ratio.
- The Johnson-Crapo draft bill is only in the early stages and the legislative process is already crumbling.
- Dissent among Senate committee members makes success of the reform bill unlikely.
- Winding down Fannie Mae and Freddie Mac does not make economic sense.
Fannie Mae Reports $5.3 Billion Profit In 1st Quarter Of 2014
- Total Comprehensive Income of $5.7 Billion for the 1st Quarter.
- Diluted Pro Forma EPS of $0.93.
- Bill Ackman values these shares up to $47.
- In an absolute worst case scenario Fannie and Freddie need $190 billion.
- Treasury has swept more than $200 billion for deficit reduction.
- Fannie and Freddie employees cannot participate in reform.
Nov. 7, 2013, 8:23 AM
- Fannie Mae (FNMA): Q3 net income of $8.7B up from $1.8B in year-ago quarter. Positive net worth of $11.6B and will pay $8.6B dividend to Treasury.
- The "dividend sweep" will have Fannie paying $82.4B to Treasury this year, and bring the total dividends paid to $113.9B vs. $116.1B in draws from 2008-11. Treasury - of course - retains its $117.1B in preferred stock.
- Press release.
Oct. 31, 2013, 3:08 PM
- Barclays (BCS -1.6%), UBS (UBS -0.2%), and Royal Bank of Scotland (RBS +1.2%) are among those facing suit by Fannie Mae (FNMA) over alleged Libor-rigging, reports Bloomberg, citing a copy of a federal court filing in NYC. The filing hasn't yet been confirmed in court records. All three banks have already settled Libor cases with various regulators.
Oct. 24, 2013, 4:30 PM
- Though the announcement is set for November, it will take at least six months for the lower limits to take effect, FHFA chief Ed DeMarco tells an audience. This should give the housing lobbying groups plenty of time to muster support for softening or eliminating the reductions.
- The current loan limit runs as low as $417K for a single-family home. "Any reduction would be across the board, not just in some parts of the country," says DeMarco.
- Fannie Mae (FNMA). Freddie Mac (FMCC).
- Homebuilder ETFs: XHB, ITB, PKB.
Oct. 23, 2013, 4:00 PM
- A federal jury has found Bank of America's (BAC -2.1%) Countrywide unit liable for defrauding Fannie Mae (FNMA +22%) and Freddie Mac (FMCC +19.4%) by selling them thousands of defective mortgages.
- The judge will determine the amount of the penalty - the U.S. has requested $848M, the gross loss to the GSEs as calculated by its expert witness.
- The suit centered on Countrywide's HSSL - High Speed Swim Lane - program instituted in August 2007, says the government, to keep the music playing as the property market was falling apart.
Oct. 23, 2013, 10:33 AM
- There's more evidence Fannie (FNMA +6.8%) and Freddie (FMCC +7.6%) aren't going anywhere anytime soon as Shellpoint Partners - led by mortgage kingpin Lew Ranieri - pulls a planned MBS offering for the 2nd time this month, citing soft demand. The company had restructured the bond issue - backed by jumbo residential mortgages - by removing some of the riskier loans in exchange for better agency ratings, but it still wasn't able to get the prices it wanted.
- Issuance of nonagency paper had flown earlier this year, but has ground to a halt since interest rates began rising this spring. Additionally, Frannie has begun offering a new security more tied to credit than rates, thus sapping some demand for nonagency bonds.
- Trying to break into the nonagency issuance market, PennyMac Mortgage Investment Trust (PMT +0.2%) last month had to cut prices at least twice on its debut offering. Redwood Trust (RWT -0.6%) - which pretty much had the nonagency field to itself not long ago - has struggled mightily since the spring.
Oct. 7, 2013, 5:16 PM
- Hasn't housing recovered? The National Association of Realtors and National Association of Home Builders send a letter to House representatives asking them to prevent the FHFA from lowering conforming loan limits for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).
- "While there has been some return of private mortgage lending, without the benefit of a federal guarantee, it remains limited and available only to the most highly qualified borrowers ... FHFA Acting Director DeMarco appears to be making decisions above and beyond this authority provided by Congress and may significantly damage local housing markets."
- The FHFA wants to cut the limits beginning in 2014 in order to shrink the GSEs presence in the mortgage market and allow room for private capital to enter.
Sep. 23, 2013, 8:30 AM
- While Washington is finally seriously thinking about how to replace Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), as on many other issues, Republicans and Democrats are deeply divided about what to do.
- Superficially, the argument is about the role of government in the mortgage market, writes the WSJ's Nick Timiraos, but the real question is whether Americans should have "relatively easy access to the pre-payable, 30-year, fixed-rate mortgage?"
- One problem with scrapping Fannie and Freddie is that they - with a government guarantee - back $4.5T of almost $10T in outstanding mortgage debt. Any replacements would have to absorb trillions of dollars of credit and interest-rate risk.
Sep. 11, 2013, 6:49 AM
- Richmond in California has approved a plan for the city to become the first in the country to forcibly acquire underwater mortgages using the power of "eminent domain," which enables governments to seize private property for a public purpose.
- The idea is for the council to work with investor group Mortgage Resolution Partners to buy delinquent mortgages at deep discounts to the associated properties' market valuations, make the loans more affordable for home owners and avert foreclosure.
- However, critics fear that the program could hurt the market for mortgage-backed securities, provoke lawsuits and endanger Richmond's finances.
- The FHFA has said it will press Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) to limit or cease business where eminent domain is approved, a move that would shut off most mortgage financing in the affected areas.
- ETFs: MBB, MBG, VMBS, CMBS, COBO
Sep. 9, 2013, 10:36 AM
- Trying to cut the government's role in the mortgage market - but sure to face plenty of opposition from Congress and industry - the FHFA is preparing to reduce the maximum size of home mortgage loans eligible for backing by Fannie Mae (FNMA.OB -0.8%) and Freddie Mac (FMCC.OB -0.9%). Currently Frannie has a $417K limit in most parts of the country, but $625K in some expensive housing markets, and up to $721K in Hawaii.
- The amounts these limits will be dropped is not yet known, but the plan is set to take effect at the start of next year. The FHFA says it doesn't need congressional approval, but the NAR is already in a huff. "A lot of people who talk about having more private capital, they're not ready to walk the walk," says FBR's Paul Miller.
- Maybe showing the absurdity of the position of those refusing to be weaned off Frannie, borrowing rates for non-conforming or jumbo loans actually dropped below those for conforming last week as banks - flush with cash looking for a return - compete to lend money.
Sep. 4, 2013, 11:04 AM
- The government is an "unbelievable hedge fund," says Bruce Berkowitz (on CNBC), regarding what is turning out to be the state's quite profitable stakes in Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).
- Turning to two of his other big investments, Berkowitz says Bank of America (BAC +0.7%) is going to look like Wells Fargo in a few years and CEO Moynihan is a genius. A bank analyst in the early 90s, Berkowitz made his bones touting the value in Wells Fargo when most thought it was going to collapse under the weight of the California housing bust. On AIG, Berkowitz says book value is currently about $60 per share (price now is $48).
- Of his penchant for having a small, concentrated portfolio: "I don't understand this argument about diversification upon diversification. It's just going to lead to an average performance ... the price you're going to pay for above average performance is short-term volatility."
Aug. 27, 2013, 11:26 AM
- Last week's reopening of the Fairholme Fund just months after it was closed to new investors suggests Bruce Berkowitz has some big investment ideas today that he didn't have earlier this year. At the top of the possibilities list would be a doubling-down of his investments in Fannie Mae (FNMA.OB -3.5%) and Freddie Mac (FMCC.OB -3.4%). The preferred stock of the two make up more than 5% of Fairholme's current holdings.
- Fairholme is among those suing to challenge Treasury's taking all of the GSE's profits.
Aug. 19, 2013, 10:23 AM
- Those Fannie Mae (FNMA.OB +3.7%) and Freddie Mac (FMCC.OB +3.1%) profits that everybody wants a piece of may not be as high as reported.
- The GSEs are masking billions of losses on delinquent loans because of the way they account for them, according to an FHFA report seen by Reuters. The inspector general's study says the companies are allowed an "inordinately long" two years to recognize the cost of 180-day delinquent mortgages.
- Accounting changes are on the way, but the FHFA - noting the significance of the new policy - is allowing the companies until 2015 to make the adjustments and even then they'll be rolled out in stages. Neither Fannie nor Freddie have yet to publicly disclose the changes.
Aug. 16, 2013, 11:15 AM
- Its eye on a recent uptick in low-down-payment mortgages, Fannie Mae (FNMA.OB +8.3%) is considering curbing purchases of mortgages requiring just 3% down. Unlike Freddie Mac (FMCC.OB +7.2%) which stopped buying anything with less than 5% down years ago, Fannie never stopped accepting the paper.
- As the FHA has backed away from the business of late, private mortgage insurers (RDN, MTG) have stepped in, making it possible for lenders to offer reasonably-priced high LTV loans that can be sold to Fannie.
- Fannie doesn't disclose the numbers, but MGIC Investment (MTG) said its 3%-down loans accounted for 5% of business during Q2 ($480M), up from 2.8% a year ago.
Aug. 14, 2013, 7:01 AM
- A former Bank of America mortgage executive who is a defendant in an FHFA lawsuit over MBS and named in a DOJ lawsuit is now plying his trade for Fannie Mae (FNMA.OB).
- "There aren't that many people out there with expertise that don't have a potentially tainted background," says one lawyer. "It's consistent with their policy that they no longer prosecute elite bankers," says William Black, who helped clean up the S&L crisis 20 years ago. Executives "can go next door and ever walk into an entity that is supervised and owned by the U.S. government."
Aug. 12, 2013, 4:14 PM
- Never underestimate the power of a large bureaucracy trying to sustain itself. Freddie Mac (FMCC.OB) is spending hundreds of millions per year to hold onto market share instead of sending the money to the Treasury, reports the FT.
- The money is going to lenders as compensation payments to make up for the fact that Freddie's MBS trade at a lower price than those of Fannie Mae (FNMA.OB). Deutsche Bank estimates it's totaled more than $2B since 2008 and Treasury is demanding changes which would unify the securities of the two GSEs. Fund managers - often limited in the amount of money they can allocated to a single security - have longed balked at the idea.
- Despite the payments, Freddie's market share has declined to the low 30s from its long-term average of 40%.
Aug. 8, 2013, 9:32 AM
- Net income of $10.1B is reduced by $10.2B payment to Treasury, leading to negative $0.03 per share figure in earnings report. After latest payment, Fannie (FNMA.OB) will have sent $105B back to taxpayers against $117.1B received.
- Freddie Mac (FMCC.OB) - which yesterday reported a $5B profit - has sent back $41B after drawing $72B.
- Fannie expects to be profitable "for the foreseeable future" and expects substantial income tax payments to accompany dividend payments to Treasury going forward.
- Full Fannie Mae earnings release.
FNMA vs. ETF Alternatives
Fannie Mae is a government-sponsored enterprise that was chartered by Congress in 1938 to support liquidity, stability and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold.
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