Freddie Mac and the mortgage market
by PlanMaestro
UPDATE: Bachus is not very keen on this program arguing against the cost to taxpayers and Fannie and Freddie are not cooperating. Hey, was not it voluntary?
To complement Pershing Square’s presentation on the state of the mortgage market, Freddie Mac includes in its quarterly results a review of the housing market that is always very interesting. It starts on page 12.
Regarding Freddie Mac the situation seems to be stabilizing, some would say improving, with almost no draw last quarter (only $100 million in Q3). Very good considering the 10% interest of the government senior preferreds. Not only that, Freddie Mac’s single family delinquencies peaked in February 2010 at a 4.2% and then improved seven months in a row.
The FHFA also released projections that show a future where Freddie Mac might be profitable. Most positive if compared to Fannie Mae for example. To add insult to humiliation, they also reduced the estimated total cost of the GSEs bailout – between $221 billion and $363 billion is the latest tally – slowly recognizing that it was a completely made up number at the beginning while still raising doubts on this most recent count.
At the same time, the Obama administration is trying to persuade the GSEs, through the FHFA, to participate in a program that allows banks and other creditors to write down mortgages and hand off the reduced loans to the FHA. The objective is to find a way to deal with the loans that are severely underwater: almost 1 of every 10 mortgages is more than 25% underwater. This looks like part of the arm twisting of the banks to also participate. The issue is that the GSEs would relinquish their options of collecting from mortgage insurers or putting back loans to banks when a loan defaults. These news might explain the strong performance of the mortgage insurers today.
Long FRE preferreds
Variant Perceptions 
Plan,
Which preferreds do you own?
The former FRE Z series
There is a bit of political risks here. It is very likely that in 2012, their net income breaks even with the senior preferred dividends. Unless government modifies that dividend obligation, this company will become a dead one.
I am not sure though why government treats FRE so badly, compared with banks and AIG.
Because they can. It is one of the few remaining levers to stimulate the economy that do not depend on congress. After the terrible blunder of the low 2009 stimulus package, they are trying to bailout consumers reducing their debt.
Yeah you are right. So if FRE accepts the government proposal for the additional write down, then another huge waive of losses will happen. According to your chart, 9% of loans are 125% LTV, so if only this section of loans are written down to 100% LTV, FRE will need to write down 3% of their total assets, which is 56 Billion.
Without this, I estimate FRE would probably just need to draw another 20 Billion, but now it would need to draw 76 Billion, so at the time they stop losses, they would have drawn 140 Billion. I think at that time if there is no growth in the market, their net income would just be breaking even with the 14 Billion annual dividends for the senior preferreds. That would really make this a zombie company.
Maybe I didn’t understand correctly? If banks write down the loans, will the banks take the loss, or FRE?
Each is independent, FRE and the banks would take care of their own loans
Plan, are you not afraid Obama will wipe you out?
I am more afraid of the republicans that have always hated the GSEs 🙂 It is a small position and it started as a hedged bet
Political risk is an issue and the GSEs have a target on their backs. Paulson’s 10% interest rate on the senior prefs, while he was lending to AIG and all the banks at 5% that had no explicit or implicit government guarantee, is just one example. However, with all that with every month that passes, it is one more month that increases the probability of the GSEs surviving in one form or another. And if they are going to survive, they will have to deal with the pending preferred stocks issue. Remember that Paulson was their salesman in chief around June 2008 with the last preferred stock IPO just months before the collapse.
And you can buy this call option between 2 and 3 cents on the dollar
Plan, how are you feeling about the preferreds with the news of all the meetings between the Treasury and different investment bankers? Looks like we will see something happening shortly.
Boy, just came back from vacation. Do you have some good links?
What I have been reading is that the GOP is getting softer lately on the GSEs and the government is accelerating its efforts to get out of the bailout business. I would prefer it to take a little more time to let FRE show its earnings power.
http://online.wsj.com/article/SB10001424052970204467204576048062199771064.html?mod=wsj_share_twitter
Here are the published meetings, Plan…. Goldman, Paulson, JPM, etc.
http://www.treasury.gov/initiatives/wsr/Pages/DoddFrank.aspx
Other links:
http://www.bloomberg.com/news/2010-12-31/u-s-treasury-met-goldman-sachs-executives-on-fannie-freddie-in-november.html
http://dealbook.nytimes.com/2010/12/31/whos-visiting-treasury-about-dodd-frank/?src=twrhp
I read the prospectus for one of FNM preferreds (T) issued on 2008 and there were serious enough alerts on the perils of buying them including many paragraphs describing negatively the state of the industry advocating for future losses, not to mention a warning that divs were not mandatory neither cumulative… that anyone buying and suffering a loss may have been left with little room for claims. I say this because I also bought a bunch recently but I feel that a 100% redemption is far from a sure thing. Same for restating dividends.
Not much transpiring from these meetings. It looks like the recent GOP backtracking on the privatization of the GSEs could be a more relevant recent event.
http://online.wsj.com/article/SB10001424052970204467204576048062199771064.html
Cautious statements from key Republican members of the House Financial Services Committee are a shift from the debate over the Dodd-Frank financial overhaul last spring and summer, when Republicans blasted the Obama administration for omitting Fannie and Freddie from the bill.
I still think that there are risks specially if things start to move fast in January with the expected Treasury reform proposal. If the executive and congress punt again that is a different situation considering that the recent efforts to put AIG and Ally back in business without wiping out the common equity could be a good precedent. My position is still small and not planning on adding until getting more clarity.
ok, thanks!
well… new doubts.
http://www.bloomberg.com/news/2011-01-03/bank-of-america-sees-2-billion-charge-on-home-loans-insurance.html
I contacted the reporter about the loans with total unpaid principal of 127 billions and asked him if this was a typo for 1.27 billion. He said no. What do you make of this?
In what context, for FRE or BAC? It looks good for BAC and FRE has reserved for an end of the world situation so it does not affect their situation that much. It would have been nice to recover more than that but FRE’s risks are all political not business.
I was planning to post this link and discuss, and only to find that you a a bit quicker than me.
This is good for FRE because the banks are buying back bad loans.
The major risk is political, as Plan said. I have never had experience with such situations, so if they want to take FRE private, what will the outcome for the preferred stocks be? I know they have to deal with it in some way. They can’t just say ok, you are wiped out, but I am not sure what are the options for them?
FRE.
But I am ok with your perspective. Thanks.
I keep coming back to this thread perhaps looking for solace. As I opened a small position with preferreds I keep digging for opinions that may contest my thesis. And I just found one.
http://www.thestreet.com/story/10966220/3/fannie-and-freddies-37-billion-question.html#
Briefly, Hempton of Bronte Capital argues that long preferreds is a trade against big Wall Street banks like C, BAC, JPM and GS all of which would want the creation of several mini Fannie and Freddie that they will control… “dismantling Freddie and Fannie at maximum loss, means maximum transfer to Wall Street”.
If this is the scenario, and given the recent meetings between GS, JPM, John Paulson and others, we little guys have very little chances of coming up even??