Comment Detail

Comment

I am not sure the FHFA received the submitted comment from me, I did not receive a confirmation of receipt. I will resubmit. Thank you.

September 15, 2021

Honorable Sandra L. Thompson
FHFA Director

Dear Madam Director,

Transferring risk to private investors simply solution.

WASHINGTON, Sept 15 (Reuters) - The regulator overseeing housing giants Fannie Mae and Freddie Mac proposed on Wednesday changes to recently imposed capital and leverage requirements on the pair.

The proposed rule from the Federal Housing Finance Agency would encourage the pair to shift more risk from taxpayers to private investors, while allowing them to support the housing market, the agency said.

“The proposed requirements provide the Enterprises with the necessary incentives to support sustainable lending initiatives by transferring a significant amount of credit risk away from the taxpayers to private investors that are better positioned to take this risk,” said FHFA acting director Sandra L. Thompson in a statement.

SOLUTION:

Mr Howard latest article, “Capital Fact And Fiction”, suggests the 2.5 percent minimum capitalization requirement would be far above Fannie and Freddie’s risk-based requirement, and thus be binding. And he said, If the administration at the same time deeming Fannie and Freddie’s senior preferred stock repaid and canceling Treasury’s liquidation preference, the companies’ core capital would rise to a positive $60 billion, leaving them with a gap to adequate capitalization of $115 billion.”

Keep in mind $115 billion is the amount for both companies.

If the administration would adopt the above suggestion from Mr Howard, the amount for both companies a total of $115 billion to adequate capitalization.

From 2nd Quarter 10Q 2021,
“Fannie Mae is a leading source of financing for mortgages in the United States, with $4.2 trillion in assets as of June 30, 2021.”...

$4.2 trillion x 2.5 percent = $105 billion minus $37.3 billion shareholders equity = $67.7 billion need to raise in a secondary offering to adequate capitalization.

Freddie Mac would need to raise $47.3 billion, the amount needed in a secondary offering to adequate capitalization. $47.3 plus $67.7 = $115 billion both companies.

Mr Howard did not suggest canceling the warrants, but in my first calculation below will not use the warrants. It’s wrong for the Treasury to claim the warrants at 79.9% of the company shareholders equity. Second calculation will include warrants.

Simple Fix

If the Treasury will cancel the liquidation preference, as the government’s been paid back in full plus 10 percent interest and the 79.9% warrants held by the Treasury canceled. A secondary offering could easily raise enough money as to satisfy the capital requirements of our regulator the FHFA. And this could be done at minimum dilution for the rightful owners the Common Shareholders. I will use the number $67.7 billion as an example in the calculation below;

Fannie Mae’s common stock outstanding 1,158,087,567

Fannie Mae’s net earnings 4 billion per quarter, a projection of 16 billion net per year. I think the Market would willingly pay a Market Cap of 230 Billion easily for that amount of earnings: 230 Billion / 16 Billion = Price to Earnings Ratio 14.37 (fair value).

Market Cap 230 Billion / 1,158,087,567 = $198 Per Share Intrinsic Value.

Example: If the company Fannie Mae is required an additional $67.7 Billion as a capital requirement to reach the $105 billion of 2.5% of total assets, and to make the offering attractive the secondary offering could be at an extreme discount of 20% and in this case the secondary offering would price at $158.40 per share;

$67.7 Billion / 158.40 = 427,398,989 million new shares.

Market Cap 230 Billion / 1,585,486,556 Billion Shares = $145.07 Per Share Intrinsic Value.

With the WARRANTS: Fannie Mae’s common stock outstanding 1,158,087,567 diluted by the warrants at 79.9% adds a total of 5,761,629,686 shares outstanding…

Market Cap 230 Billion / 5,761,629,686 = $39.91 per share

Example: If the company is required to hold $67.7 Billion as a capital requirement to reach the $105 billion of 2.5% of total assets, and to make the offering attractive the secondary offering could be at an extreme discount of 20% and in this case the secondary offering would price at $31.92 per share;

$67.7 Billion / $31.92 = 2.12 billion new shares.

After the secondary offering total of 7.8 billion common shares

Market Cap 230 Billion / 7.8 Billion Shares = $29.48 Per Share Intrinsic Value.

The Treasury would not have to provide a consent decree going forward. The Treasury needs to get out of the way. The company could still function for the purpose of its charter.

FROM A PRIVATE INVESTORS POINT OF VIEW:

First Example:
Estimated Net income per year $16 billion / 1,585,486,556 billion shares total after secondary offering = $10.09 per share net income per year; amount of net profits Fannie generates per year.

Secondary Offering priced at $158.40 per share minus $145.07 per share Intrinsic Value after secondary offering = $13.33; the new equity owners are buying $10.09 per share net earnings per year for $3.24 per share; $13.33 minus $10.09 = $3.24

Second Example with Warrants:
Estimated Net income per year $16 billion / 7.8 billion shares total after secondary offering = $2.05 per share net income per year; amount of net profits Fannie generates per year.

Secondary Offering priced at $31.92 per share minus $29.48 per share Intrinsic Value after secondary offering = $2.44; the new equity owners are buying $2.05 per share net earnings per year for $0.39¢ per share; $2.44 minus $2.05 = $0.39¢

Wall Street would snap up a secondary offering on these terms in a minute.
Treasury should get out of the way.

Thank you,

Rodney T Fernandez
3730 Main St.
Moss Point, Mississippi 39563

Shareholder Fannie Mae, Freddie Mac