Comment Detail

Comment

February 16, 2022

Honorable Sandra L. Thompson
FHFA Director

Dear Madam Director,

Transferring risk to private investors 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:

If the administration would deem Fannie Mae’s senior preferred stock repaid and canceling Treasury’s liquidation preference, the company’s core capital would rise to a positive $47.4 billion. The senior preferred stock was not a perpetual equity investment before the Net Worth Sweep took place. No Perpetual Dividend payment under the 2008 agreement when the company was first taken over; All the money sent to the Treasury should be credited to the payoff of the Liquidation Preference and cancel the SPS. The SPS can be thought of as a kind of bond with a coupon amount of 10%, the SPS is not Common Stock. As of December 31, 2021, Fannie Mae has paid to the Treasury $181.4 billion on the amount of draws from the Treasury 119.8 billion, a difference of $61.6 billion.

Richard Epstein wrote

THE FHFA AND TREASURY RIPPED UP THE OLD AGREEMENT.

THE EXISTING SHAREHOLDERS, NOT THE TREASURY, ARE THE ONLY PERSONS TO WHOM THAT DUTY IS OWED.

THE CONSEQUENCES HAVE BEEN HUGE. WITHOUT THE THIRD AMENDMENT, VIRTUALLY ALL THE SENIOR-PREFERRED STOCK WOULD HAVE BEEN REDEEMED.

NOTE: REDEEMED

Article writing April 5, 2016

Professor Richard Epstein

Quote “Second, HERA authorized the newly minted Federal Housing Finance Agency (FHFA) to place any impaired corporation into a conservatorship under its control “to preserve and conserve the assets” of the corporation in conservatorship, and to manage its operations until it returned to health, at which point the conservatorship would end, and the business would return to private ownership. The existing shareholders, not the Treasury, are the only persons to whom that duty is owed.” End of Quote

Quote “The conflict of interest took a more ominous turn with the adoption of the Third Amendment between FHFA and Treasury nearly four years later. At that time, the market had quieted down, and the GSEs were making timely dividend payments on Treasury’s preferred stock. Nonetheless, FHFA and Treasury ripped up the old agreement, and substituted in its place a new deal that created a “net worth sweep” whereby all of the funds received by the GSEs were paid over to Treasury as a dividend, even in amounts far in excess of the original 10 percent dividend. The consequences have been huge. Without the Third Amendment, virtually all the senior-preferred stock would have been redeemed. With the Third Amendment, about $128 billion that could have been used to redeem the preferred shares has been reclassified as a dividend payment, rather than a return of capital." End of Quote

Link: https://ricochet.com/326448/archives/fannie-freddie-fiasco/

Mr. Howard article, “Capital Fact and Fiction”, suggests the 2.5 percent minimum capitalization requirement would be far above Fannie and Freddie’s risk-based requirement. Quote “(September 2021). This post gives the facts about Fannie and Freddie’s credit losses following the 2008 mortgage crisis, and the changes in the credit quality of their books and their guaranty fees since that time. It also details how Mark Calabria “used four contrivances [which I list and discuss] to artificially engineer a result for the required amount of Fannie’s ‘risk-based’ capital that was greater than his arbitrary minimum of 4.0 percent.” It notes that “there is a huge difference between the capital required by a risk-based standard for Fannie and Freddie based on fact, and one based on fictions invented by those who oppose the companies on ideological or competitive grounds,” and adds that, “developing and implementing a fact-based capital rule for the companies is astonishingly easy,” as I go on to explain." End of Quote.

Link: https://howardonmortgagefinance.com/2021/09/07/capital-fact-and-fiction/

Fair Market Value as of 02/15/2022

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

Fannie Mae’s net earnings 5 billion per quarter, a projection of 20 billion net per year. I think the Market would willingly pay a Market Cap of 300 billion easily for that amount of earnings: 300 billion / 20 billion = Price to Earnings Ratio 15 fair value.

Market Cap 300 billion / 1,158,087,567 = $259 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 300 billion / 5,761,629,686 = $52.06 per share

4,603,542,119 Treasury Common Shares x $52.06 = $239 Billion

1,158,087,567 Common Shareholders x $52.06 = $60 Billion

If the administration would adopt the above suggestion the amount for Fannie Mae a total of $105 billion to adequate capitalization.

From Fannie Mae 10K 2021,
“Fannie Mae is a leading source of financing for mortgages in the United States, with $4.2 trillion in assets as of December 31, 2021.

$4.2 trillion x 2.5 percent = $105 billion minus $47.4 billion shareholders equity = $57.6 billion to adequate capitalization.

The Treasury could provide a consent decree, business line of credit, or funding from a private corporation, in the amount of $57.6 billion. The company’s net income at $20 billion yearly can easily qualify for such a loan.

The Treasury to claim the warrants at 79.9% of the company shareholders equity is absolutely wrong in so many ways. If the Treasury is determined to exercise 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 300 billion / 5,761,629,686 = $52.06 per share

4,603,542,119 Treasury Common Shares x $52.06 = $239 Billion

1,158,087,567 Common Shareholders x $52.06 = $60 Billion

If the Treasury would cancel the Liquidation Preference and Senior Preferred Stock the Treasury is looking to cash in at $239 Billion.

The Junior Preferred Stock are not due any amount of accumulated backward dividends. There is no hurry whatsoever to settle with the JPS Shareholders... The advantage of the JPS is in a receivership; And receivership is not in discussion any longer; the conclusion, the GSEs business model, simply there’s no better; No reason to replace. So, Fannie Mae can issue, at a later date in time, Junior Preferred Stock replacing the higher dividend payment to the existing JPS at a lower rate. The JPS are on the books at a small amount of company equity, in the amount of $19.1 billion. New offering replacement for the existing JPS lower rate; the JPS Shareholders receives Par Value.

Exit from conservatorship that benefits all stakeholders—the government, existing and new shareholders, and homebuyers.

Thank you,

Rodney T Fernandez

Shareholder Fannie Mae, Freddie Mac