Tuesday, May 6, 2008

Earnings review today: FNM!!

Some notes:

  • Earnings etc., yes, you could take with grain of salt. That's accounting #s.
  • You shouldn't mess with capital though. At least in the short run (2-3Qtrs ahead) credit losses are much smaller than the amount of capital being thrown at it periodically.
  • This is as of 3/31. Which doesn't include the bulk of massive spread tightening (price increases) in MBS since BSC backstop details were finally understood (3/29 I think) and new purchases since then. You could be looking at net yield of 100bps+ next earnings. No I am not kidding, I see this with my own eyes.
  • Writedown on AAA bonds reflect prices in the market and not value. With 30+% credit support I expect $0 cash to materialize as loss and has 99.99% chance of being right unless everything FNM owned in Subprime AAA is manufactured trailer park homes (which is not the case, clearly).
  • In the cons, I only have objections with the amount of credit "enhancement" from people who need enhancing themselves, Mortgage Insurers. PMI is payable monthly by the borrower so that's less of a problem. However, the pool coverage is paid upfront so hopefully the insurance is good for that amount. I just checked MGIC may have about $5B equity and lines, and FNM by itself has $26B notional insured with them (so it's like 5-7B exposure assuming very severe losses) . Again while for FNM that amount of deficiency isn't too troubling, it does prove MTG/RDN/PMI operates exactly like ABK and MBI. And that's very troubling because we'd never really find out what their capacity is until it's too late.
  • Increasing prices at the time of no competition (80% of market is now FNM/FRE). Not a bad deal especially if you can lever up even more from the extra 5% surplus release this morning. The gov't is now taking the lapdog role very reminiscent of Clinton (boy) era. I expect if Clinton (girl-dude)/ Obama makes it the GSEs will actually be allowed to run with ZERO capital but that's for a debate some other time.

Conclusion: Details suggest pricing and lending may lead house prices (they basically front run house price declines and increase pricing in anticipation of more declines). Nibbling on calls and long FRE for speculation purposes that FRE beats, due to 1. later by a month reporting close date capturing lots of MBS improvement and 2. generally leading FNM in credit loss by 1 quarter so I reasonably expect the amount thrown into the pile maybe smaller than the most dire predictions.


Neil said...


tip of the hat, nice call on FNM!

MTGSPY said...

good luck on the next trade neil.

Ivan Boesky said...

I see the point of FRE FNM basically owning the mortgage market going forward. Now is probably a decent time to take on more risk in originating new securities by gearing even higher.

I suppose my only question to you is are their current holdings not too bad to weather the current storm and pull through? Or will all the risk they took during bubble years haunt them like the ghost of x-mas past?

MTGSPY said...

I shown u the caveat already in that picture. MTG and RDN holds the key in credit. FNM is just one of their customer ($26.6B account for MGIC, for example).

But in total what do they have? $3B equity value? That's the problem my friend.

FNM says somewhere they got, 1.1, 2% or something like that for their Alt-A. Does that mean you should expect no more than 5% loss per $1 insured? If that's the case than RDN and MTG will be NEAR DEATH but will bleed just enough to live the rest of their days in obscurity. And FNM in GLORIOUS LOOT of them AND the taxpayers.

Good luck.