Monday, February 8, 2010

Fannie Mae Freddie Mac in Limbo, Speculators, well, Speculating (FNM; FRE)

UPDATE: From Options Insider a look at the first story:
...If this is the case, the investor is extending the short put position out to the January 2012 contract and expecting the government agency to ultimately survive the next couple of years. In this scenario, the trader keeps the $0.40 in premium on the sale of the fresh batch of put options if Fannie’s share price rallies above $1.00 by expiration in 2012. But, there are a other possible explanations for the trade. It is possible that the open interest at the March $1.0 strike is unrelated to today’s activity. In this second scenario, the trader is essentially predicting that shares will erode ahead of March expiration....MORE
Original post:
Regular readers know we are long term bearish on the common equity of the former GSE's.

It is a lock that mortgages will continue to be originated and securitized, less so that Fannie and Freddie will survive in their current form and almost inconceivable that common shareholders will realize more than book value (a negative number).

The companies currently have negative cash flows and if and when they turn positive, the claims of the debtholders and preferred stock holders, including the U.S. Treasury, will suck up everything for the next decade.

Here are some of the recent takes on where this might end up. We have a lot of stuff on these two, If you are interested, do a 'Search Blog' using the keywords Fannie or the symbols FRE and FNM.
First up MarketBeat last Friday:

‘Hog-Wild’ on Fannie Mae Puts

In the world of options, it’s easy to stick out.

This afternoon’s Options Update from Interactive Brokers highlighted a large position traded Friday by an investor in Fannie Mae options.

“Mortgage financier Fannie Mae jumped onto our ‘most active by options volume’ market scanner after one investor went hog-wild with put options,” the note said.

The investor bought 118,000 March $1 put contracts at $0.15 a piece and sold 118,000 January 2012 $1 puts for $0.40 each. The trade brought a net credit of $2.95 million to the investor.

IB has two scenarios for the large trade.

  1. Open interest of 156,689 puts at the March $1.0 strike indicate the trader could be buying-to-close a previously established 118,000-lot short put position initiated back in September of 2009. If this is the case, the investor is extending the short put position out to the January 2012 contract and expecting the government agency to ultimately survive the next couple of years. In this scenario, the trader keeps the $0.40 in premium on the sale of the fresh batch of put options if Fannie’s share price rallies above $1.00 by expiration in 2012....MORE

Next up Bloomberg (via BusinessWeek) on the Government's investment in the two:

No Turning Back on Fannie, Freddie, Lockhart Says (Update1)

The U.S. investment in Fannie Mae and Freddie Mac may be too deep to effectively transition the mortgage-finance companies out of government control and back into the hands of private investors, their former regulator said.

“I would love to figure out how to get there, but I think we may be too far along the line of government involvement,” James B. Lockhart III, who ran the Federal Housing Finance Agency and its predecessor agency from 2006 until August 2009, said in a Bloomberg Television interview today.

Lockhart, 63, said he wasn’t excited about putting the companies into conservatorship in 2008 and pushed back against suggestions to take the more drastic step of receivership. Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, were seized by FHFA 17 months ago because of their risk of failing and have since survived on $110.6 billion in taxpayer- funded aid.

“Most of that money will never be seen again,” said Lockhart, who is now a vice chairman for Invesco Ltd.’s WL Ross & Co. “They were just allowed to leverage themselves so dramatically.”>>>MORE

From Sunday's Washington Post:

Mortgage giants GSEs in limbo: In housing, a dangerous policy vacuum grows.

THERE IS NO END in sight to the federal bailout of Fannie Mae and Freddie Mac. President Obama's fiscal 2011 budget proposal said as much in a few phrases that promised nothing more definitive than continued "monitoring" of the two mortgage giants, which have been operating since mid-2008 in the legal and organizational limbo known as government "conservatorship." The administration had said its plans for definitive reform could be expected "at the time of the budget," not in the budget itself, so technically this doesn't count as a broken promise or a blown deadline. Still, as the two agencies' chief regulator, Edward J. DeMarco, gently reminded congressional leaders on Tuesday, conservatorship was intended as a "timeout" during which policymakers could reinvent the entities. With an election year upon us, that timeout is looking more and more like a cop-out.

This is alarming. The Fannie-Freddie business model -- "government-sponsored enterprises" (GSEs) with private shareholders but a public purpose, promoting homeownership -- is a proven loser. In fact, Fannie and Freddie were in large part responsible for inflating the housing bubble that burst so disastrously in 2007. The market's perception (correct, as it turned out) that the GSEs enjoyed federal backing enabled them to take on far more risk than their capital bases could support.

Continuing to pump taxpayer money into Fannie and Freddie so that they can continue to securitize home mortgages -- the Treasury Department has covered $111 billion worth of their losses so far -- is justifiable as an emergency measure. Without it, the U.S. housing market would have collapsed: Fannie and Freddie now back the vast majority of new mortgages, and the homeownership rate has nonetheless fallen almost two percentage points from its 2004 peak of 69 percent....MORE

Finally, From the New York Times (Feb. 1, DealBook, Feb. 2):

Cloudy Future for Fannie and Freddie

The Great Bailout is mostly over for the banks. But for those troubled behemoths of the nation’s housing bust, Fannie Mae and Freddie Mac, the lifeline from Washington just keeps getting longer, The New York Times’s Charles Duhigg writes.

Fifteen months after Fannie and Freddie were effectively nationalized, neither the Obama administration nor Congressional leaders see a quick solution to one of the thorniest problems in American finance: how to fix the twin mortgage giants without choking the flow of credit to homeowners and dealing a blow to a still-fragile housing market.

The administration had said for months that it would begin charting a new course for Fannie and Freddie when it released its budget proposal on Monday. The companies, crucial pillars of American housing, already have consumed over $112 billion of taxpayer dollars.

Bankers, builders and homeowners stand to win or lose from any plan for the two so-called government-sponsored enterprises, or G.S.E.’s. But, on Monday, that plan amounted to a single, ambiguous sentence from the White House:

“The administration continues to monitor the situation of the G.S.E.’s closely and will continue to provide updates on considerations for longer-term reform of Fannie Mae and Freddie Mac as appropriate.”

Treasury officials say more details may be forthcoming, although they decline to say when, The Times said. To many experts, however, the message is that Fannie and Freddie are likely to remain wards of the state for years.

And, given the alarm in some quarters over the mounting budget deficit, these two giants and their vast obligations are likely to remain conveniently — and controversially — off the federal books. Fannie Mae and Freddie Mac have obligations of $3.9 trillion to investors who bought bundles of mortgages that the companies assembled.

Powerful and often competing interests are grappling over the companies’ futures. Lawmakers on both sides of the aisle, eager to demonstrate their scorn for the companies, have called for their eradication. But few policy makers are willing to take aggressive steps that might weaken the housing market. On Christmas Eve, the White House quietly disclosed that it had, in effect, given the companies a blank check by making their federal credit line unlimited; the ceiling had been $400 billion.

For decades, Fannie and Freddie have played a central role in the housing market. But when the market began falling apart in 2008, so many of the home loans that Fannie and Freddie had bought or guaranteed went bad that the companies nearly went bankrupt. The government essentially took them over.

Today, many financial companies are pushing to shrink or even dismantle the two G.S.E.’s in hopes of expanding their own businesses into the resulting vacuum. Financial executives contend that the government does not belong in the housing market. Given the animosity directed at the financial industry in general, however, few will criticize the government publicly....MORE