My Fannie Valentine – It’s Not If, But When And How Much – Federal National Mortgage Association (OTCMKTS:FNMA)

@JohanA commented on @RuleOfLawGuy article, and his last question was “Is there a statute of limitation for purposefully violating law and preventing victims from seeking justice?” To which I replied:

Exactly my point, and I’ll go one step further. The initial 10% PSPA dividend was totally usurious, in the then zero % rate environment, for GSEs with an implicit guaranty to boot. A bare three weeks after FnF takeout, HARP was announced with terms much more favorable for banks in much worse shape, without an implicit guaranty, and laden not only with toxic mortgages but also with all sorts of CDOs and derivatives which turned out to be uninsured, cf. AIG. Same people who devised HERA devised TARP, yet they treated the GSEs way worse than the TBTF banks. Not to mention that starting in October, Treasury directed the GSEs to buy $40 billion of toxic mortgages per week, substantially aggravating a situation which would have otherwise been manageable.

Now, all the current suits were filed while thousands of nefarious evidence documents were being sealed for “national security reasons.” Fortunately, some of these documents were finally provided, and cited by Judge Willett in his majority opinion declaring the FHFA unconstitutional, and his minority opinion vacating the NWS, remanding it to the District Court. In his minority opinion, he also rejected Treasury’s claim that “the Shareholders waited four years to sue” (p. 121), leaving the door open to copycat suits which would incorporate these two new elements – nefarious intent by an unconstitutional agency.

Please also note that Willett did not mention one essential issue which goes to nefarious intent. The NWS was adopted in August 2012, whereas the last FNMA draw was on March 2012, and in June 2012 for FMCC. In other words, when the companies had returned to profitability. Indeed, the dividend paid by FNMA to Treasury in June 2013 was a whopping $59 billion, and by FMCC in December 2013 an equally whopping $30 billion.

Suffice it to say, whereas I agree with @Rule of Law Guy on the Preferred, i.e. a double from current levels, I do have an idea on the common, and the upside in my opinion is far greater. Let it rip.

  • SCOTUS rules CFPB unconstitutional. Siela Law and DOJ both agree the non-removal director clause make the CFPB unconstitutional . Slam dunk, same goes for FHFA, with the support of Calabria himself, cf. 2015 memo cited by Willett twice, p.36 and 40.
  • Either Judge Sweeney or Judge Atlas, or both, determine fraud at the onset, based on Parrott et al comments, just released.
  • Copycats suits are filed, claiming new evidence – emails – and Willett.

And here is my bet:

  • First off, no downside to current stock price, common or preferred, except for normal volatility. Especially since earnings came through pretty good.
  • Upside in Preferred is limited to their call price. 100% ain’t bad, and will happen because these are very profitable companies, and closets have been cleaned (for now).
  • Upside in Common hinges on the Settlement amount. Amount, warrants.
  • Which is why we, as shareholders, need to keep the line – PSPA was usurious.
  • Back of the envelope, taking FNMA as the case. Borrowed a total of $116Bn, from March 2009 to March 2012. Call this an average of $85 billion. Times 3% interest, which looks to me a fair estimate of what it should have been, not the 10% usurious rate, equals about $10 billion. Total $126 billion. This amount was paid off in June 2014, when the cumulated dividend was $126 billion. If this back-of-the-envelope is not good enough, here is the more detailed table:
  • By June 2019, the cumulated dividend paid by Fannie was $181 billion. An excess of $55 billion, excluding interest, and eventual damages. This is the amount that should reasonably be coming back to Fannie. Together with the $15 billion earned and retained in 2019, more than enough to not even raise capital.
  • From here on, the main question will be dilution, or not. Will warrants be cancelled, or not. I think they’ll be cancelled but this is a blind guess… as in blind justice.

Disclosure: I am/we are long VECO, S, HL, FNMA, FNMAT, FMCC, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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