Stephan Prescher

Vice President at Valor Lending Group financing Real Estate for Commercial nationwide and residential in CA. Pride in Lending

[Aakash Gupta @aakashgupta]

The math on Fannie and Freddie is so dislocated it looks like a pricing error.

Fannie printed $14.4 billion in net income last year. Freddie printed $10.7 billion. Combined market cap on the pink sheets right now: ~$12 billion. The market is pricing $25 billion in annual earnings at a 0.48x multiple. Find me another 0.48x earnings multiple anywhere in American finance. It doesn't exist.

The dilution fear is the reason the stock is cheap and the reason the stock is wrong. Treasury put in $187 billion. The GSEs have swept back over $300 billion since 2012. That's an 11.6% IRR. If Treasury exercises its 79.9% warrants at today's price, the government's stake is worth ~$9.6 billion. If it exercises post-relist at 10x earnings, that stake is worth $200 billion. The difference is $190 billion. Washington doesn't leave $190 billion on the table to spite penny stock holders.

Capital requirements look scary until you do the arithmetic. The ERCF says $334 billion. They have $179 billion. The FHFA can lower Tier 1 to 2.5% without Congress. New target: ~$190 billion. Gap: $11 billion. One IPO closes it. One year of retained earnings closes it twice.

G-fees are already at 65 bps. Pre-crisis they were 20. The GSEs have been charging privatized pricing inside a conservatorship for 14 years. Credit losses outside of 2008 average under 5 bps. The margin is so fat that mortgage rates don't move at all on release.

So what are you actually buying at $5? A royalty on the American mortgage system. 65 bps on $7.5 trillion in outstanding MBS. $48 billion in gross annual revenue. Under 5 bps in historical losses. The most predictable spread in finance, backstopped by a guarantee both parties have publicly committed to preserving.

JPMorgan trades at 13x and takes real credit risk. Utilities trade at 15x with half the visibility. These two trade at 0.48x collecting tolls on other people's risk.

The second those warrants convert and the NYSE listing goes live, every index fund and pension fund with a financial sector mandate has to buy. Two of the ten most profitable companies in America, sitting on the pink sheets, waiting for one signature.

[Forbes @Forbes]

.@SteveForbesCEO makes the case for privatizing Fannie Mae and Freddie Mac, a move that has just been proposed by President Trump. #WhatsAhead

[Stephan Prescher @SPatValor]

@TuckerCNews YES

[Bill Ackman @BillAckman]

I am often asked for stock recommendations, but generally don’t share individual names unless I believe the risk versus the reward is extraordinarily compelling.

As we look toward 2025, one investment in our portfolio stands out for large asymmetric upside versus downside so I thought I would share it.

We have owned Fannie Mae and Freddie Mac common stock for more than a decade. Today, they trade at or around our average cost. As such, they have not been great investments to date.

What makes them particularly interesting today versus any other time in history is that there is a credible path for their removal from conservatorship in the relative short term, that is, in the next two years.

During Trump’s first term, Secretary Mnuchin took steps toward this outcome, but he ran out of time. I expect that in the second @realDonaldTrump administration, Trump and his team will get the job done.

A successful emergence of Fannie and Freddie from conservatorship should generate more than $300 billion of additional profits to the Federal government (this is on top of the $301 billion of cash distributions already paid to the Treasury) while removing ~$8 trillion of liabilities from our government’s balance sheet.

The GSEs have built $168 billion of capital since Mnuchin ended the net worth sweeps in 2019. This is already a fortress-level of capital for guarantors of fixed-rate, first mortgages to creditworthy, middle class borrowers.

The scenario we envision is that:

(1) the GSEs are credited with the dividends and other distributions paid on the government senior preferred, which would have the effect of fully retiring the senior preferreds at their stated 10% coupon rate with an extra $25 billion profit (in excess of the preferreds’ stated yield) to the government. This extra profit could be justified as payment to the government for its standby commitment to the GSEs during conservatorship.

(2) the GSEs’ capital ratio is set at 2.5% of guarantees outstanding, a level which would have enabled the GSEs to cover nearly seven times the their actual realized losses incurred during the Great Financial Crisis — a true fortress-level balance sheet.

A 2.5% capital ratio is the same required for mortgage insurers who by comparison guarantee the first ~20% of losses on often riskier mortgages with less creditworthy borrowers, compared with the GSEs’ guarantee which attaches at the senior-most <=80% of the property’s mortgaged value. Mortgage insurers therefore typically incur 100% losses on a default whereas by comparison GSE losses on a default are minimal.

The GSEs also have enormous ongoing earnings power, particularly during challenging periods in the housing market where they tend to take significant additional market share. This enables them to quickly recapitalize after a period of housing market stress.

Assuming a Q4 2026 IPO, the two companies collectively would need only raise about $30 billion to meet the 2.5% capital standard, a highly achievable outcome. Freddie needs more than Fannie (which will need little if any capital) because it has grown its guarantee book more quickly than Fannie in recent years.

We estimate the value of each company at the time of their IPOs in 2026 at ~$34 per share. We assume their IPOs are priced at $31 per share reflecting a ~10% discount to their intrinsic values.

We calculate a profit to the gov’t of ~$300 billion assuming full exercise of its warrants and a sell down of common stock in both companies over the five years following the IPOs.

We believe the junior preferreds are also a good investment, but they do not offer nearly the same return because their upside is capped.

Trump likes big deals and this would be the biggest deal in history. I am confident he will get it done.

There remains a high degree of uncertainty about the ultimate outcome so you should limit your exposure to what you can afford to lose if you choose to invest.

Happy New Year!

[Stephan Prescher @SPatValor]

https://t.co/VymTJF85Hh

[Stephan Prescher @SPatValor]

https://t.co/VymTJF85Hh

[Stephan Prescher @SPatValor]

https://t.co/tzdxRV6nyn

[Stephan Prescher @SPatValor]

https://t.co/tzdxRV6VnV

[Stephan Prescher @SPatValor]

https://t.co/DFSB6NKBaX

[Stephan Prescher @SPatValor]

https://t.co/VymTJF85Hh

[Stephan Prescher @SPatValor]

@FantasyPros Start one full point ppr Higgins, Hopkins, D. Smith, Z. Flowers

[Stephan Prescher @SPatValor]

@FantasyPros Need help on start-sit situation. Start one full point ppr Higgins, Hopkins, D. Smith, Z. Flowers.

[Stephan Prescher @SPatValor]

@FantasyPros Need help on start-sit situation. Start one full point ppr Higgins, Hopkins, D. Smith, Z. Flowers.

[Stephan Prescher @SPatValor]

https://t.co/DFSB6NKBaX
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[Stephan Prescher @SPatValor]

@MyFantasyLeague Question on fantasy football. A trade was vetoed by the league with the required votes and then submitted again with no change three hours later. Should that be a LM veto or let the league vote on it again?

[Stephan Prescher @SPatValor]

@JeffRatcliffe Question on fantasy football. A trade was vetoed by the league with the required votes and then submitted again with no change three hours later. Should that be a LM veto or let the league vote on it again?

[Stephan Prescher @SPatValor]

@MyFantasyLeague Question on fantasy football. A trade was vetoed by the league with the required votes and then submitted again with no change three hours later. Should that be a LM veto or let the league vote on it again?

[Stephan Prescher @SPatValor]

@SiriusXMFantasy Question on fantasy football. A trade was vetoed by the league with the required votes and then submitted again with no change three hours later. Should that be a LM veto or let the league vote on it again?

[Stephan Prescher @SPatValor]

@JeffRatcliffe Question on fantasy football. A trade was vetoed by the league with the required votes needed and then submitted again with no change three hours later. Should that be a LM veto or let the league vote on it again?

[Stephan Prescher @SPatValor]

@Eminem the Kool-aid has been gone, a Detroit Lions hype song. 🙏🙏🙏. Villains!!!