DISCLOSURE: I hold a long position in MTG.
So Kyle Bass doesn’t think house prices can go much lower from here. He studied every housing bubble in the past 100 years and realized that it takes about 7 years after prices peak for there to be a recovery. Since house prices peaked in 2006, he reasons that we are close to a recovery. Going long a bond insurer would be a good bet if he’s right.
One interesting thing I found out about Kyle Bass is that he thinks the GSE preferreds are worth par! That is a really controversial view. And I’m not sure I agree.
would be very interested to see any analysis of the gse preferreds if you have a view. i noticed kyle was also very clear that he owns “only some of them” so I would assume any view on them would have to highlight the seniority or any differences in claims between them if any exist.
I have never researched much housing-related stuff. Too much detail to go through, not enough time and energy. I am swamped with ideas now.
As far as the different classes of preferred, read KH’s comment. Very helpful. The preferreds owned by the government are senior to non-government owned preferreds. And the government has stated it doesn’t expect to be paid in full. How could anyone be optimistic about the non-government owned preferreds?
Bass is not to be trifled, with but I have never understand the GSE-preferred call at all. The government is senior to all the non-government preferred holders, and various government organs (Treasury, FHFA) have stated repeatedly that they don’t expect to be paid in full. So why would they let a single penny flow to Kyle Bass? There is absolutely no plan to pay anything to the private prefs for the foreseeable future, so in any event this is going to take time. And it’s by no means clear that a Republican presidency would be any friendlier than a Democratic one — to the contrary!
Right now the GSEs have zero equity. So for the private preferreds to get a hold of some real value, the government has to be repaid hundreds of billions of dollars, the GSEs have to be recapitalization (5% of their assets is ~$250B I believe), and their business models have to continue to function (i.e. the “implicit government guarantee” shell game has to continue even though no political actor claims to think it should). What probability do you put on that sequence of events?
Think about it this — Fannie’s equity market cap used to (back in 2004-05 bubble times) be ~$70B; Freddie’s was ~$50B. The government preferred at Fannie is now $112.6B, ~60% higher than its old market cap; at Freddie it’s $72.2B, ~45% higher than its old market cap. So in order for there to be value in the *non-government* preferreds, the GSEs need to be a *lot* more valuable than they used to be, notwithstanding the crappiness of the housing market etc. etc. etc. etc.
Actually I think the preferreds would be a good short, though admittedly one that would be dangerous to put on in a lot of size.
Good point about how if the government doesn’t expect to get paid in full the preferreds shouldn’t either. That’s how I like to think of a lot of distressed investments… mostly shorting them. The senior claimholders are thinking one thing, while the junior claimholders are thinking something totally different. They can’t both be right and usually it’s the senior claimholder (in this case the government) is right.
Maybe the entire capital structure would be OK if house prices really jump? What’s going to cause that to happen?
I have not left a comment for a long, long time, but it is good to see you posting more ideas.
I can think of at least one way housing prices would jump up… it would also relate back to some investments Kyle “nickels” Bass has made…He bought $1 million in nickels to guard against inflation & fiat default.
If inflation (or hyperinflation) were to get going, housing prices would certainly jump. Perhaps Kyle sees this as a possible cheap hedge to high inflation? Buy the highest preferreds and wait & see what happens. I don’t think the government has any intention or desire to wipe out the capital structure of these companies.
If he is right about these things eventually being worth par, he will have a 10X capital gain (or more), and presumably will be getting a yield of 50% to 75% on his initial investment as dividends would be paid.
Will this be enough to offset losses due to inflation?
Maybe…
Thanks.
I like this trade, but it is difficult to hedge. You could buy a loan servicer like ASPS, but I think these have all seen their peak earnings.