Investors in Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) common stock may have had their fate sealed on December 20, 2010.  This is when, unknown to investors, a memo to then-Treasury Secretary Timothy Geithner from the Treasury Department’s Under Secretary for Domestic Finance Jeffrey Goldstein placed restrictions on shareholders receiving earnings from the troubled firms.

Fannie Mae FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

Fannie Mae, Freddie Mac: Government not following disclosure rules

That the government would limit a shareholder’s earnings is unusual, but even more eye-opening is the failure to disclose this material information to shareholders, none of which was disclosed in financial filings of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), an interesting tidbit first published by Gretchen Morgenson in the New York Times.

The information came to light in a legal filing this month.  The failure to disclose material information to investors appears to stand in contrast with U.S. securities rules.  “If there is disclosure regarding future Fannie Mae and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) earnings and the administration has a commitment that existing Fannie Mae and Freddie Mac common equity holders will never receive any future positive earnings,” Lewis D. Lowenfels, a securities law expert in New York, was quoted as saying, “this commitment would be material to investors and should be disclosed.”

Morgenson notes that failing to disclose the administration’s harsh treatment of shareholders is disturbing because, when bailing out Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the Treasury received warrants — option-like securities that rise in value when the shares underlying them do. When investors, hoping for a housing recovery, flocked to the shares and pushed them higher, the value of the warrants increased. As previously noted in ValueWalk, Fannie Mae and Freddie Mac have significantly ramped up in recent years. Fannie Mae’s common stock now trades at $3.06 a share, while it traded at just 34 cents when the memo was written.

“I have been critical of these companies, but this change in the bailout terms seems punitive, especially when considering how other bailout recipients were treated,” Morgenson said.  This has led to lawsuits against the government from Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders, as reported in ValueWalk.

Shareholder court fight seeks nullification of memo, return to 2008 law

With Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) so profitable, and profits going to the U.S. general treasury account rather than investors, the issue is likely to be contentious.  Technically Fannie Mae and Freddie Mac still owe the government $189.5 billion, due to changes in the repayment process. Shareholder lawsuits seek to force the government to follow laws that harken back to 2008 and nullify the 2010 memo to Geithner.