Fannie Mae Shareholders Sue U.S. Treasury

net worth sweep Fannie Mae Freddie MacBy User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Fannie Mae shareholders have filed a lawsuit against the Department of the Treasury and the Federal Housing Finance Agency according to an announcement made by the group yesterday. The suit highlights the unusual position of Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA). Shareholders are nominally suing the company itself, but their real target is the government conservators in charge of the company.

Fannie Mae Shareholders Sue U.S. Treasury

The suit is being brought by plaintiffs Bruce Reid and Bryndon Fisher, both shareholders in Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA). The suit asserts that the FHFA has a clear directive to rehabilitate Fannie Mae, but that directive is being ignored at the expense of the company’s common shareholders.

Fannie Mae lawsuit

Fannie Mae, officially known as the Federal National Mortgage Association, was named in the suit as the nominal defendant under the terms of a derivative lawsuit. A derivative lawsuit sees shareholders take action against a third party in control of a company. In this case the United States Department of the Treasury and the FHFA are the targets.

The government does not explicitly guarantee the credit-worthiness of Fannie Mae, but an implicit guarantee was priced into the company’s debt by the market. This implicit guarantee was demonstrably real in 2008 when the government bailed out the company and put it into its current consevatorship.

Back in May Fannie Mae announced that it planned to pay a $59.4 billion dividend to the U.S. Treasury. That dividend payment, which bypasses holders of the company’s common stock, is one of the most important incentives for the shareholders behind this lawsuit. It’s clear that Fannie Mae is healthy enough to return profits, but common shareholders are being ignored.

Government sponsored enterprise

Restore Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) is a group that seeks to restore the rights of the common shareholders in the company. The announcement of this law suit appeared on the group’s website yesterday. The lawsuit is not the first to brought against Fannie Mae’s controllers in recent months. The highest profile moves to protect the property rights of Fannie Mae investors came from Fairholme Capital and Perry Capital back in July.

Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) is a Government Sponsored Enterprise. It was designed under the new deal to increase the liquidity of credit after the Great Depression. Fannie Mae, and Freddie Mac its brother, are the most well known GSEs, and both ended up embroiled in the 2008 financial crisis.

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Paul Shea
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