Breaking Down The Fannie Mae, Freddie Mac Lawsuits

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While most of the recent focus on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform has focused on the Crapo-Johnson plan that was recently announced and could ultimately replace Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a new Federal agency, for the GSEs private shareholders the big question is still what will happen to the value of their stocks.

Since Congress has essentially opted out of this fight, the legality of Treasury’s policy of quarterly income sweeps (instead of paying dividends and recapitalizing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be determined by the courts. Professor David Reiss at Brooklyn Law School has broken down the current state of litigation in a recent paper.

Most Fannie Mae cases are seeking damages related to Treasury’s income sweeps

There are at least nineteen cases currently pending over FHFA’s conservatorship of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), but they can be broken down into three groups. Ten cases were filed in the United States District Court for the District of Columbia, eight in the United States Court of Claims, and one in the United States District Court for the Southern District of Florida. The South Florida case is the odd man out, alleging that FHFA violated its obligation to finance the housing trust fund, but the other 18 cases deal fairly directly with the Treasury’s income sweeps, and there is some overlap among plaintiffs in those cases.

The other cases mostly seek to invalidate the Third amendment and undo the income sweeps, arguing that the government violated the Administrative Procedures Act.

“The main claims are that (i) the Third Amendment created a new security, which the Treasury was not authorized to acquire after January 31, 2009 pursuant to HERA, and (ii) the Third Amendment does not ‘conserve’ the assets and business of the two GSEs, which violates the FHFA’s duties as conservator of the two companies,” writes Reiss.

Of course the actual suits are more complex, including claims that the FHFA acted capriciously and that it breached its contract with preferred stock owners. Some of the cases, which name the United States as the defendant, are seeking compensation under the fifth amendment of the US Constitution, alleging that the value of their stock was essentially taken by the state without due compensation.

Reiss questions the role of litigation after a crisis

Reiss won’t hazard a specific guess on the outcomes of the cases this early in the process, but he does think that the litigation raises an important question about how we approach future crises.

“What role should these types of lawsuits play after a major crisis has passed?” he asks. Is it better to give the government a free pass when its actions averted what may have been another depression, or is litigation an effective way of ensuring that everyone gets their due once the chaos has passed?

“The first allows for various kinds of scapegoating,” writes Reiss, “while the second allows for the kind of revisionism that favors the wealthy and powerful.”

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About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.

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