Fannie Mae, Freddie Mac Income Sweeps Will Be Decided By The Courts

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When Senate Banking Committee Chairmen Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) outlined a new proposal for how to deal with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the two government sponsored enterprises saw their common stock prices plunge on the assumption that the new framework would enshrine third amendment income sweeps into law. But recent comments from Senator Crapo imply that the fight between shareholders and Treasury will have to play itself out in the courts.

“They have filed suit right now in order to challenge the way that the current conservatorship is managing the current profitability of Fannie Mae and Freddie Mac.  And we are not necessarily going to dictate the outcome of that.  That will be a decision that’s made in the courts,” Crapo said in an interview on Bloomberg TV. “The answer that we get from the court will then guide Congress as to how we move forward.”

Crapo acknowledges that shareholders have a “strong argument” that because the GSEs continued to act as public, listed companies private investors should be able to count on that, but he isn’t necessarily pulling for them either, saying that he doesn’t know how the court will rule (and not suggesting an answer either).

Fannie Mae, Freddie Mac shareholders fighting on a single front

This is still a big step forward for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders, because it means they are back to fighting on a single front. Part of the speculation over the last week has been whether there is enough deadlock in Washington for the GSE lawsuits to wind through the courts. Since hedge funds, pension funds, and other institutional investors held their long positions on senior preferred shares, it was clear they were still banking on the court’s ruling before new legislation was passed, but that’s no longer a concern.

Crapo’s comments may reduce opposition

For supporters of the Johnson-Crapo framework, and the Corker-Warner bill before it, this could eliminate some of the opposition to GSE reform. Earlier this week Senator Toomey (R., PA) said that he would have a hard time supporting any legislation that allowed the GSE income sweeps to continue. Now that Crapo is willing to legislate around the issue, it’s possible that Senator Toomey and others will back his plan.

The Johnson-Crapo framework would replace Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a group of private entities that have the right to buy mortgages and then sell Federal-wrapped mortgage-backed securities, but the Federal guarantee would only kick in after all of those businesses had gone under. The proposal is expected to meet opposition from conservatives who want the government out of the secondary mortgage market entirely.

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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.