Lamberth’s Decision On Fannie Mae ‘Just The Beginning’: Investors Unite

Investors Unite has been holding regular throughout the year to raise awareness about some of the individual Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders and push for ending the GSE’s conservatorship, but the beginning of today’s even had to go off script to address Judge Lamberth’s recent decision that sent stock prices plummeting.

“These cases will be appealed,” said Investors Unite founder and CapWealth Advisors CEO Tim Pagliara. “While we’re not happy with Judge Lamberth’s opinion, this is just the beginning.”

Fannie Mae: Lamberth’s decision is an early setback in a long legal battle

Pagliara explained that the major cases against the government on behalf of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders can be divided into two groups: those that argue the Federal Housing Finance Agency (FHFA) overstepped its authority with the full income sweep, violating the Administrative Procedures Act and those that argue the full income sweep violates the Takings Clause in the Fifth Amendment of the Constitution.

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Judge Lamberth’s decision relates to the Administrative Procedures Act, so arguing that it hurts Fairholme’s chances in the case in the US Court of Federal Claims (the second category of cases) is oversimplifying. But Lamberth also isn’t the last word on whether FHFA overstepped.

“Judge Lamberth’s opinion has no more precedential value in Iowa than an Iowa case would have in his district,” says Pagliara. “It is very possible that different judges will look at things differently. That sets the stage for the cased to be moved up to a higher level in the Federal Court of Appeals to resolve the inconsistent results.”

Of course Pagliara, along with Perry and Fairholme, would have rather had an early win than an early setback, but there wasn’t much chance that the final outcome of this legal battle would be decided at the district level anyways.

Pagliara says conservatorship partly to blame for weak housing market

In addition to pointing out that Fannie and Freddie shareholders still have other legal channels open to them, Pagliara called on the next Congress to take up the issue of GSE reform. One of the dangers of Congressional inaction is that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are being gradually wound down without any plan for what might come next. According to Pagliara, the conservatorship of Fannie Mae and Freddie Mac along with the full income sweep is one of the major factors behind the weak US housing market because mortgages are harder to get than they would be if the GSEs were functioning as they had been for the last few decades.

Correction: Pagliara’s argument is that mortgages would be more readily available if the GSEs were functioning normally, but not necessarily cheaper.