Fannie Mae-No Politics (FNMA)

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US Treasury accused over Fannie Mae and Freddie Mac

US Treasury accused over Fannie Mae and Freddie Mac

By Gina Chon in Washington

The US government is being accused of refusing to hand over documents and emails relating to mortgage finance companies Fannie Mae and Freddie Mac in a hedge fund lawsuit over their profits, despite a judge’s order that it do so.

The lawsuit led by Bruce Berkowitz’s Fairholme Funds challenges a 2012 government move that requires Fannie and Freddie to send all their profits to the US Treasury, which plaintiffs say is illegal and hurts shareholders like Fairholme Funds.

The high stakes court case becomes even more important for shareholders like Fairholme, Bill Ackman’s Pershing Square and Perry Capital as possibly the only way to share in Fannie and Freddie’s profitability because legislative efforts to wind down the companies will probably fail this year.

The mortgage finance companies needed a $188bn rescue during the 2008 financial crisis but have turned round in recent years. They have paid dividends to the government that exceed their bailout amount. Fannie and Freddie have been overseen by the US government since 2008.

In February, US Court of Federal Claims Judge Margaret Sweeney allowed Fairholme to seek evidence to support its claims that the Treasury Department, through the Federal Housing Finance Agency, acted illegally in taking all of the profits of Fannie and Freddie.

But since then, Fairholme has not received the documents it has requested and accused the government of blanket refusal to provide any relevant information, according to people familiar with Fairholme’s thinking.

The Justice Department, which is defending the US government, has declined to hand over documents belonging to Fannie and Freddie, information related to the government’s assessment of their future profitability or documents concerning its decision to ensure that private shareholders will not have access to Fannie and Freddie’s profits, these people say.

DoJ has argued that Ms Sweeney allowed Fairholme to seek only a limited amount of evidence, instead of a range of topics that the agency deems as inappropriate and irrelevant to the case.

Ms Sweeney has not ruled on the dispute but she recently indicated that she may side with Fairholme, saying she probably has a broader view of her order than DoJ, according to court proceedings.

Fairholme will also seek to depose former Treasury Secretary Tim Geithner and former FHFA director James Lockhart, and also wants to see emails and other documents from the officials as part of the lawsuit, according to people familiar with Fairholme’s thinking.

DoJ, the Treasury Department and FHFA either declined to comment or did not return requests for comment. The case has already produced documents that show the Treasury had discussed as early as December 2010 the issue of revising bailout terms to ensure that shareholders would not have access to Fannie and Freddie’s future earnings.

Despite the early legal success of Fairholme, research firm Cornerstone Macro said it doubts shareholders will “ever receive anything of value”, partly because of the weak legal arguments in the lawsuit.

Worries about the future of Fannie and Freddie have increased with the recent dip in the housing market. On Tuesday, Mel Watt, the director of FHFA, Fannie and Freddie’s regulator, outlined a strategic plan that clarifies lending rules, which should help expand credit access for mortgages.

Fannie and Freddie will relax payment history requirements for mortgage lenders by allowing two delinquent payments in the first 36 months of an acquisition, which should reduce the amount of bad mortgages banks have been forced to repurchase from Fannie and Freddie.

That could help lenders relax credit standards, which could improve access to mortgages. The confusion around the so-called put backs had caused banks to be more stringent in their lending criteria.