Fannie Mae-No Politics (FNMA)

[jacklanvo99]

The FHFA became conservator of the GSEs in 2008 under an agreement in which the Treasury would provide up to $200 billion in bailout funds in exchange for preferred stock valued at an equivalent amount, warrants to purchase as much as 79.9% of the common stock, and a mandatory 10% dividend. Over the next four years, the Treasury infused $187.5 billion into the GSEs, but the mortgage entities still found themselves cash-strapped and unable to meet their obligations, due in part to the mandatory dividend payments to the Treasury.

To remedy the situation, the FHFA and Treasury amended their agreement. As amended, the Treasury retains its preferred shares in the companies. However, instead of collecting the 10% dividend payments, the Treasury “sweeps” on a quarterly basis nearly all of the net income of the GSEs into a slush fund for general government expenses, including cutting the government’s deficit. The GSEs’ private sector preferred shareholders – including institutional investors, insurance companies and pension funds – are left with little, both in terms of dividends and the value of their equity.http://cblr.columbia.edu/archives/13499

The slow return of the housing market and its two backbone financial institutions, Fannie Mae and Freddie Mac, has created not only huge profits for the U.S. government, but also a flood of lawsuits claiming unconstitutional government takings of privately owned shareholder profits. It has been seven years since Fannie Mae and Freddie Mac were placed in government conservatorship, and much has changed for the government-sponsored enterprises’ (“GSEs”) balance sheets. Back in the fall of 2008, they had a combined $5.3 trillion in outstanding debt, requiring $187.4 billion of capital injection from the United States Treasury to salvage the companies, and in effect, the U.S. housing market. Since then, the GSEs have regained profitability and paid back the Treasury $230.8 billion to date, $43.4 billion more than they received from the Treasury.

However, due to an amendment to the original conservatorship agreement between the Treasury and the Federal Housing Finance Agency (“FHFA”), the conservator of the GSEs, these payments are not considered a repayment of principal debt owed to the Treasury, but rather dividend payments. This amendment, known as the “the net-worth sweep,” allows the Treasury to “sweep” nearly all of the net income of the GSEs on a quarterly basis into the government’s coffers. With the GSEs’ profits in the tens of billions ($84 billion for Fannie and $49 billion for Freddie in 2013), this arrangement certainly works to alleviate the government’s crushing deficit.

The deal, however, is not without its losers. Large private investors of the GSEs bet big during the financial downturn on the return of the GSEs’ profitability. But as the mortgage market bounces back, their expected returns have been “swept” to the Treasury, leaving them with effectively worthless shares in the GSEs. The private investors have responded by filing a volley of lawsuits directed at the Treasury, arguing that the “net-worth sweep” constituted a violation of the Fifth Amendment’s “takings clause,” which protects against seizure of “private property for public use without just compensation.” So far, the claims have been unsuccessful. Nevertheless, a settlement with the investors and a reform in the “net-worth sweep” agreement may be prudent next moves for the government.