The U.S. Treasury has received billions in profit from post-crisis Fannie Mae and Freddie Mac revenues – and investors are suing for it.
For decades, Fannie Mae and Freddie Mac helped in causing a steady rise in home buyers—until the subprime crisis hit and Fannie and Freddie were on the hook for billions in losses.
Legislators swore to reorganize the two companies and some planned to phase them out entirely. However, over eight years later, Fannie and Freddie still operate under government control—and they’re now a bigger part of the system, guaranteeing payment on nearly 50% of all U.S. mortgages, an increase from 38% before the crisis.
There is one crucial difference: Any profits the companies generate go to the government instead of investors. In 2012 the government altered the terms to say that every quarter Fannie and Freddie would send Treasury all their profits except for a certain amount of money kept in reserve. That reserve started at $3 billion in 2013 and was scheduled to fall by $600 million every subsequent year, until hitting zero in 2018.
The latest payment, a combined $9.9 billion to the U.S. Treasury at the end of March, made the total amount of cash Fannie and Freddie have paid to taxpayers about $266 billion, making their bailout one of the most profitable in history. There’s now a heated battle over who should receive those profits.
The companies’ pre-crisis common and preferred stocks still trade over-the-counter, and investors who bought shares, such as hedge fund managers Bill Ackman and John Paulson, say the Treasury is breaking the law by taking the money. The battle initiated when the Obama administration made the changes to the bailout terms back in 2012.
In 2013, Fannie and Freddie became profitable again. All those earnings went to taxpayers, infuriating investors who hoped to share in the recovery. Ackman, Richard Perry, a prominent hedge fund manager and Bruce Berkowitz, a mutual fund manager, claimed the changes were illegal and sued. In more than 20 lawsuits, investors have made allegations including that the dividend payment is an illegal confiscation of private property, that the government lied about its reasoning, and that the structure of the regulator in charge of Fannie and Freddie, the Federal Housing Finance Agency (FHFA), is unconstitutional.
Judges have so far ruled in favor of the government. Ackman is in favor of a strategy that would strengthen the companies and keep their activities fundamentally intact. “There is simply no credible alternative to Fannie and Freddie,” he wrote in a letter to investors in March. Investors want the government to begin the process of selling its stake in Fannie and Freddie by stopping the dividend, but they don’t want the companies to go away.
Some lenders and advocates for affordable housing agree. They would also like the dividend suspended to allow Fannie and Freddie build their reserves. They’re worried that any alternative Congress might enact would make it more difficult for lower-income borrowers to obtain mortgage loans. Treasury Secretary, Steven Mnuchin, has reported that ending government control remains a priority, but that he’s currently focused on regulatory relief and tax reform.
Building capital is a necessary antecedent to selling Fannie and Freddie back to the private market, where their shares could be worth billions of dollars. Mnuchin assigned one of his counselors, Craig Phillips, to take charge of the situation. Phillips has reportedly proposed ideas as wide-ranging as putting the companies into receivership, which could push out investors, as well as legislation to replace or supplement them with a new structure.