How Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) Became Victim of Government’s Plan?

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In September 2008, Director of FHFA James B. Lockhart III put Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) under conservatorship and fired the company’s executives. 8 years later they are the only companies that have not emerged from the financial crisis.

What prompted government to bailout Fannie Mae and Freddie Mac?

Ownership of guarantees or securities worth $12 trillion of mortgage securities

Possibly a huge amount of GSE debt held by foreign entities like China.

Arizona, California, Florida, and Nevada saw surge in mortgage defaults during that time.

What’s causing the uproar?

Unprecedented agreement in 2012 after the crisis with 100 percent of profits going to U.S. Treasury instead of shareholders.

Being in conservatorship for so long yet conducting actions that are the antithesis of conservatorship which is to conserve assets.

A slew of lawsuits and plaintiffs have been filed in US court raising several questions.

Secrecy with regard to documents in Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) case.

What was the plan?

As per the original plan Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) were supposed to pay a stiff dividend on bailout funds. However, based on revised agreement between U.S. Treasury and FHFA the government received 100 percent of profits made by both the companies. The revised agreement known as the Net Worth Sweep was justified as protection for the shareholders but raises many questions as to it’s motives. Did the government have authority under HERA (Housing And Economic Recovery Act) to change or purchase new securities in 2012? Can a shareholder sweep all profits from other shareholders under Delaware Law?

The question which arises is why he government acted as it did and why has the process been shrouded in secrecy.

What next?

Release of protected documents in the public domain continue to help clear up the facts. At this point investors await action in a number of court cases including:

  • Perry Capital v Jacob J. Lew in United States Court of Appeals For the District of Columbia Circuit appealing the decision of Judge Lamberth
  • Fairholme Funds, Inc, et al., v United States in the United States Court of Federal Claims
  • Jacobs and Hindes et al., v Federal Housing Finance Agency in the U.S. District Court for the District of Delaware
  • Robinson v Federal Housing Finance Agency in the U.S. District Court Eastern District of Kentucky Southern Division
  • Washington Federal, v United States in the United States Court of Federal Claims

The cases are testing various aspects of the Fannie Mae and Freddie Mac’s conservatorship, the validity of the net worth sweep and in the case of Washington Federal whether the companies needed a bailout to begin with.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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