How Federal Housing Finance Agency (FHFA) and Treasury Violated Insolvency Principles In Case of FNMA and FMCC?

The Federal Housing Finance Agency (FHFA) as conservator was supposed to act independently and revive Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) once it took over the reins in 2008. However, it did not follow the process laid out in Housing and Economic Recovery Act of 2008 (HERA). The success of HERA has been time and again demonstrated in past by Federal Deposit Insurance Corporation (FDIC).

Instead the government indulged in re-negotiation in 2012 which led to a new precedence called “Net Worth Sweep.”

So what exactly is Net worth sweep?

Unprecedented Amendment between US treasury and FHFA in 2012 states that whatever profits made by Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) have to be transferred to U.S. Treasury.

Questions which arise?

What was the real motivation for such an amendment when FHFA knew about potential profits of FNMA and FMCC?

Why was the template followed for every other company abandoned in the middle when history shows that it worked in case of troubled companies?

Was there an ulterior motive on the government end with regard to profits of FNMA and FMCC?

Was the FHFA acting independently as required by law or was the U.S. Treasury or higher calling the shots?

 FNMA and FMCC put in lose-lose situation

Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) have trillions of liability. However, since the entire profit is swept by the government they are not able to show any reserves. This leaves them susceptible in the next crisis.

Investors and shareholders have lost trust in GSE’s linked to government. This could play a large role if the government needs private capital in an attempt to replace the GSEs.

What next after Fannie Mae files were sealed?

In documents filed on June 10th, the defendant notified the court that on behalf of the Office of the President, documents related to Fannie Mae will not be released under “presidential communications privilege.” You can read more here.

Judge Sweeney has not been sympathetic to the claims of privilege by the government. She has also questioned the independence of the FHFA. HERA requires the FHFA to act independently as a conservator.

“Instead of harm to the Nation resulting from disclosure, the only “harm” presented in the potential for criticism of an agency, institution, and the decision-makers of those entities. The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties.”

“The Court notes that from the inception of this litigation, the government has consistently maintained that the court lacks jurisdiction over this case because the United States had no control over the enterprises. Taking the government at its word, it is surprising that defendant is concerned with the unsealing of government officials’ deposition testimony.”

(taken from this great read by Glen Bradford)

Some interesting tweets

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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