Fannie-Freddie Profit Pie Proves Alluring; Interest Groups, Investors Challenge Treasury's Sole Claim to Mortgage Firms' Profits
By Nick Timiraos
9 July 2013
06:16 PM
The Wall Street Journal Online
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved.
Now that Fannie Mae and Freddie Mac are making fat profits again and sending money to Washington after their controversial federal bailout, the government has trouble on another front: Investors, nonprofits and other groups want a share of the bounty.
Lawsuits filed this week help frame the battle. On Tuesday, two nonprofit housing groups sued the Federal Housing Finance Agency, the companies' regulator, challenging a 2008 decision to suspend payments to two affordable-housing trust funds. That suit, coming a day after one by a large hedge fund that owns preferred shares of the companies, alleged that changes made last year to the terms of the government's bailout violate federal law.
The lawsuits illustrate how the U.S. government faces greater scrutiny of its so-called conservatorship of Fannie and Freddie now that the firms are producing record profits and sending all of them to the government.
The Treasury injected nearly $188 billion to prop up the firms throughout the financial crisis, but last month, Fannie and Freddie paid $66 billion to the Treasury in the form of dividend payments , bringing to $132 billion the total dividends paid to the government.
Given the growing profits and uncertain fate facing the firms, legal battles and other skirmishes are only "going to multiply until Congress reforms the companies," said Julia Gordon, director of housing finance and policy at the Center for American Progress, a liberal think tank.
Tuesday's lawsuit concerns two funds that Congress established in July 2008 to finance low- income housing with a fraction of the annual revenue of Fannie and Freddie. The FHFA suspended those payments in November 2008, two months after the companies were rescued from collapse by the U.S. government.
The nonprofit housing groups argued in Tuesday's lawsuit that the companies should resume making those payments now that they are profitable. The groups also said the FHFA, which is acting as the companies' conservator, shouldn't be allowed to indefinitely suspend the payments.
"The conservator can't simply ignore the law," said Sheila Crowley, president of the National Low Income Housing Coalition, which is one of the plaintiffs. She said the circumstances that led the FHFA to suspend those payments no longer apply because the payments wouldn't increase the cost of the government's bailout.
In a letter to the chief executives of both firms in November 2008, the FHFA directed them to suspend the trust-fund payments because they would "further contribute to the financial instability" of Fannie and Freddie.
"In 2008, when the [trust fund] payments were suspended in line with governing law, the financial condition of Fannie Mae and Freddie Mac was uncertain," said Denise Dunckel, an FHFA spokeswoman. "That remains the case today." She declined to comment specifically on Tuesday's lawsuit.
For years until their collapse, Fannie and Freddie enjoyed wide support from politicians in part because they were viewed as an easy, off-budget means of supporting various housing-finance causes. Congress created two different housing trust funds in 2008 to build a dedicated revenue source for low-income housing that wasn't subject to the annual appropriations process. The trust funds allow states and state-designated grantees to apply for money that will finance new rental housing or rehabilitate existing units for families with very low incomes. Fannie and Freddie were required to set aside 0.04% of every dollar in new mortgage purchases for the trust funds, which would have amounted to around $400 million last year.
"Winning this lawsuit would yield the largest new investment in low-income affordable housing in over 30 years," said Rachel LaForest, executive director of Right to the City Alliance, a political advocacy group that is a co-plaintiff.
The suit, filed in federal court in Miami, follows a separate lawsuit filed late Sunday in federal court in Washington by a hedge fund that invested in preferred shares in Fannie and Freddie. The hedge fund, Perry Capital LLC, is seeking to strike down an amendment made last August to Fannie's and Freddie's bailout agreement that requires the companies to send all of their profits to the U.S. Treasury. Previously, the companies had to pay a 10% dividend on their bailout funds.
Perry Capital said the Treasury's decision to require Fannie and Freddie to send all of their profits to the government as dividend payments represented a "blatant overreach" that "illegally begins to liquidate" Fannie and Freddie. Perry Capital is being represented by Theodore Olson of Gibson, Dunn & Crutcher LLP, a former U.S. solicitor general.
Meanwhile, Fairholme Capital Management LLC, a mutual-fund manager, said it would also file suits this week to challenge the bailout revamp.
A Treasury Department spokesman said the government was reviewing the lawsuits. "We fully believe our actions have been lawful and appropriate," said the spokesman.
Perry Capital and Fairholme are among a handful of hedge funds and other investors that began buying up the preferred shares at large discounts beginning over the past four years on the bet that Fannie's and Freddie's return to profitability could lead to a big payout. Last summer's revamp of the bailout agreement prevents Fannie and Freddie from rebuilding capital or redeeming a new class of "senior preferred" shares owed by the Treasury.
Fairholme said last month that it had invested around $500 million for shares that have a face value of $2.4 billion. Perry hasn't disclosed its stake, but a lawyer on Sunday said the fund had made a significant investment.
By Nick Timiraos
9 July 2013
06:16 PM
The Wall Street Journal Online
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved.
Now that Fannie Mae and Freddie Mac are making fat profits again and sending money to Washington after their controversial federal bailout, the government has trouble on another front: Investors, nonprofits and other groups want a share of the bounty.
Lawsuits filed this week help frame the battle. On Tuesday, two nonprofit housing groups sued the Federal Housing Finance Agency, the companies' regulator, challenging a 2008 decision to suspend payments to two affordable-housing trust funds. That suit, coming a day after one by a large hedge fund that owns preferred shares of the companies, alleged that changes made last year to the terms of the government's bailout violate federal law.
The lawsuits illustrate how the U.S. government faces greater scrutiny of its so-called conservatorship of Fannie and Freddie now that the firms are producing record profits and sending all of them to the government.
The Treasury injected nearly $188 billion to prop up the firms throughout the financial crisis, but last month, Fannie and Freddie paid $66 billion to the Treasury in the form of dividend payments , bringing to $132 billion the total dividends paid to the government.
Given the growing profits and uncertain fate facing the firms, legal battles and other skirmishes are only "going to multiply until Congress reforms the companies," said Julia Gordon, director of housing finance and policy at the Center for American Progress, a liberal think tank.
Tuesday's lawsuit concerns two funds that Congress established in July 2008 to finance low- income housing with a fraction of the annual revenue of Fannie and Freddie. The FHFA suspended those payments in November 2008, two months after the companies were rescued from collapse by the U.S. government.
The nonprofit housing groups argued in Tuesday's lawsuit that the companies should resume making those payments now that they are profitable. The groups also said the FHFA, which is acting as the companies' conservator, shouldn't be allowed to indefinitely suspend the payments.
"The conservator can't simply ignore the law," said Sheila Crowley, president of the National Low Income Housing Coalition, which is one of the plaintiffs. She said the circumstances that led the FHFA to suspend those payments no longer apply because the payments wouldn't increase the cost of the government's bailout.
In a letter to the chief executives of both firms in November 2008, the FHFA directed them to suspend the trust-fund payments because they would "further contribute to the financial instability" of Fannie and Freddie.
"In 2008, when the [trust fund] payments were suspended in line with governing law, the financial condition of Fannie Mae and Freddie Mac was uncertain," said Denise Dunckel, an FHFA spokeswoman. "That remains the case today." She declined to comment specifically on Tuesday's lawsuit.
For years until their collapse, Fannie and Freddie enjoyed wide support from politicians in part because they were viewed as an easy, off-budget means of supporting various housing-finance causes. Congress created two different housing trust funds in 2008 to build a dedicated revenue source for low-income housing that wasn't subject to the annual appropriations process. The trust funds allow states and state-designated grantees to apply for money that will finance new rental housing or rehabilitate existing units for families with very low incomes. Fannie and Freddie were required to set aside 0.04% of every dollar in new mortgage purchases for the trust funds, which would have amounted to around $400 million last year.
"Winning this lawsuit would yield the largest new investment in low-income affordable housing in over 30 years," said Rachel LaForest, executive director of Right to the City Alliance, a political advocacy group that is a co-plaintiff.
The suit, filed in federal court in Miami, follows a separate lawsuit filed late Sunday in federal court in Washington by a hedge fund that invested in preferred shares in Fannie and Freddie. The hedge fund, Perry Capital LLC, is seeking to strike down an amendment made last August to Fannie's and Freddie's bailout agreement that requires the companies to send all of their profits to the U.S. Treasury. Previously, the companies had to pay a 10% dividend on their bailout funds.
Perry Capital said the Treasury's decision to require Fannie and Freddie to send all of their profits to the government as dividend payments represented a "blatant overreach" that "illegally begins to liquidate" Fannie and Freddie. Perry Capital is being represented by Theodore Olson of Gibson, Dunn & Crutcher LLP, a former U.S. solicitor general.
Meanwhile, Fairholme Capital Management LLC, a mutual-fund manager, said it would also file suits this week to challenge the bailout revamp.
A Treasury Department spokesman said the government was reviewing the lawsuits. "We fully believe our actions have been lawful and appropriate," said the spokesman.
Perry Capital and Fairholme are among a handful of hedge funds and other investors that began buying up the preferred shares at large discounts beginning over the past four years on the bet that Fannie's and Freddie's return to profitability could lead to a big payout. Last summer's revamp of the bailout agreement prevents Fannie and Freddie from rebuilding capital or redeeming a new class of "senior preferred" shares owed by the Treasury.
Fairholme said last month that it had invested around $500 million for shares that have a face value of $2.4 billion. Perry hasn't disclosed its stake, but a lawyer on Sunday said the fund had made a significant investment.
