HOUSTON (CN) — Shareholders have sued the Department of the Treasury and the Federal Housing Finance Agency, claiming their $195 billion "net worth sweep" of Fannie Mae and Freddie Mac in 2012 illegally sent all their dividends to the U.S. Treasury rather than shareholders.
The Federal National Mortgage Association (Fannie Mae), and The Federal Home Loan Mortgage Corporation (Freddie Mac), are government-sponsored private companies that own or guarantee trillions of dollars in U.S. home loans. They buy home loans from banks, freeing up the banks to issue more home loans.
After the financial crisis began in late 2007, as the value of securitized home loans collapsed, Congress in July 2008 passed the Housing and Economic Recovery Act of 2008, under which Fannie and Freddie received a $188 billion government bailout.
The Act also created the Federal Housing Finance Agency and authorized it to appoint itself conservator of the companies, which it did in September 2008.
Lead plaintiff J. Patrick Collins a Freddie Mac stockholder, filed the lawsuit on Oct. 20 in Federal Court.
"As conservator, HERA charges FHFA to rehabilitate Fannie and Freddie by taking action to put the companies in a sound and solvent condition while preserving and conserving their assets," the complaint states. (Emphasis in original.)
The Housing and Economic Recovery Act of 2008 also gave the Treasury Department temporary authority to buy stock in Fannie and Freddie under preferred stock purchase agreements.
"Under these PSPAs, Treasury received an entirely new class of securities in the companies, known as senior preferred stock ('government stock'), which came with very favorable terms for Treasury," the complaint states.
"At the outset, Treasury received $1 billion of government stock (via one million shares) in each company and warrants to acquire 79.9 percent of the common stock of the companies at a nominal price in return for its commitment to acquire government stock in the future." (Parentheses in complaint.)
By 2012, Collins says, the companies were generating massive profits: "In fact, in the first two quarters of 2012, the companies posted sizable profits totaling more than $11 billion."
But despite the Treasury Department's agreement to return control of the companies to their boards once they became solvent, Collins says, in 2012 it strengthened its grip on the companies.
"Despite the companies' relative financial health, the Department of the Treasury implemented a deliberate strategy to seize the companies and operate them for the exclusive benefit of the federal government," the complaint states.
On Aug. 17, 2012 the Treasury Department and the Federal Housing Finance Agency executed a "Net Worth Sweep" under which Fannie Mae and Freddie Mac became obligated to pay a quarterly dividend to Treasury equal to their entire net worth, according to the complaint.
"The Net Worth Sweep has resulted in a massive and unprecedented financial windfall for the federal government at the expense of the companies' private shareholders," the 83-page lawsuit states.
"From the fourth quarter of 2012, the first fiscal quarter subject to the Net Worth Sweep, through the second quarter of 2016, the most recently reported fiscal quarter, Fannie and Freddie generated $195 billion in comprehensive income. But rather than using those profits to prudently build capital reserves and prepare to exit conservatorship, Fannie and Freddie instead have been forced to pay $195 billion in 'dividends' to the federal government under the Net Worth Sweep."
The Treasury Department has recouped more than $250 billion under the Net Worth Sweep, $63 billion more than it invested in Freddie and Fannie, Collins says.
The Federal Housing Finance Agency has said it will keep Fannie and Freddie in a conservatorship until Congress passes housing finance legislation.
"Holding the companies hostage in a perpetual conservatorship while awaiting potential legislative action was never an option for FHFA contemplated under HERA," the complaint states.
The lengthy lawsuit cites discovery in a case pending in the U.S. Court of Federal Claims. U.S. Court of Federal Claims Judge Margaret Sweeney this month ordered the federal government to turn over documents to plaintiff Fairholme Funds.
Fairholme seeks FHFA documents on whether Fannie and Freddie were anticipated to ever be solvent when the agency implemented the Net Worth Sweep, how long the conservatorship was expected to last, and the reasons for the government's decision to claim a dividend equal to the companies' entire net worth.
Collins seeks declaratory judgment that the Net Worth Sweep violates the Administrative Procedure Act's prohibition against federal agencies taking action that exceeds their statutory authority; that the Housing and Economic Recovery Act of 2008 violates the Constitution's separation of powers clause because it installed a single director over the FHFA who can be removed by the president only for cause; and he wants the Net Worth Sweep vacated and set aside, "including its provision sweeping all of the companies' net worth to Treasury every quarter."
He is represented by Chad Flores with Beck Redden in Houston.
A FHFA spokeswoman declined comment.
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