A ruling in the Federal Claims Court on Tuesday made by Judge Margaret Sweeney will force the U.S. Treasury to disclose all of Fannie Mae’s and Freddie Mac’s conservatorship documents. Over 10,000 discovery documents will be released to the United States District Court of Appeals in Washington D.C. and the United States District Court.
Fairholme Funds made the request in court against the GSEs, claiming that their investor ownership stake was taken unlawfully from them by the government when the conservatorship occurred. Fairholme's efforts are a step toward getting their ownership stake returned to them.
The conservatorship between Fannie Mae and Freddie Mac has left many in the industry wondering when it will end.
In May, Fitch Ratings affirmed that while Fannie Mae and Freddie Mac maintained a "Stable Rating Outlook" in April due to direct financial support from the U.S. government, the ratings company said it expected the controversial FHFA's conservatorship of the two Enterprises would continue indefinitely.
"Despite significant legislative efforts over reform of the housing market during the past year, the government-sponsored enterprises remain in conservatorship without a clear exit path," Fitch said in its report. "The Federal Housing Finance Agency has signaled that it will not interfere with Congress with respect to housing market reform."
The GSEs have been under FHFA conservatorship since September 2008, at which time they needed a combined bailout of $187.5 billion from taxpayers in order to stay afloat.
Congress enacted the Housing and Economic Recovery Act of 2008 (HERA) in response to the mortgage crisis, and HERA created a new regulator for Fannie and Freddie, the Federal Housing Finance Agency (FHFA). FHFA was authorized to assume control of Fannie as either a conservator or a receiver under certain conditions. FHFA elected to assume control of Fannie in September 2008, as a conservator. FHFA entered into a preferred stock purchase agreement (PSPA) with Treasury as a vehicle for Treasury to make investments in Fannie to preserve Fannie's solvency
In March, the Office of Inspector General of the Federal Housing Finance Agency (FHFA) released a white paper titled "The Continued Profitability of Fannie Mae and Freddie Mac is Not Assured," warning that the profitability of the two GSEs may not continue due to their having to rely on core earnings for profits in the future.
"Fannie Mae reports that it expects to remain profitable for the foreseeable future; however, it acknowledges that a decrease in home prices or changes in interest rates, combined with provisions of their agreements with Treasury that require the reduction of their retained asset portfolios, could lead to losses," wrote Acting Deputy Inspector General for Evaluations Kyle Roberts in the white paper. "Thus, if these losses result in an Enterprise reporting a negative net worth, that Enterprise would be obligated to draw on Treasury’s funding commitment."
Bethany McLean, co-author of “The Smartest Guys in the Room” and author of the forthcoming book “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,” noted in an op-ed piece on the New York Times that the conservatorship was meant to be a temporary solution following the 2008 crisis, but the situation remains unresolved and continues to grow into a larger issue.
“We were going to stabilize the companies’ finances, reduce their importance to the mortgage market, and figure out a better system, McLean noted on the NY Times. “But nothing happened. In fact, the situation has gotten even more precarious. In the years since the crisis, private lenders, for the most part, have been willing to make mortgages if they can immediately sell them to government agencies, mainly Fannie and Freddie. In other words, without Fannie and Freddie, there wouldn’t be much of a mortgage market.”
McLean suggests that the first step to ending the conservatorship is to stop sending all the GSEs’ dividends to the Treasury, and this would allow them to start rebuilding capital. Then, a tighter regulatory structure must be established, one that limits the businesses in which Fannie and Freddie can operate, limits the incentives of their management teams to take risk, and limits their ability to lobby. This would allow them to cap the returns to shareholders.