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The U.S. government is unlikely to change its current control over Fannie Mae and Freddie Mac in spite of efforts from lawmakers and various lawsuits filed by GSE shareholders against the government, according to Standard and Poor’s analyst Nikola G. Swann and his team.
Swann and his team wrote in a report to clients that the impasse among lawmakers as to the future of the GSEs, the fact that Fannie Mae and Freddie Mac have been profitable since 2012, and the near recovery of most housing markets have made the privatization of the GSEs or any type of reform unlikely for the foreseeable future. That could change if either party sweep both the Presidency and Congress in 2016; if the housing market suffers another collapse akin to the one experienced in 2008; or if any of the lawsuits filed by GSE investors Pershing Square or Fairholme funds over the sweeping of GSE profits into Treasury are successful, according to Swann.
“The chief point of contention is the 'full income sweep,' which replaced a set 10 percent dividend payment on Treasury's preferred shares with an indefinite, quarterly sweep of every dollar of profit each firm earns.”
“The U.S. Treasury's decision to modify, in 2012, the Preferred Stock Purchase Agreements (PSPAs) governing the terms of its financial support to Fannie and Freddie led to the filing of a number of lawsuits against the government by private-sector shareholders of these two GREs,” Swann said. “The chief point of contention is the 'full income sweep,' which replaced a set 10 percent dividend payment on Treasury's preferred shares with an indefinite, quarterly sweep of every dollar of profit each firm earns.”
The Treasury responded that it changed the terms of the bailout agreement in 2012 and began sweeping all GSE profits into Treasury “to avoid Fannie or Freddie having to borrow from the Treasury to pay the set dividend, and noted that taxpayers continue to bear risks emanating from these entities, implying that this deserves compensation.”
Swann contends that if the plaintiffs were to be awarded substantial damages in any of the lawsuits, it would draw significant political attention. In an extreme case, the Administration might possibly decide to distance themselves from Fannie Mae and Freddie Mac and privatize them should the courts rule that the profit sweep is illegal. With no timetable set for a settlement on any of the lawsuits, however, that could take some time. Even then, Swann said, the government is likely to continue backing existing Fannie Mae and Freddie Mac loans.
Senator Bob Corker (R-Tennessee) has been at the forefront of the push for GSE reform, but a bill he introduced in 2013 has stalled. Both parties are generally in agreement that the conservatorship needs to end after seven years, but they cannot agree on what, if anything, should replace Fannie Mae and Freddie Mac.
