Another lawsuit has been filed over the sweeping of Fannie Mae and Freddie Mac profits into the U.S. Department of Treasury, this time by a citizen asserting her legal rights as an investor in the GSEs.
Arnetia Joyce Robinson, a retired bank manager, filed her complaint in the U.S. District Court for the Eastern District of Kentucky against the Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac; Mel Watt, as director of the FHFA; and Treasury.
Like the plaintiffs in previous lawsuits against the government, Robinson is angry about the government changing the terms of the bailout agreement in August 2012 to sweep all of the GSE profits into Treasury for an indefinite period.
“Fannie and Freddie are two of the largest privately owned insurance companies in the world,” the complaint stated. “They insure trillions of dollars of mortgages and provide essential liquidity to the residential mortgage market. The Companies operate for profit, and their debt and equity securities are privately owned and publicly traded. The Companies’ shareholders include community banks, charitable foundations, mutual funds, insurance companies, pension funds, and countless individuals, including Plaintiff.”
Robinson contends that despite posting record losses for 2007 and the first half of 2008, shortly before the government seized control of them, Fannie Mae and Freddie Mac were always capable of paying their debts and were never in danger of insolvency. The complaint contends that Fannie Mae and Freddie Mac took a relatively conservative approach to investing in mortgages during the years 2004 to 2007, the so-called “housing bubble,” during which many institutions were not conservative where the mortgage market was concerned.
“Despite the Companies’ relative financial health, the Department of Treasury implemented a deliberate strategy to seize the Companies and operate them for the exclusive benefit of the federal government.”
“As a result, the Companies (i) experienced substantially lower mark-to-market credit losses during the financial crisis than other mortgage insurers, (ii) were never in financial distress, and (iii) remained in a comparatively strong financial condition. Indeed, the Companies’ ability to pay any outstanding claims—a fundamental principle for all insurers—was never in doubt,” the complaint said. “Despite the Companies’ relative financial health, the Department of Treasury implemented a deliberate strategy to seize the Companies and operate them for the exclusive benefit of the federal government.”
The complaint states that the Housing and Economic Recovery Act of 2008 (HERA) gave Treasury and FHFA limited authority as to the financial affairs of the GSEs, and those limitations “make clear that Congress did not intend for the Agencies to operate Fannie and Freddie in perpetuity, and certainly not for the exclusive financial benefit of the federal government.”
Robinson also asserts that due to FHFA’s “wildly pessimistic assumptions” about future losses, Fannie Mae and Freddie Mac were forced to excessively write down the value of their assets.
“Despite the Companies’ concerns, FHFA caused the Companies to incur substantial non-cash accounting losses in the form of loan loss provisions,” the complaint stated. “To be clear, tens of billions of dollars of these provisions—recognized by the Companies as expenses—were completely unnecessary since the potential loan losses never materialized into actual losses.”
To view Robinson’s complaint, click here.