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Court Deals a Blow to Hopes of GSE Investors

Several GSE investors have sued the government over the sweeping of Fannie Mae and Freddie Mac profits into Treasury (aka the “Net Worth Sweep), a practice that began when the bailout agreement was amended in August 2012.

Those investors have suffered a number of setbacks in the last couple of years, however. The latest one came on Friday when a judge in the U.S. District Court for the Eastern District of Kentucky threw out a lawsuit filed by a GSE investor against the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), and the U.S. Department of Treasury claiming the Net Worth Sweep damaged Fannie Mae and Freddie Mac.

According to the Wall Street Journal, Judge Karen Caldwell in the Kentucky court ruled that courts were barred under the Housing and Economic Recovery Act (HERA) of 2008 from interfering with the FHFA’s authority to act as conservator of the GSEs, saying that the HERA was a “statutory scheme that swept away courts’ authority to enjoin FHFA conduct.”

Caldwell’s ruling further stated that the FHFA was not required by law to restore Fannie Mae and Freddie Mac to a “sound and solvent condition” or to “preserve and conserve” their assets, according to the Journal; instead, the provisions in the HERA granting the power to restore the GSEs to solvency and preserve their assets were not mandatory but were permissive.

Fannie Mae and Freddie Mac received a combined $187.5 billion bailout from taxpayers in 2008 to remain afloat. In September 2008, they were taken into conservatorship by the newly-created FHFA. In 2012, the GSEs returned to profitability but the terms of the bailout agreement were amended in August of that year to require all of their profits to be swept into Treasury every quarter instead of the original agreement of 10 percent annually.

Courts have dismissed similar lawsuits by GSE investors in Iowa in February 2015 and in Washington, D.C. in October 2014. In August 2016, the U.S. Court for the Eastern District of Virginia dismissed a suit filed by GSE investor Tim Pagliara, who was seeking to examine Freddie Mac’s financial records. Several GSE suits are still pending in the courts, including one by Pagliara in Delaware seeking to examine Fannie Mae’s records.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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