Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that play a vital role in the US housing market. They buy mortgages from banks and other lenders, package them into securities, and sell them to investors. This helps to make more money available for home loans, which keeps mortgage rates low and makes it easier for people to buy homes.

In 2008, Fannie Mae and Freddie Mac were placed in government conservatorship after they suffered billions of dollars in losses during the subprime mortgage crisis. Since then, they have been required to pay all of their profits to the US Treasury Department.

In 2013, shareholders of Fannie Mae and Freddie Mac filed a lawsuit against the Federal Housing Finance Agency (FHFA), the agency that oversees the GSEs. The shareholders alleged that the FHFA had breached its contractual obligations to them by sweeping all of the GSEs’ profits to the Treasury.

The Lawsuit and Its Outcome

The lawsuit went to trial in 2023. In August of that year, a federal jury awarded the shareholders $612.4 million in damages. The jury found that the FHFA had breached the implied covenant of good faith and fair dealing by agreeing to the Net Worth Sweep, which transferred all of the GSEs’ profits to the Treasury.

The FHFA appealed the jury’s verdict, but the US Supreme Court declined to hear the case in January 2023. This means that the jury’s verdict stands, and the shareholders will be awarded $612.4 million in damages.

Conclusion

The Fannie Mae and Freddie Mac lawsuit is a significant victory for shareholders. It is also a reminder that the FHFA is not above the law. The agency has a fiduciary duty to the GSEs and their shareholders, and it must comply with its contractual obligations.

FAQs

Q: What is the significance of the Fannie Mae and Freddie Mac lawsuit?

A: The Fannie Mae and Freddie Mac lawsuit is significant because it is the first time that a court has found that the FHFA breached its contractual obligations to shareholders. The lawsuit also sets a precedent for future lawsuits against the FHFA.

Q: Who will benefit from the $612.4 million jury award?

A: The $612.4 million jury award will be distributed to shareholders of Fannie Mae and Freddie Mac who were harmed by the Net Worth Sweep.

Q: What does the jury’s verdict mean for the future of Fannie Mae and Freddie Mac?

A: The jury’s verdict is unlikely to have a significant impact on the future of Fannie Mae and Freddie Mac. The GSEs will remain in government conservatorship until Congress passes legislation to reform them.

Q: What is the Net Worth Sweep?

A: The Net Worth Sweep is a policy implemented by the FHFA in 2012 that requires Fannie Mae and Freddie Mac to pay all of their profits to the US Treasury Department.

Q: Why did the FHFA implement the Net Worth Sweep?

A: The FHFA implemented the Net Worth Sweep in order to recoup the money that the US government spent to bail out Fannie Mae and Freddie Mac in 2008.

Q: What are the arguments for and against the Net Worth Sweep?

A: The main argument in favor of the Net Worth Sweep is that it is necessary to protect the US taxpayer. The main argument against the Net Worth Sweep is that it harms shareholders of Fannie Mae and Freddie Mac.

Sources:

• Bernstein Litowitz Berger & Grossmann LLP: https://www.reuters.com/legal/us-supreme-court-rejects-investor-suits-over-fannie-mae-freddie-mac-2023-01-09/
• Reuters: https://www.reuters.com/legal/us-supreme-court-rejects-investor-suits-over-fannie-mae-freddie-mac-2023-01-09/
• National Mortgage Professional: https://nationalmortgageprofessional.com/news/shareholders-fannie-mae-freddie-mac-awarded-612-million
• ISS Insights: https://insights.issgovernance.com/posts/in-rare-jury-trial-fannie-mae-and-freddie-mac-shareholders-recoup-612-million-against-us-housing-agency/