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Investors in Fannie and Freddie Lose Post-Bailout Profit

By William Vogeler, Esq. on February 28, 2017 | Last updated on March 21, 2019

Have you ever worried about how you were going make that next payment on your house or apartment?

Now think about how it must have been in 2008, when the nation's largest mortgage lenders were about $200 billion short. It was a mortgage crisis that triggered the Great Recession, America's biggest economic meltdown in almost a century.

It may feel like those days are behind us, but they aren't for everybody. Investors in Fannie Mae and Freddie Mac, the largest lenders at the time, say they did not get the money they were due in the subsequent economic recovery. And a federal court of appeals just made it a little more difficult for those investors.

The Golden Ruler

The U.S. Circuit Court of Appeals for Washington, D.C. said that most of the investors' claims are barred under the Housing and Economic Recovery Act, which authorized the Federal Housing Finance Agency to take over the lenders. The court said the FHFA also had the power to recoup its investment regardless of private investors' interests.

"Entirely absent from the Recovery Act's text is any mandate, command, or directive to build up capital for the financial benefit of the companies' stockholders," Judges Patricia Millett and Douglas Ginsburg said in the co-written opinion.

The case arose after the the FHFA, which loaned Fannie Mae and Fannie Mac almost $200 billion to bail them out, restructured a debt repayment plan under the Recovery Act. The lenders have since repaid the bailout money, and profits are going to the government. Investors sued because they are not reaping the same benefits.

According to the majority in the appellate court, the FHFA did not owe them anything.

A Dissent

Judge Janice Rogers Brown disagreed. She basically said the agency circumvented bankruptcy law, ignoring its duty to the shareholders.

"The practical effect of the court's ruling is pernicious," Brown said.

"By holding, contrary to the Act's text, FHFA need not declare itself as either a conservator or receiver and then act in a manner consistent with the well-defined powers associated with its chosen role, the Court has disrupted settled expectations about financial markets in a manner likely to negatively affect the nation's overall financial health."

While the court barred the investors' statutory and common law claims, it sent the case back to the trial for further proceedings on claims relating to dividends.

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