Government LendingLegalMortgage

Federal judge rules in favor of FHFA on net worth sweeps

Order states that investors were not denied dividends from Fannie Mae and Freddie Mac ‘that they otherwise were reasonably certain to receive’

The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has been granted summary judgment on one of the last remaining claims by investors in a lawsuit alleging the government overstepped its authority when it adjusted its stock-purchase agreements with the agencies and allowed net worth sweeps.

The plaintiffs, Fairholme Funds Inc., et al., are private-sector investors in Fannie Mae and Freddie Mac, which have been in conservatorship under FHFA oversight since the 2008 financial crisis.  The plaintiffs claimed, among other causes of action, that their interests were harmed when FHFA and the U.S. Treasury Department amended in August 2012 for the third time the so-called preferred stock purchase agreements (PSPAs) with the government-sponsored enterprises (GSEs) Fannie and Freddie. The change allowed the government to sweep up the GSEs net worth, or profits, beyond a set capital threshold.

The sweeps ended in 2019, after the Treasury had taken in some $301 billion in profits from Fannie and Freddie — compared with $191 billion in capital injections made by the government. The sweeps, the suing investors claim, harmed their future dividend prospects, leading the Fairholme Funds litigation against the GSE’s conservator, FHFA.

FHFA disagreed, claiming, among other arguments, that the U.S. Supreme Court had already ruled that as conservator, FHFA has “expansive authority.”

“After nine years of litigation — including numerous decisions by the circuit courts of appeals, and now the United States Supreme Court, holding that the third amendment [to the PSPAs] was both authorized and a reasonable exercise of FHFA’s broad statutory powers — it is time to end this case,” FHFA argued in its April motion for summary judgment in the case. “[Fairholme Funds’] sole remaining claim is for breach of the implied covenant of good faith and fair dealing arising under Delaware and Virginia law.

“… The Supreme Court unanimously held … that FHFA — exercising its ‘expansive authority in its role as a conservator’ — ‘reasonably viewed [the third amendment to the PSPAs] as more certain to ensure market stability’ than ‘the shareholders’ suggested strategy.’ … This holding alone forecloses [Fairholme’s] implied covenant claim.”

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The case, filed in U.S. District Court for the District of Colombia, is still scheduled to go to trial in mid-October focused on other alleged causes of damages to investors’ interests. The judge in the federal litigation, Royce Lamberth, however, late last week issued a ruling favorable to FHFA.

“[FHFA’s] motion for summary Judgment [seeking dismissal of the claims] is granted insofar as no genuine dispute remains on the fact of harm on the theory that [Fairholme Funds, et al.] were denied dividends that they otherwise were reasonably certain to receive,” Judge Lamberth’s order states. “… Insofar as a genuine dispute of material fact remains on the fact of harm on the theory that [Fairholme’s] shares [and the shares of other investors party to the lawsuit] lost of much of their value, and in all other respects, [the FFHA’s] motion for partial summary judgment is denied.”

Reporter’s Note: This story has been updated to make clearer that the litigation remains pending.

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