Fannie, Freddie Plunge After Court Rules Hedge Funds Can’t Sue

Editor’s Note: Although the hedge funds and investors can’t claw back lost profits, perhaps they can sue on the rampant fraud committed by the GSEs.
Moments ago, the stocks of the nationalized GSEs – Fannies and Freddie – tumbled by over 30%, after a federal appeals court upheld a ruling that barred hedge funds from suing to overturn the U.S. government’s 2012 decision to capture billions of dollars in the profits generated by the mortgage guarantors Fannie Mae and Freddie Mac after their bailout.According to Bloomberg, which first reported the ruling, some Fannie Mae and Freddie Mac investors still have a shot at money damages, based on when they acquired their shares and whether they did so before or after the Federal Housing Finance Agency was created and then imposed its control over Fannie Mae and Freddie Mac. They can pursue breach of contract claims, the appeals panel said in a split 2-1 decision Tuesday.

“It’s a little too early for me to announce what our response will be other than to say what these breach of contract claims were always the central claims in this case,” said Hamish Hume, a Washington-based attorney with Boies Schiller Flexner LLP, who represented some of the prevailing shareholders.

In place since January 2013, the controversial net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies’ collapse during the global fiscal crisis and as of 2016, at least $56 billion more. All of that without reducing Treasury’s liquidation stake in either firm.

As Bloomberg adds, the court, which included two judges selected by Republican presidents and one picked by a Democrat, heard arguments on April 15. It later allowed additional friend-of-the-court briefs to be filed by allies on each side, solicited still more submissions concerning a jurisdictional question and permitted the investors’ filing of evidence produced in sweep-related cases pending before other courts. Their ruling may yet be subject to U.S. Supreme Court review.

The U.S. Treasury Department press office did not immediately reply to an e-mailed request for comment. David Thompson, an attorney for the suing Fairholme Funds Inc. did not immediately respond to a voice-mail message seeking comment.

The appellate decision follows Fannie Mae’s Nov. 3 report in which it said it made a $3.2 billion profit in the third quarter of 2016, the company’s 19th straight quarterly profit. Those profits were more than the $1.96 billion earned in the same quarter a year earlier. The company had said it would send $3 billion to the Treasury in December, bringing its total payments to $154.4 billion.

 

Two days earlier, the smaller Freddie Mac said it made a $2.3 billion profit during the third quarter of this year and would send the same amount to the U.S.

 

Sweep terms let the companies retain an annually diminishing capital buffer that phases out in 2018, meaning any losses later sustained will require one or both to draw on taxpayer funds.

Meanwhile, some prominent hedge funds investors – most notably Bill Ackman and Richard Perry –  have been actively pushing the government to revert to the GSE status quo, as existed prior to the 2008 bailouts, convinced it would unlock substantial stakeholder value. Today, however, that won’t be the case.

10 Responses

  1. Well – problem is- assignments are missing. Also, can never rely on the last “loan” refinance in question. Need to go back to purchase of home and trace everything. Banks don’t hand over loans to other lenders — although that is they way it should be. Doesn’t occur. But, the problem is that settlements released much to to the banks. Borrowers are left fending for themselves in courts that don’t understand because there was little investigation that led to the settlements that provided little consumer relief. Little guidance and no assistance. Had hoped new administration would understand this. Doesn’t yet appear that they do. How much damage has already been done? How much is no longer repairable? Too late? We needed investigation. Didn’t happen. . . .

  2. So in laymens terms for the basic homeowner facing foreclosure what are you saying?

    That the Fannie Mae owned loan may not really have a valid owner ?

    That the debt is not secured by the mortgage which is being enforced by the servicer ?

    In my case the servicer Wells Fargo is foreclosing on a loan that they claimed is owned by Fannie Mae …but they established standing by submitting an Assignment, note and Mortgage.

    The court doesn’t seem to be interested in any accounting or chain of title ..they accept the assignment, note and Mortgage as all the proof they need to allow Wells Fargo to foreclose.

    I believe my loan was discharged a long time ago, which would explain why Fannie Mae didn’t attempt to foreclose in their own name.

    But how do we get the court to consider the points you raise?

  3. Ian — It is all in the accounting. it is very likely they would have been GSE at purchase money – unless the purchase price was over the GSE limit. The problem is that these refinances never went on a bank’s or entity’s balance sheet – they went straight to an off balance sheet conduit – if they went there at all. The loans don’t have a “home.” And, they are all collected by debt collectors. It is the accounting of the loans, or lack thereof, that forces to look back further. Who last had this loan as a real accounted for asset? If you could check this, which is hard to do, I am sure most would find the original source as a GSE.

  4. ANON- intersting post- how do we know that the subprime refinances were all charged-off GSE debt? I’ve had my suspicions over the years, but nothing conclusive. If you tracked, for instance, all the loans in the ABC2005-3MLT, and we t back to inception of the purchase money mortgages, they would all be fannie/freddie loans?

  5. Deadly clear is asking the right question. The private entity trusts that became the subject of the financial crisis, were refinances of original charged off GSE loans. Did Freddie/Fannie know this? Don’t know. But, one thing for sure, is that the homeowner/borrower did not know. So once the Freddie/Fannie loan is reported in default (actual default non-existent at the time), the “debt” is restructured into a a private entity trust which is not reported as an asset at the time due to charge off of asset, but just restructuring of the default debt. No one knew!! Paid for a real refinance — that is, paid to have prior loan paid off by the borrower!!! That did not happen. Loans were “paid out” — paid off is different from “paid out”. So, when GSEs invested in the top tier tranches of the private entity trusts — did they know they were investing in their own charged off debt? Don’t know. But, Deadly asks an important question. And, what would be the purpose? As always, profit motivates. Higher interest rates. What we now know is that all these loans in numerous private entity trusts were charged off GSE debt. So, dealing with who really is entitled to collect anything? What really happened after GSE charge off? Can a charge off survive as an asset on another entity’s balance sheet. Don’t think so – and think that is why we had financial collapse.

    Balance sheet is the issue and question. Thank you Deadly Clear for bringing this to attention.

    Whose balance sheet is loan on — if any entity’s balance sheet at all?? Remember – investors do not have balance sheets for mortgage loan accounting. They account for security income. On whose balance sheet does the loan lie? And, if none, then there was no Lender.

  6. Please explain the non prosecution agreement. Is this why there are no investors showing up in court? So much fraud

  7. The originator never signed the loan agreements and never funded the loans. Fannie Mae sued GMAC/Rescap for selling them empty loans/Trust. SEC sued Fannie Mae for continuing the loans/trust that they knew were empty. Multi-states Sued all involved for the fake empty bad loans and trust. The whole thing is a farce. This is why we cant sue effectively because er’body but us got paid and consent agreement cleared them from being sued again! 😦

  8. Deadly. Are you saying that Freddie
    And Fannie were behind the modification denials all along. I have documents to suggest this. But I didn’t know if I was interpreting the information correctly. Freddie is instructing Wells Fargo to dual track on a modification/foreclosure. There is no reduction in interest and a 40 year term on the document from Freddie to Wells Fargo. I accused wells of making it up. Maybe they didn’t?? Maybe Freddie was behind the curtain pulling the levers all along

  9. BTW – Ackman and Perry are clueless. Also read the DOJ vs. BofA Complaints (3). In just the last week we’ve found several instances where it appears Fannie and Freddie have been intentionally concealed as the real party in interest. Do you think maybe they have even more debt than has already been exposed? Sure looks like they took on the volume of these loans and maintained an interest under the guise of a federal-like (but not really) agency – a TBTF on the back of the taxpayers. Dump ’em fast and hire a special prosecutor to dig out all the concealment.

    Homeowners that should have been modified were thrown into foreclosure and no one knew the GSEs were the real party of interest, except the foreclosure attorneys and the servicers…maybe, yeah?

  10. Ya think Fannie and Freddie were complicit? See https://www.sec.gov/news/press/2011/2011-267.htm

    Read the Complaints and Non-Prosecution Agreements at the bottom.

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