TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/409279
12 | Th e M Rep o RT cover story Freddie Mac would not exist as ongoing entities. "Many saw this as an oppor- tunity for speculation, but they may have chosen poorly," Pinto said. "They knew that Freddie and Fannie were subject to a charter established by Congress that could be revoked at any time." Pinto said that anyone who bought stock had to know that this was a political entity with a unique charter that could be amended at will by Congress. The advice is confirmed by Jim Vogel, Executive Vice President at FTN Financial Capital Markets. "Private capital invested in a government-spon- sored enterprise always runs the chance of disappearing with a change in government policy," Vogel said. The situation with the GSEs is a good example. Judge Lamberth's decision, denying any compensation to shareholders, was met with vehe- ment response by some. "No way," screamed numerous investors, including consumer advocate and multiple-time presidential candi- date Ralph Nader. They contend that giving the money to the Treasury is a violation of their Fifth Amendment rights against the sei- zure of private property for public use without just compensation. Nader has been a high-profile spokesman for Fannie Mae and Freddie Mac shareholders for several years. Nader owns about 100,000 shares cumulatively between Fannie and Freddie, which he has held since before the 2008 conservatorship, according to a report in The Washington Post in May. "This issue's not going to go away with one district court decision by any means," Nader said during a recent confer- ence call hosted by Fannie and Freddie shareholder advocacy group Investors Unite. "This was deception of the first order. If any corporate executives engaged in something like this, even the slumbering SEC would have moved to action." The group that Nader spoke to, Investors Unite, is a coalition of approximately 1,000 private investors committed to the "pres- ervation of shareholder rights" in the GSEs and to obtaining full restitution on investments. The organizer and leader of this group is Tim Pagliara, a 32-year veteran of the investment business. He is also the chairman and CEO of CapWealth Advisors based in Franklin, Tennessee. He believes there was never any determination of insolvency about the GSEs. "Everyone needs to have the facts straight on this is- sue," he said. He said that back in 2008, Fannie and Freddie still had the ability to raise additional capital and had other options that were taken away in September of that year when the GSEs were put into conservatorship. He maintains that there was a choice of whether to put the GSEs into a conservatorship, liquidate them, or put them into receivership. Conservatorship was not the only option. But in August 2012, FHFA and the U.S. Treasury agreed to re- vise the terms of their agreement. Instead of a 10-percent dividend, the Treasury would receive all net income earned by Fannie Mae and Freddie Mac paid in a quarterly "sweep." Now 100 per- cent of the profits from Fannie and Freddie go into the U.S. Treasury. "What this means is that the government has nation- alized the housing industry and is using it as a tool for budget reduction," he explained. According to a New York University Law School profes- sor, the ruling handed down by Judge Royce Lamberth is flawed. Richard A. Epstein, the Laurence A. Tisch professor of Law at NYU, says that the mistakes in the judgment are so serious and one-sided that the judge should withdraw his decision and recon- sider the facts. "First, the judge's opinion seriously misstates the rights and duties of the Federal Housing Finance Agency (FHFA) as a conservator," Epstein explained. "Second, it seriously misstates the authority of Treasury under HERA." Epstein pointed out that the amendment to the conserva- torship was not negotiated by an independent board of directors. According to Epstein, the amendment was not intended to return Fannie and Freddie to the private market, but was designed to ensure they would never be able to return to the market, no matter how profitable their operations had become. "What this means is that no private company is ever safe," he explained. "No private party will ever rely on government assuranc- es or guarantees if the amendment is allowed to stand. The rule of law, which is critical to the proper functioning of free markets, has no meaning if it can be suspended whenever deemed convenient." But despite their protesta- tions and with full knowledge of the uphill battle in the courts that lays ahead, investors are still buying into the GSEs. For example, in recent weeks reports have surfaced that Bill Ackman, leader of Pershing Square Capital Management, a New York-based hedge fund that is itself involved in a lawsuit against the federal government related to GSE prof- its, has added to the fund's GSE stock portfolio. Billions Lost and Lessons Learned H indsight is a wonderful thing. It helps us learn; it also can be used to point fingers. A report recently released by the FHFA Office of Inspector General (OIG) revealed that Freddie Mac and Ginnie Mae ignored "red flags" regarding a mortgage fraud scheme perpe- trated by lenders Taylor, Bean & Whitaker and Colonial Bank, resulting in billions of dollars in losses for the GSEs. But Ginnie Mae president Ted Tozer did not take the report ly- ing down, taking issue with the OIG. In fact, he maintained that "private capital invested in a government- sponsored enterprise always runs the chance of disappearing with a change in government policy." —Jim Vogel, FTN Financial Capital Markets