December 2016 - Getting Serious About Diversity

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60 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST GSE Shareholders Fight for Their Day in Court Billions of dollars in damages are at stake in the Net Worth Sweep case. T hree GSE sharehold- ers have filed a lawsuit against the Federal Housing Finance Agency (FHFA) and the U.S. Department of Treasury over the sweeping of GSE profits into Treasury, or the Net Worth Sweep. GSE shareholders J. Patrick Collins, Marcus J. Liotta, and William H. Hitchcock filed their complaint in the U.S. District Court for the Southern District of Texas, Houston Division, claiming the Net Worth Sweep is illegal and not authorized by the Housing and Economic Recovery Act (HERA) of 2008. The plain- tiffs are reportedly seeking billions of dollars in damages. "We are pleased to have brought this important suit, which aims to stop the largest ex- propriation of private property in our nation's history and look for- ward to having it heard in full," said Chad Flores, a Houston- based attorney representing the plaintiffs, in an interview with MReport. The Net Worth Sweep has prompted approximately two dozen lawsuits from sharehold- ers, which have gained various degrees of traction in the courts over the last three years. None of the lawsuits have been decided in the shareholders' favor as of yet. Fannie Mae and Freddie Mac received a combined $187.5 billion bailout from taxpayers in 2008 to remain solvent, after which the FHFA, which was created out of the HERA, took the GSEs into conservatorship in September 2008. The GSEs returned to profitabil- ity in 2012, but Treasury amended the terms of the bailout agreement in August 2012 to require all of the GSEs' quarterly profits to be swept into Treasury in what is commonly known now as the Third Amendment. In the original agreement, the GSEs were required to pay 10 percent of their dividends annually to Treasury. "The Net Worth Sweep has resulted in a massive and un- precedented financial windfall for the federal government at the expense of the Companies' private shareholders," the complaint from Collins, Liotta, and Hitchcock alleges. The complaint further points out that since the fourth quarter of 2012 (the first fiscal quarter subject to the Net Worth Sweep) through Q2 2016, Fannie Mae and Freddie Mac have generated $195 billion in comprehensive income— but "rather than using those profits to prudently build capital reserves and prepare to exit con- servatorship, Fannie and Freddie instead have been forced to pay $195 billion in 'dividends' to the federal government under the Net Worth Sweep—$124 billion more than the government would have received under the original PSPAs (Preferred Stock Purchase Agreements)." The plaintiffs continued, "Adding Net Worth Sweep dividends to the dividends Fannie and Freddie had already paid, Treasury has now recouped a total of over $250 billion—$63 bil- lion more than it invested in the Companies. Yet, according to the Agencies, the amount of outstand- ing Government Stock remains firmly fixed at $189 billion, and the Agencies continue to insist that Treasury has the right to all of Fannie's and Freddie's future earnings in perpetuity." Collins, Liotta, and Hitchcock allege that in August 2012, Treasury chose to suddenly amend the terms of the bailout agreement because they knew of the pending profitabil - ity of the GSEs. They also pointed out that the FHFA's conservatorship of Fannie Mae and Freddie Mac was not intended to be permanent. The conservatorship continues to this day, more than eight years later, with no immediate end in sight. The plaintiffs also contend that the Net Worth Sweep "blatantly transgresses the limits Congress placed on FHFA's and Treasury's authority. As conservator of Fannie and Freddie, FHFA is charged with rehabilitating the Companies with the goal of returning them to private control. The Net Worth Sweep guarantees that this never can be accomplished." The FHFA declined to com - ment on the complaint from Collins, Liotta, and Hitchcock. Treasury did not immediately respond to a request for comment. In early October, the non-par - tisan Congressional Budget Office (CBO) issued a report stating that if Fannie Mae and Freddie Mac were allowed to retain some of their profits and build capital, it would reduce the risk of another taxpayer- funded bailout. The GSEs' capital buffer is required to be reduced to zero by January 1, 2018. "This (CBO report) makes perfect sense and serves as a reminder of the absurdity of the Net Worth Sweep underway since 2012," according to a blog post from Investors Unite, a non-profit coali - tion of more than 1,100 GSE inves- tors. "Treasury says the Sweep was needed to protect taxpayers from exposure to another bailout if the market suffered a major setback. However, with the GSEs' capital dwindling away, many experts, including Federal Housing Finance Agency Director Mel Watt, have raised the idea that the Sweep itself exposes taxpayers."

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