Fannie, Freddie, FHFA, Treasury: Litigating The Net Worth Sweep
BY: Marcus Mello
Since 2013, an onslaught of litigation stemming from the federal government’s regulatory response to the 2008 housing collapse has played out in federal district and claims courts. Plaintiff-shareholders of Fannie Mae and Freddie Mac have taken the Federal Housing Finance Agency (“FHFA,” the conservator of Fannie and Freddie) and the U.S. Treasury to task on statutory claims, constitutional takings claims, and contractual claims. The litigation has dragged on, but last August, the plaintiff-shareholders saw some semblance of light at the end of their decade-plus tunnel in court. After determining that the FHFA breached its implied covenant of food faith and fair dealing, a jury awarded the plaintiffs $612.4 million in damages. Though the FHFA is expected to appeal, the outcome is significant in that it is the first victory for the plaintiff-shareholders since the rise of the litigation.
Before the 2008 financial crisis, Fannie Mae and Freddie Mac were highly profitable juggernauts that collectively owned or guaranteed nearly half of the entire United State mortgage market. Though they were both created by acts of Congress, Fannie and Freddie were subsequently converted into private corporations to boost competition in the secondary mortgage market. For decades, they increased access to mortgage credit for homebuyers by adding liquidity to the mortgage market. Operating with an implicit government guarantee, Fannie and Freddie were able to purchase mortgages at cheaper rates and issue securities at lower yield, which ultimately resulted in lower mortgage rates for borrowers. But with the crash of the housing market, Fannie and Freddie quickly fell from grace.
The aftermath of the housing crash and the ensuing litigation shows the limits of regulatory policymaking while also revealing the strategies that could prove successful for future plaintiff-shareholders who find themselves in similar situations as those at the heart of the litigation. While shareholders that invest in highly regulated financial institutions cannot have unreasonable expectations of compensation, the government also does not have a free pass to act unreasonably to the terms of a contract to which it is a party. In this case, the contracts were the stock purchase agreements that the FHFA and Treasury entered into with Fannie and Freddie upon them being placed under the conservatorship of the FHFA.
Ultimately, the litigation shows that the legality of a regulatory response has an upper bound. The government can enact a policy that significantly reduces the worth of an investor’s property, but it cannot violate its contractual obligation to not act arbitrarily or unreasonably, which it was found to have done here.
Sources:
Perry Capital LLC v. Lew, 70 F.Supp.3d 208, 217-18 (2014).
Perry Capital LLC v. Mnuchin, 864 F.3d 591, 634 (2017).
Petition for a Writ of Certiorari to the U.S. Supreme Court, Andrew T. Barrett v. U.S., 26 F.4th 1274, 8 (2022) (No. 22-99).
Alison Frankel, DOJ: Fannie, Freddie Shareholder Demands Endanger Housing Market, Reuters (Jun. 18, 2014), https://jp.reuters.com/article/idUS297733741120140604/.
Kessler Topaz Meltzer & Check, LLP, KTMC Wins Historic $612 Million Jury Verdict For Fannie Mae and Freddie Mac Stockholders (Aug. 15, 2023), https://www.ktmc.com/news/ktmc-wins-historic-612-million-jury-verdict-for-fannie-mae-and-freddie-mac-stockholders.