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Treasury, FHFA Are Ignoring the Law in Their Handling of Fannie and Freddie Conservatorships

Bloomberg BNA, By Michael Krimminger and Mark A. Calabria

Recent reports about federal court decisions in lawsuits challenging actions by Treasury and the Federal Housing Finance Agency (FHFA) in the conservatorships of Fannie Mae and Freddie Mac may lead some to conclude that the government has been vindicated. However, a look beneath the surface reveals that these initial decisions do not address the substance of the challenges to the actions in the conservatorships of these two government-sponsored enterprises, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association (GSEs)– particularly the 2012 Treasury-imposed changes to the original conservatorship agreement.

The Treasury changes, embodied in the “Third Amendment,” implemented a “net worth sweep” that strips the GSEs of their entire net worth each quarter and prevents the accumulation of any funds to repay pre-conservatorship shareholders, or build capital or any buffer against future losses. In addition, it explicitly reduces to zero the GSEs’ minimal reserve against losses by 2018. Fundamentally, this action ignored the statute governing the conservatorships, the Housing and Economic Recovery Act (HERA), and decades of established practice.

Read the full article: Treasury, FHFA Are Ignoring the Law in Their Handling of Fannie and Freddie Conservatorships