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Yale Legal Scholar: FHFA & Treasury “Exceeded” Authority on Fannie and Freddie

Writing in the National Law Review, Yale Law School lecturer Logan Beirne dissects the recently filed lawsuit in Iowa by three Fannie Mae and Freddie Mac investors accusing the federal government of exceeding its authority as a conservator. Beirne says the case “astutely focuses on [the Federal Housing Finance Agency’s statutory breeches,” unlike the earlier suits that focused on constitutional claims. Beirne writes:

“However, rather than work as conservator to benefit Fannie Mae and Freddie Mac’s shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. In a surprise deal, the FHFA effectively wiped out the private shareholders and essentially turned the proceeds of Freddie and Fannie to the U.S. Treasury.”

When the government decided to put the enterprises into conservatorship, it was done in part to ensure that Fannie and Freddie did not experience more distress than they already had. We’ve noted before that the government imposed tough terms in exchange for this, but at the time, the vast majority believed it was a necessary step. As Beirne points out, the companies returned to profitability by the second quarter in 2012 … and then the Third Amendment Sweep was created just a few months later.

As a conservator, though, FHFA, despite comments from officials, had a statutory obligation to shareholders. Concerns for taxpayers are important, yes, but breaches of contractual responsibilities are frowned upon, and can lead to future distrust. Beirne writes:

“As conservator under HERA, it is precisely the FHFA’s responsibility to work for the benefit of the shareholders. Under standard corporate law principles, that conservator is bound, by a strong fiduciary duty to protect the corporate assets for the benefit of both common and preferred shareholders. By working for the benefit of third party taxpayers – and to the detriment of private shareholders – the FHFA is in breach of its duties under HERA.”

The three plaintiffs in the Iowa case – Thomas Saxton, Ida Saxton and Bradly Paynter – have alleged that FHFA and the U.S. Treasury “systemically exceeded their limited authority under HERA” and “acted arbitrarily and capriciously.” Anyone who’s familiar with the history here should certainly agree with that. Beirne rightly concludes that while the “political winds of the moment” make the seizure of private property from shareholder seem popular, the long-term consequences of allowing this violation of the rule of law to go unchecked would have very costly consequences on the housing market.

We strongly encourage you to spend a few minutes reading the piece – it’s well worth your time.