On Tuesday, February 21st, a federal appeals court upheld a decision barring a group of investors in Fannie Mae and Freddie Mac from suing to overturn the U.S. government’s policy of transferring profits from the GSEs to the Treasury Department. The court did however find that certain shareholders can pursue breach of contract claims.
According to a recent article in the American Banker, the central issue of this case was the legitimacy of a 2012 decision by the government to shift from receiving a 10 percent quarterly dividend on its stake in the GSEs to collecting effectively all of their profits. This policy, now known as the "net-worth sweep", was implemented under the 2008 Housing and Economic Recovery Act (HERA) which created the Federal Housing Finance Administration and gave it broad authority over the GSEs. Authority was granted not just to re-stabilize the mortgage giants which had been rocked by the financial crisis but also to ensure that taxpayers recouped the $187 billion bailout which Fannie and Freddie received.
However, investors have looked to sue over the net worth sweep, many arguing that the government’s change in policy goes beyond the authority granted by HERA.