A recently revealed memo from the Treasury Department indicates that owners of Fannie Mae and Freddie Mac common stock will not be able to access any future earnings from the mortgage giants, a previously undisclosed arrangement that experts say might violate securities laws and amount to a de facto nationalization of the companies.
Fannie Mae and Freddie Mac, known as government-sponsored enterprises (GSEs), were sharply criticized by many for their role in the 2008 financial crisis as packagers of mortgage-backed securities that went underwater. Treasury bailed out the mortgage companies with a total of $189.5 billion in taxpayer funds.
Some investors flocked to the companies’ troubled shares in hopes that a housing recovery would be imminent. That is exactly what happened—Fannie and Freddie began earning billions in mid-2012 and have repaid $185 billion to the Treasury.
However, a 2010 Treasury memo addressed to then-Secretary Timothy Geithner mentioned "the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future."
The memo, produced in a lawsuit filed by Fannie and Freddie shareholders, was first discussed earlier this month at a Washington, D.C., forum hosted by a shareholder advocacy group.
Thousands of investors in the companies were not made aware of the memo, which outlined a policy that deprived them of future earnings. Securities laws require the disclosure of any "material" information that might affect an investor’s view of a company.
James Cummins, a leading securities lawyer who has litigated against Fannie and Freddie since 2004 on various issues, said in an interview that the information in the memo would have been of great interest to potential investors at the time.
"It’s material information because it was going to tell people who might want to buy stock, ‘Hey, by the way, you’re not going to get any dividends and all of the earnings of the company are going to U.S. Treasury,’" he said.
A spokesman for the Treasury Department told the New York Times, which originally reported on the memo, that it referred to recouping taxpayers.
"The relevant language in the memo was about the importance of repaying taxpayers for the enormous investment that they made in the GSEs if the GSEs ever generated positive returns, which, at the time, was uncertain to ever occur," the spokesman said.
Cummins said the memo was similar to a 2012 announcement by Treasury that it would capture all the profits posted by Fannie and Freddie in each quarter rather than collect annual dividend payments.
The companies were placed under the care of a conservator, the Federal Housing Finance Agency (FHFA), in 2008 that aimed to "preserve and conserve [their] assets and property."
Cummins said that conservatorship has produced a unique situation in the mortgage market.
Critics accuse Fannie, Freddie, and the FHFA—which still guarantee nine out of every 10 U.S. mortgages—of crowding out competition from private mortgage insurers.
"It’s like a sick person going into a hospital, being cured of the illness, and then having the hospital refuse to release the patient," Cummins said.
"It’s so different from what the entrepreneurial, capitalistic dream of the U.S. is supposed to be," he added. "It’s just totally different from what anybody anticipated was going to happen."
Cummins said Treasury’s control of the earnings, coupled with presidential appointments to the board of directors for Fannie and Freddie, more closely mirrors nationalized industries "in the Soviet Union or in Mexico."
"If you combine U.S. Treasury taking all the earnings and the [Obama] administration taking a lot of the board seats, I don’t see how you can describe it as anything other than nationalization," he said.
Republican lawmakers continue to blame Fannie and Freddie for causing the financial crisis and have proposed several bills to revive the private mortgage market.
They also say the mortgage agencies cannot legally buy back the billions in stock they sold Treasury—and repay taxpayers—until Congress changes their status.