Tag Archives: takings

Whither The Housing Trust Fund?

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As part of my review of the litigation surrounding the newly-profitable Fannie And Freddie (here, here, here and here), I turn to the complaint filed by “extremely low income tenants in desperate need of affordable housing” and the National Low Income Housing Coalition and the Right to the City Alliance, Samuels et al. v. FHFA et al., No. 1:13-cv-22399 (Jul. 9, 2009).

As the complaint notes, Congress created the Housing Trust Fund as part of the Housing and Economic Recovery Act of 2008 (HERA).  The Housing Trust Fund was to be funded by contributions by Fannie and Freddie that were based on their annual purchases.   Those contributions could amount to hundreds of millions of dollars a year.

But here was the rub:  the Director of the FHFA could suspend  those contributions if the Director finds that they

(1) are contributing, or would contribute, to the financial instability of [Fannie or Freddie];

(2) are causing, or would cause, the [Fannie or Freddie] to be classified as undercapitalized; or

(3) are preventing, or would prevent, [Fannie or Freddie] from successfully completing a capital restoration plan under section 4622 of this title. (14, quoting 12 U.S.C. section 4567(b))

And that is just what happened in 2008:  the FHFA put them into conservatorship because of fears of their impending insolvency and their mounting losses. With the housing recovery, Fannie and Freddie have returned to profitability — massive profitability. But the federal government has redirected those profits to the Treasury, which had provided many billions of dollars to the two companies during the early years of the crisis without funding the Housing Trust Fund.

The plaintiffs allege that despite “the record profits of the Enterprises and despite the statutory requirement that any suspension of payments be temporary,  the Federal Defendants have failed and refused to review these findings and/or discontinue their suspension of the statutorily required payments by Fannie Mae and Freddie Mac into the Housing Trust Fund.” (17) The plaintiffs allege that this is “arbitrary and capricious in light of the changed and current financial condition of the Enterprise. The required statutory contribution is a small percentage of the Enterprise’s profits and thus would not contribute to the financial instability” of the two companies or to the other two bases for suspending the contributions pursuant to section 4567(b). (18, citations omitted) In sum, “the level of capitalization is solely a function of the policy decisions of the conservator not the cost of contributions to the Housing Trust Fund.” (22)

The big challenge that the plaintiffs face, as far as I can tell, is how they can convince the Court that the two companies are financially stable when they are still so deeply in debt to the federal government, notwithstanding the billions of dollars of profits that they two companies have remitted so far to the Treasury.

Fairholme or Foul? Investor Complaint Over Fannie and Freddie Preferred

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I recently reviewed the complaint filed by former Solicitor General Olson in Perry Capital LLC v. Lew and today I review the complaint in a similar lawsuit, Fairholme Funds, Inc. v. United States, filed July 9, 2013.  Fairholme filed another lawsuit the next day, Fairholme Funds, Inc. et al. v. FHFA et al., which I will review tomorrow. Whereas the Perry case alleged violations of the Administrative Procedures Act and the Housing and Economic Recovery Act of 2008 (HERA), the July 9th Fairholme case alleges that the United States must pay just compensations pursuant to the Fifth Amendment of the US Constitution for taking the plaintiffs’ property, by gutting Fannie Mae and Freddie Mac preferred shares of all of their worth.

As with the Perry case, the Fairholme complaint turns on whether an amendment to the government’s preferred stock documents which gave to the government all of Fannie and Freddie’s profits created a new security in violation of HERA.  In particular, the complaint alleges that by “changing the dividend on its Government Stock in this manner, FHFA actually created, and Treasury purchased, an entirely new security.” (5) This, it appears to me, is a highly contested claim.

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Evoking a famous Supreme Court case, the complaint also states that just “as the Federal Government cannot seize the assets of corporations (for example, the nation’s steel mills) for a public purpose without paying just compensation, so too it cannot seize the shares of stock in corporations to accomplish the same end.” (23) This implicit comparison to the Youngstown Steel case does not work as far as I am concerned.  In Youngstown Steel, the Supreme Court struck down President Truman’s exercise of his inherent authority to seize steel mills in order to support the Korean War mobilization.  Here, we have the federal government already knee deep in the affected companies.  Fannie and Freddie are government-sponsored enterprises; were placed in conservatorship; and have the federal government as their majority shareholders.

While the issues here are complex, my first read of the complaint is that the plaintiffs have a tough row to hoe even though the federal government may have upended preferred shareholders’ settled expectations.