The history of how we got here is messy and controversial:
Fannie Mae and Freddie Mac were originally created with the purpose of “promoting access to mortgage credit through the nation…by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing” U.S.C § 1716(3). The design ensured government intervention to effectively subsidize homeownership.
A particularly unique aspect of the US mortgage system, the fixed-rate mortgage loan, is made possible by the stability and liquidity FNMA and FMCC. No other nation offers such a product, instead issuing their mortgage loans on a floating interest rate basis. This arrangement essentially shifts massive amounts of risk from private investors to the US government. The unique relationship between the GSEs and the private markets is a double-edged sword. It in effect allows thousands of Americans to become homeowners and at the same time, can encourage excessive risk taking ultimately destabilizing the housing market.
On July 30, 2008, Congress enacted the Housing and Economic Recovery Act (“HERA”), authorizing the Treasury to invest in the GSEs on the basis of the “systematic danger that a Fannie Mae or Freddie Mac collapse posed to the already fragile national economy.” In exchange for the Treasury’s funding commitment, which as of August 8, 2012 amounted to $187.5 billion in total, Fannie and Freddie provided the Treasury with senior preferred stock.
Under government conservatorship, FNMA and FMCC have respectively paid out dividends of more than $31.5 and $26.9 billion in excess of the principal loan they received to the Treasury over the past few years. While the dividend was initially fixed at 10% for the Treasury’s senior preferred shares, the change in initial terms in 2012 to require a variable rate dividend payout has prevented the improvement of FNMA and FMCC’s balance sheets, despite these past returns. So, for the past 8 years, FNMA and FMCC have been required to give all profits to the government in excess of $3 billion. This has not only prevented common and junior preferred shareholder from seeing any returns on their investment, but the building of capital by either GSE as well.
The plaintiffs find this stipulation to be the most egregious offense of all. From a philosophical standpoint they argue that the rights granted in the arrangement between the FHFA, Treasury, and GSEs effectively amounted to the nationalization of a once private company, a fundamental violation of America capitalist history and democratic values.
The government and their supporters argue that the 2009 financial crisis was extraordinary situation and the government was given broad and unprecedented leeway to act and prevent what could potentially have been a repeat of the great depression.
Investment returns aside, the battle for the GSEs which is playing out on the legislative, legal and economic front is a battle for shaping the future of American values.
Disclosure: I am/we are long FNMA/FMCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Forbes). I have no business relationship with any company whose stock is mentioned in this article.