Appeals court strikes blow to investors in Fannie, Freddie dispute

Hedge funds do not have the ability to sue the U.S. government over its decision to claim billions of dollars in profits from ailing housing giants Fannie Mae and Freddie Mac, a federal appeals court ruled Tuesday.

The ruling from the U.S. Court of Appeals for the District of Columbia Circuit strikes a significant blow against a group of investors that had staked a claim at potentially billions of dollars in value from the two government-sponsored enterprises.

Investors had argued that the government has been improperly seizing billions of dollars in profits from the two organizations, stemming from a policy decision made as the government propped up the two mortgage giants.

Some investors may still have legal standing to pursue claims, depending on when they purchased their shares and if the investment came before the government stepped in to salvage the two.

{mosads}The court offered a split decision, with two members of the panel backing the government’s move and one judge dissenting.

At the heart of the debate is whether the government had the legal right to change the terms of its bailout of Fannie and Freddie to effectively claim all of their profits while under conservatorship.

The appeals court largely upheld a lower court ruling, which found that investors could not file suit, as the housing and economic recovery laws passed in the wake of the financial crisis granted broad deference to policymakers to take action.

In 2008, the housing enterprises’ regulator, the Federal Housing Finance Agency, stepped in and took over their operations, as they faced collapse following the subprime mortgage crisis. As part of the arrangement, the government received preferred shares in the two companies, as well as an arrangement that saw the government receive a hefty dividend payment from the pair each quarter.

However, as Fannie and Freddie struggled to earn enough money to make that payment, it resulted in a situation where the two ended up borrowing money from the government to pay out the dividend. In turn, the government restructured the arrangement so that each quarter, the enterprises effectively paid their net worth each quarter to the government.

As the two enterprises recovered along with the housing market, the government began collecting billions of dollars, now exceeding the roughly $188 billion they received in bailout funds originally.

Some hedge fund investors had piled into Fannie and Freddie when they were under distress, but saw their ability to recoup profits from the enterprises erased by that move. Several investor groups mounted legal challenges beginning in 2013, arguing the altered terms amounted to an unconstitutional seizure by the federal government.

Value in the two companies had seen strong gains since President Trump won the election, particularly after comments from his now-Treasury secretary, Steven Mnuchin, who suggested he wanted to see the government exit its stake in the two mortgage giants.

But the two enterprises’ stocks plummeted after Tuesday’s ruling, both seeing their value drop over 22 percent after it was released.