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Home >> Daily Dose >> Fannie Mae, Freddie Mac Deemed Private Companies by 9th Circuit Court
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Fannie Mae, Freddie Mac Deemed Private Companies by 9th Circuit Court

DSN-freddiefannie-620x330The Ninth Circuit Court of Appeals recently affirmed a district court’s decision that Fannie Mae and Freddie Mac are private companies, albeit companies chartered or sponsored by the federal government, and not “officers, employees, or agents of the federal government for purposes of the False Claims Act.”

In upholding the lower court’s decision in the case of United States of America ex rel. Adams v. Aurora Loan Servs., Inc, the Ninth Circuit Court ruling stated that the FHFA’s conservatorship of the Enterprises does not “transform Fannie Mae and Freddie Mac into federal instrumentalities. We agree that the FHFA has ‘all the rights, titles, powers and privileges of’ Fannie Mae and Freddie Mac. However, this places FHFA in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.”

The ruling by the Ninth Circuit Court could have major implications for the lawsuits currently pending that challenge the legality of the sweeping of all GSE profits into Treasury, commonly known as the “Net Worth Sweep.”

Myron Steele, an attorney representing the plaintiff in one such lawsuit (Jacobs v. Federal Housing Finance Agency), wrote a letter to Judge Gregory Sleet of the U.S. District Court for the District of Delaware, where the Jacobs case is pending, and informed the judge of the Ninth Circuit’s ruling. Steele contends that the Ninth Circuit ruling means that as private companies, the GSEs are subject to Delaware state law—which does not permit the Net Worth Sweep.

Steele stated in his letter that the Ninth Circuit Court’s holding that the conservatorship placed FHFA “in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around” contradicts the FHFA’s motion to dismiss the Jacobs case, in which the Agency asserts that Fannie Mae and Freddie Mac should be subject to federal and not state law.

“We agree that the FHFA has ‘all the rights, titles, powers and privileges of’ Fannie Mae and Freddie Mac. However, this places FHFA in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.”

Ninth Circuit Court of Appeals

“This holding is contrary to Defendants’ arguments that federal law, not state law, governs the conservator’s power to implement the Net Worth Sweep as a term of preferred stock, and that FHFA has authority under HERA to act as it sees fit without regard to whether Fannie Mae and Freddie Mac themselves have power under state law to issue preferred stock having the terms of the Net Worth Sweep,” Steele wrote.

The FHFA declined to comment on the Ninth Circuit ruling.

The case ruled on by the Ninth Circuit Court was a False Claims Act suit originally brought about by a group of realtors in the U.S. District Court for the District of Nevada against various mortgage lenders and loan servicers. The plaintiffs claim that the defendants certified that loans purchased by Fannie Mae and Freddie Mac were free and clear of certain HOA charges and liens when they were not, and further alleged that the false certifications were made to the GSEs as instrumentalities of the United States, according to the Ninth Court ruling.

The Net Worth Sweep began in August 2012 after an amendment to the original bailout agreement for Fannie Mae and Freddie Mac. The GSEs returned to profitability in 2012, four years after accepting a taxpayer-funded bailout of $187.5 billion. The Net Worth Sweep has spawned several lawsuits by Fannie Mae and Freddie Mac investors, notably by Florida-based mutual fund Fairholme Funds (still pending). A spokesperson for Fairholme Funds told MReport that the firm had no comment on the Night Circuit Court ruling.

Click here to view Steele’s letter and the Ninth Circuit Court ruling.

About Author: Kendall Baer

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Kendall Baer is a Baylor University graduate with a degree in news editorial journalism and a minor in marketing. She is fluent in both English and Italian, and studied abroad in Florence, Italy. Apart from her work as a journalist, she has also managed professional associations such as Association of Corporate Counsel, Commercial Real Estate Women, American Immigration Lawyers Association, and Project Management Institute for Association Management Consultants in Houston, TX. Born and raised in Texas, Kendall now works as the online editor for DS News.

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