Fannie Mae and Freddie Mac shareholders sue US government

13 Jun 2013

Fannie Mae and Freddie Mac shareholders sued the US over allegations that the 2008 takeover of the housing lending giants was illegal and cost investors billions of dollars.

The takeover of the mortgage companies by the Federal Housing Finance Agency, ''while beneficial to the economic welfare of the nation, destroyed the value of Fannie Mae's and Freddie Mac's common and preferred stock and trampled the private ownership rights'' of shareholders, according to the complaint filed yesterday in the US Court of Federal Claims in Washington.

The shareholders are seeking $41 billion in damages. Seattle-based law firm Hagens Berman Sobol Shapiro LLP, a lead counsel in class-action lawsuits is representing the shareholders.

Investors in Fannie Mae and Freddie Mac had taken a renewed interest in the companies' future now that they had started posting record profits with the housing market rebounding. Fannie Mae posted its best results ever in 2012, reporting net income of $17.2 billion for 2012, overtaking S&P 500 companies such as Wal-Mart Stores Inc, General Electric Co and Berkshire Hathaway Inc according to data compiled by Bloomberg.

Freddie Mac, the smaller of the two, reported earning $11 billion last year and both said they expected to remain profitable.

Among the plaintiffs are the main subsidiary of Washington Federal of Seattle, the Austin Police Retirement System.

The two companies, which are government-sponsored enterprises, or GSEs, were taken under government conservatorship in September 2008. The US treasury holds $189.4 billion in senior preferred share of the GSEs, for bailout assistance, with suspension of dividends on all other share classes since September 2008.

The GSEs continue to play a critical role in mortgage finance, with around $5.2 trillion held in mortgage loans and mortgage backed securities as of 31 March, and purchasing roughly 90 per cent of newly originated mortgage loans in the US.

With the return of the companies to profitability, common shares of the GSEs have rebounded tremendously this year, and have been paying substantial dividends to the government and some private investors see the possibility for the companies to escape the bailout.

In a statement, Steve Berman, managing partner and co-founder of Hagens Berman, said the government was "obligated to provide just compensation under the Fifth Amendment for shareholders who suffered significant financial losses."