By Kuldip K. Ambastha
On Wednesday, June 23, 2021, U.S. Supreme Court rulings (on Collins vs. Yellen, 19-422; Yellen vs. Collins, 19-563; and Mnuchin vs. Yellen, 19-563) led to Federal National Mortgage Association (Fannie Mae, FNMA) having a -32.1% loss and Federal Home Loan Mortgage Corporation (Freddie Mac, FMCC) having a -36.8% loss. Fannie Mae had been chartered by the U.S. Congress in 1938 and buys mortgages in the secondary mortgage market from large commercial banks, pools the mortgages into securities, and sells these securities to investors around the world. Freddie Mac had been chartered by the U.S. Congress in 1970 and buys mortgages in the secondary mortgage market from smaller banks to pool and sell akin to what is described in the previous sentence related to Fannie Mae.
Fannie Mae and Freddie Mac are both overseen by the Federal Housing Finance Agency (FHFA). As government-sponsored enterprises (GSEs) which are now publicly traded, Fannie Mae and Freddie Mac are well-known for playing a large role in providing liquidity to the American mortgage market. The U.S. Supreme Court rulings allowed President Joe Biden to remove the Director of the FHFA and replace this individual with an Acting Director of the FHFA. Also, the U.S. Supreme Court dismissed the claim of Fannie Mae and Freddie Mac shareholders that sought to terminate a 2012 decision which directed Fannie Mae and Freddie Mac to send profits to the U.S. Treasury. This claim was sent back to a lower court (the 5th Circuit Court of Appeals) to determine what remedy shareholders may or may not have as related to the 2012 decision on profits.
Various efforts to overhaul Fannie Mae and Freddie Mac over the years have failed to gain traction. With the change in leadership seen at the top of the FHFA, expect a change in vision as to how Fannie Mae and Freddie Mac should operate going forward. Fannie Mae and Freddie Mac profits will continue to go to the U.S. Treasury and not shareholders, unless the 5th Circuit Court of Appeals rules otherwise in the future.
Keywords – Federal National Mortgage Association, Fannie Mae, Fannie, FNMA, Federal Home Loan Mortgage Corporation, Freddie Mac, Freddie, FMCC, U.S. Supreme Court, 5th Circuit Court of Appeals, U.S. Congress, U.S. Treasury, Federal Housing Finance Agency, FHFA, Director, Acting Director, government-sponsored enterprise, GSE, mortgage, loan, President Joe Biden.
Disclosure – The principals and clients of Ambastha Financial LLC have no positions in FNMA or FMCC.
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