Report: Supreme Court to review Fannie Mae, Freddie Mac ‘profit sweep’ policy

The Supreme Court agreed on Thursday to issue a ruling on whether investors can legally challenge a years-old deal requiring housing lenders Fannie Mae and Freddie Mac to turn over millions of their profits to the federal government, Bloomberg News reported.

The payments were set up in 2008 after the federal government bailed out Fannie and Freddie during the housing crisis, but the companies have more than repaid the bailout money and are still being forced to part with the lion’s share of their profits each year.

According to Bloomberg, the two companies have paid more than $300 billion to the Treasury Department in what the outlet called the “profit sweep” scheme, and President Donald Trump has been trying to end the practice for more than a year.

The ruling would settle whether the federal government is forced to defend legal challenges to continuing the profit sweeps, or could refuse to defend it and let it be changed.

Investors: Profit sweeps exceed authority

Investors are arguing that the profit sweep agreements exceed the authority of the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie.

The justices will reportedly hear the case sometime in the next nine-month session, which begins in October.

Being able to stop the payments to the federal government would give Fannie and Freddie a chance to capitalize more on their profits, which will ultimately lead to them being able to write more loans.

“So long as there is a credible threat that litigation will invalidate the net-worth sweep, a cloud of uncertainty will hang over the companies’ capital structure,” shareholders told the Supreme Court, according to Bloomberg.

They went on: “Investors will not be willing to supply the tens of billions of dollars in new capital that are essential to Treasury’s reform plan.”

The FHFA said it “looks forward to the U.S. Supreme Court taking up” the case and hopes that the result will clear up any issues involved, Bloomberg reported.

Looking forward

According to a 2019 report from MarketWatch, the Trump administration, for its part, has argued that Fannie and Freddie should “continue paying a ‘commitment fee’ after being recapitalized to maintain their access to the government’s preferred capital lines.”

It remains unclear clear how large the commitment fee would be, but Treasury Secretary Steve Mnuchin indicated in September that it would “allow both Fannie Mae and Freddie Mac to retain their earnings, which will be a significant increase in capital and a step in the right direction to us ultimately raising third-party capital,” MarketWatch reported.

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