Blow for shareholders of Fannie & Freddie

The prices of the American real estate finance companies Fannie Mae and Freddie Mac, which were practically nationalized during the financial crisis, have fallen massively. The reason is a disastrous ruling by the Supreme Court for private shareholders.

Fannie Mae Headquarters in Washington (archive image)

Dhe cause of the financial crisis around 14 years ago is essentially to be found in the American real estate market. Accordingly, she whirled him around. The then semi-public financing agencies, known under the names Fannie Mae and Freddie Mac, got into trouble. Their share prices fell from more than $ 60 at the time and have barely hit the $ 5 mark since then. On Wednesday, shareholders had to cope with another slide in prices when they fell by more than 30 percent.

The reason was a ruling by the Supreme Court. The agencies are vital to the housing industry. You buy real estate loans from financiers and securitize them in bonds. They guarantee the servicing of the real estate loans. Under normal circumstances, a safe business that stabilizes the housing market. Not too but during the financial crisis. At the time, Fannie and Freddie got into trouble as a result of massive loan defaults. The Obama administration took control and saved it with $ 188 billion in taxpayers’ money. In return, however, the Ministry of Finance has been collecting practically all profits since then, and there were plenty of them after the financial crisis was over. The further fate of the agencies is considered to be the greatest unresolved matter from the financial crisis.

Share price of “Freddie Mac”

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Private shareholders refused to accept the status quo and filed a lawsuit, which has now been dismissed by the Supreme Court, which declared the skimming off of profits just as legal as the authority to appoint the head of the Federal Housing Finance Agency as it sees fit.

At the time, the Trump administration had appointed Mark Calabria, an economist who was considered to be libertarian, and who sought to reduce the importance of Fanny and Freddy, who guarantee $ 5.7 trillion in mortgages. The Biden government could pursue completely different goals, writes the Bloomberg news agency.

If the Democrats in Congress have their way, Fannie and Freddie should make living more affordable again, especially for socially disadvantaged groups such as minority groups. Within a few hours of the verdict, Sandra Thompson, the head of the department for housing policy goals, was appointed managing director of the FHFA. This and a permanent successor will in fact be able to control the terms and conditions of Fannie and Freddie.

Share price of “Fannie Mae”

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The defeat of the shareholders before the Supreme Court takes Biden any pressure to change the status quo for the time being, Bloomberg quotes Jim Vogel, analyst at FHN Financial. Administration and Congress could now keep this as long as they wanted. Isaac Boltansky from Compass Point Research & Trading does not expect any major changes in home finance. The system is indeed a “monster of Frankenstein” and anything but perfect, but it continues to work well. Congress has neither the interest nor the capacity to fix something that is not broken.

In addition, there are other lawsuits with different legal arguments. The current decision did not deal with demands from shareholders for fair compensation for violating shareholder agreements, quoted Bloomberg Hamish Hume, attorney for Boies Schiller Flexner, who is representing investors in another case. Those who suffered from the recent price slide included hedge funds such as Paulson & Co., Pershing Square Capital Management and Fairholme Funds, which also hold certain preferred stocks, the loss of which is said to have exceeded 60 percent in some cases.