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It is near certainty that Treasury and FHFA together conspired and crafted the Net Worth Sweep Amendment to help expedite the wind down. There are plenty of public information not to mention protected and privileged information to support that fact. To get a better picture of the situation, you’ll need to understand the statutory purpose and actions of FHFA/Conservator in conjunction with the communication and actions of Treasury. Meanwhile, Senator Charles Grassley of Iowa, Chairman of the Senate Judiciary Committee wants answers, the truth and transparency with a deadline of April 20th.

HERA Statutory Purpose:

The purpose of appointing the Conservator is to preserve and conserve the Company’s assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly to the instability in the current market.

The purpose stated above from FHFA was absolutely never in their intention based on their actions and completely misleading to say the least when they placed Fannie Mae and Freddie Mac under Conservatorship. Most would considered it as an outright huge lie after reviewing FHFA and Treasury Actions Analysis.

FHFA and Treasury Actions Analysis:

When the 2012 Amendment was under consideration, Fannie Mae and Freddie Mac were experiencing a turnaround in their profitability. Due to rising house prices and reductions in credit losses, in early August 2012 the Enterprises reported significant income for second quarter 2012. Fannie Mae had net income of $5 billion and Freddie Mac had net income of $3 billion, and neither required a draw from Treasury under the PSPAs.

It is clear, on August 17, 2012, less than two weeks after the Enterprises announced their positive quarterly earnings, Treasury and FHFA announced that they had modified the terms of the PSPAs. In its press release, Treasury said that the changes would “help expedite the wind down of Fannie Mae and Freddie Mac, make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market.”

The 2012 Amendment modified five areas of the PSPAs:

(1) Change the structure of dividend payments owed to Treasury:

The 2012 Amendment significantly altered the structure of the dividend payment, such that the Enterprises are no longer required to draw funds from Treasury just to pay Treasury dividends. As of January 1, 2013, the dividend payment is no longer based on a fixed percentage of the liquidation preference. Instead, the dividend is based on the amount of positive net worth reported by each Enterprise. Net worth is the amount by which assets exceed liabilities.

(2) Increase the Enterprises’ rate of mortgage asset reduction:

The PSPAs originally required that each Enterprise reduce its mortgage assets by 10% per year down to $250 billion. The 2012 Amendments accelerate the reduction to 15% per year. In announcing the 2012 Amendments, FHFA’s Acting Director indicated that the goal of “the faster reduction in the retained mortgage portfolio” was to “further reduce risk exposure and simplify the operations of Fannie Mae and Freddie Mac.” As of December 31, 2012, each Enterprise could own mortgage assets valued at no more than $650 billion. With the 15% reduction rate, the Enterprises would reduce their portfolios to $250 million by 2018, four years earlier than previously scheduled. So far, the Enterprises have met or exceeded their annual 10% reduction target.

(3) Suspend the periodic commitment fee:

Under the original PSPAs, each Enterprise was supposed to begin paying in 2010 a quarterly “periodic commitment fee” in an amount to be agreed on by Treasury and the Enterprises. The amount was never set and Treasury consistently waived the fee, so it was never paid. Although the 2012 Amendments retain the fee within the PSPAs, they suspend it as long as the new dividend formulation is in place.

(4) Require that the Enterprises produce annual risk management plans:

The 2012 Amendments added a new requirement that each Enterprise, under the direction of FHFA, provide a “risk management plan” to Treasury on December 15th each year starting in 2012. The risk management plan “shall set out [the Enterprise’s] strategy for reducing its enterprise-wide risk profile and shall describe, in reasonable detail, the actions [the Enterprise] will take, to reduce both the financial and operational risk associated with each reportable business segment.” In its press release announcing the 2012 Amendments, Treasury indicated that these plans would “support a thoughtfully managed wind down” of the Enterprises. Treasury also described the plans as focusing on how each Enterprise intends to “reduce taxpayer exposure to mortgage credit risk for both its guarantee book of business and retained investment portfolio.” The Enterprises provided these plans to FHFA for 2012.

(5) Exempt dispositions at fair market value under $250 million from the requirement of Treasury consent.

The PSPAs require that the Enterprises obtain Treasury’s consent for certain transactions. Those transactions requiring consent include any asset dispositions, with a few exceptions. For example, one exception was that the required mortgage asset reductions by the Enterprises (i.e., the annual 10%—now 15%—reductions) do not require Treasury consent. The PSPAs also excepted any asset dispositions for fair market value “in the ordinary course of business, consistent with past practice,” presumably to allow the Enterprises to conduct their business without having to seek Treasury approval for routine transactions. The 2012 Amendments add an exception to the consent requirement, allowing the Enterprises to dispose of assets or properties at a fair market value of less than $250 million without seeking Treasury’s approval, even if the transaction does not fit into the category of “ordinary course of business.” The Enterprises may still need FHFA approval for the transactions.

In Conclusion:

Treasury’s announcement of the 2012 PSPA Amendment said that the changes would “make sure that every dollar of earnings” the Enterprises generate would be “used to benefit taxpayers,” “support the continued flow of mortgage credit,” and “help expedite their wind down.”

It is a fallacy that ending the circularity of draws from Treasury to pay dividends increases the likelihood that ample funds will remain available for Treasury support of the Enterprises, if such support becomes necessary. The change in the dividend structure also will affect quarterly payments to Treasury, potentially resulting in the Enterprises returning more money to Treasury sooner. Indeed, because of accounting treatment, sustained profitability of the Enterprises could result in one-time large dividend payments to Treasury from each Enterprise. However, the significance of the impact of the change in the dividend structure depends on a variety of factors, including the magnitude of fluctuations in the Enterprises’ net worth. Further, increasing the rate at which the Enterprises shrink their retained mortgage portfolios may pose challenges as the remaining investments are less liquid. At the same time, this will increase Enterprises operating and financial risks.

The evidence is clear and factual. The purpose of the 2012 Amendment was to more quickly reduce the Enterprises’ assets rather than preserve and conserve as prescribe in HERA. Furthermore, the changes to the PSPAs DO NOT help put the Enterprises in a sound and solvent condition but rather set the course toward financial housing disaster.

Fast Forward:

Charles Grassley Questions Diversion of Fannie and Freddie Earnings

Charles E. Grassley, Chairman, Committee on the Judiciary seeks the truth and wants answers to the following no later than April 20, 2015 from Eric Holder, US Attorney General and Jack Lew, Treasury Secretary:

1. Has the President personally invoked executive privilege over documents related to the Fannie Mae, Freddie Mac and Treasury Third Amendment agreement? If so, when? If not, why are DOJ attorneys citing that privilege as a reason to withhold those documents?

2. Does the Third Amendment cause a breach of any of FHFA’s statutory duties to ensure that each regulated entity operates in a safe and sound manner? Please explain.

3. During the negotiation of the Third Amendment between Treasury and FHFA, did DOJ communicate with any of the entities involved regarding its legality? If so, please describe those communications in detail.

4. Under what legal authority was the Third Amendment authorized?

5. Prior to litigation, did DOJ discuss with Treasury and/or FHFA the need to assert privileges, including executive privilege, over certain documents?


What’s Next:

No later than April 20th, 2015, DOJ and Treasury must answer those 5 critical questions. The answers could potentially shed more lights on the wrong doing of those agencies when they crafted the 2012 Amendment to expedite the wind down of Fannie Mae and Freddie Mac.  It is no longer about if but when we all will know the truth and nothing but the truth to assist plaintiff expedite their case in Federal Claims Court.

Depositions of former FHFA directors and others are scheduled for April 17th and 29th but it is subject to change to several dates in May. More importantly, it is not expected to be rescheduled beyond the end of May which tells us that plaintiff has enough evidence to move forward.

Factual Reference Links:

Treasury Department Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie

Third Amendment dated as of August 17, 2012

Questions and Answers on Conservatorship

Letter to DOJ from Chairman, Committee on the Judiciary  

Letter to Treasury from Chairman, Committee on the Judiciary

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