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Freddie Mac Earnings Exceed Previous Four Quarters

Despite fears that were initially put forth when then pandemic began, housing has not only been resilient, but literally record setting in almost every way. The secondary mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) played a big part in this, as they always have. Strangely enough, despite these continued earnings (FNMA confirmed they will report on 8/3/2021) and their ability to provide stability and liquidity to the overall housing market, the mortgage giants remain in conservatorship. Even more strange, on July 23rd, 2021 the Supreme Court ruled that a proviso of this conservatorship called the Net Worth Sweep is legal and within the power of the conservator, who happens to be the Federal Government by way of the Federal Housing Finance Agency (FHFA).

In a nutshell, the companies were placed in a "temporary conservatorship" by then Treasury Secretary Paulson during the Bush administration at the outset of the 2008 Housing crisis despite having significant cash reserves. In August of 2012, then Treasury Secretary Geithner under the Obama administration enacted the Net Worth Sweep (NWS), which in essence allowed the Treasury to sweep ALL profits from earnings without transparency as to where or how they be used. To date the amount of money taken from Fannie and Freddie exceeds $300 billion dollars, and while the NWS is on hold for now in an effort to allow the companies to build capital, the ability to re-instate the practice of taking profits can begin again once capital retention limits are met.

For those scoring at home, this is also called "Nationalization". Treasury Secretary Mnuchin in the Trump administration suggested early on one of his priorities was to remove the entities from conservatorship, but that never occurred. As a result of this ill-conceived Net Worth Sweep, a flurry of lawsuits ensued, with one making it all the way to the Supreme Court. Probably even more surprising, was that in a 9-0 unanimous ruling, the Court stated that the Net Worth Sweep was legal and within the power of the conservator. Why is it surprising? Well, the literal definition and purpose of a conservatorship and responsibilities of the conservator described by the FHFA itself "authorizes FHFA as conservator to "take such action as may be: (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity."

I guess we just question the sense of sweeping 100% of profits of a company and claiming it to be part of putting the company in "sound and solvent condition", especially in the case of these companies which are vital to the housing market and to the overall economy. More importantly, if it can be done here, then where and to whom CAN'T it be done? Scary times.

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