WASHINGTON Feb 5 Investors that have bid up the preferred and common shares of government-controlled Fannie Mae and Freddie Mac are starting to get louder.
Leading the charge: consumer advocate Ralph Nader, a shareholder in the two companies who has aligned himself with some unlikely bed-fellows, including hedge funds.
The groups are mounting a push to ensure that any decision on the future of the two taxpayer-owned mortgage finance giants helps shareholders salvage some of their money.
President Barack Obama and Democrats and Republicans in Congress want to wind down Fannie Mae and Freddie Mac. But the effort is unlikely to break a political log-jam that threatens to put the reform effort out of reach - at least during the current administration's remaining years in office.
Fannie and Freddie, now making record profits, are expected soon to make taxpayers whole on their bailouts, dampening the urgency for Congress tackle housing finance reform legislation.
"Housing reform will have an impact not just on shareholders, but on industry stakeholders and the broader economy," Nader said at a round table discussion in Washington as part of his campaign with Shareholder Respect, a group created to empower Fannie and Freddie shareholders.
Fannie and Freddie, which own or guarantee 60 percent of all U.S. home loans, were taken over by the government in 2008. Shareholder dividends were suspended and the duo, or so-called government-sponsored enterprises, are not allowed to rebuild capital.
The firms sweep most profits as dividends back to the Treasury on the government's 80 percent stake in them.
Several hedge funds, including Perry Capital and Bruce Berkowitz's mutual fund Fairholme Fund, bought preferred stock of Fannie and Freddie cheaply and have filed lawsuits seeking to overturn the bailout agreement. The hope is the firms will eventually be able to buy their way out of government control.
Perry Capital maintains the decision by the Treasury to require Fannie and Freddie to sweep their profits to the government as dividend payments is an overreach that is "plainly unlawful," according to Theodore Olson of Gibson, Dunn & Crutcher LLP, a former U.S. solicitor general who represents them.
"This deal has proven extraordinary lucrative for the federal government," said Olson. He admits it will take a long time to win in the courts, and there is still hope Congress and the White House will act before judges alter the landscape.
Fannie and Freddie shareholders, mainly those who own preferred stock with a face value of $33 billion, want to share in any profits that exceed the amount of the government's capital injections into the firms.
So far, no Republican or Democrat has supported the argument, and it has not won over the Obama administration.
Lawsuits also align investors with nonprofit groups that want a piece of the Fannie and Freddie bounty. For them, the issue is how much Fannie and Freddie can give back to low-income housing trust funds now that they are making profits.
Fannie Mae and Freddie Mac have taken $187.5 billion in U.S. aid since the government takeover. They have since paid about $185.2 billion in dividends to the government, thanks to a surge in the U.S. housing market.
Congress had created two housing trust funds to build a revenue source for low-income housing using part of Fannie and Freddie's profits. But the Federal Housing Finance Agency, the companies' regulator, suspended payments into the funds in 2008, after the government seized the companies as mortgage losses mounted.
"The suspension was supposed to be made temporary, which implies it is supposed to be revisited," said Sheila Crowley, president of the National Low Income Housing Coalition, whose organization is a plaintiff in a lawsuit against the regulator.
The group, which aims to provide subsidies to rehabilitate and fund low-income housing, is seeking to force Fannie Mae and Freddie Mac to resume payments into the trust fund.
Crowley said the circumstances that prompted the FHFA to suspend those payments no longer apply since the payments would not add to the total cost of the government's bailout.
Litigation is expected to drag out to 2019 or later.
Even if the two companies' dividend payments were to exceed the amounts borrowed from the government in the future, the companies would still owe money, because the bailout does not have a mechanism for a buy-back of the government-held preferred shares.