Fannie, Freddie Investors Undaunted by Court Loss

A representative of Fairholme Funds, one of the activist hedge funds that brought the lawsuits in both the District and Federal Claims courts, told the Washington Examiner that “although litigation is a lengthy process, shareholder-owned Fannie Mae and Freddie Mac remain vitally important and increasingly valuable to all constituents”, adding that “we will vigorously pursue the enforcement of existing contractual claims and our inalienable rights of property ownership as guaranteed by the United States Constitution.”

Fairholme and others are “likely to get a more fair hearing than they did with Judge Lamberth” in the Federal Claims case, said John Berlau, a fellow at the Competitive Enterprise Institute. CEI is one of 17 free-market think tanks that have called on the Treasury to reverse its collection of Fannie and Freddie’s profits in the name of property rights.

“We’ve been arguing for decades that Fannie and Freddie were receiving government subsidies” and distorting the housing market, said Berlau, “but it’s no answer to say that in this special case it’s OK to violate shareholder rights and contracts.”

Unlike Investors Unite, Berlau favors winding down Fannie and Freddie and replacing them with a system of private capital for mortgage insurance. Investors Unite aims to have the companies recapitalized, reformed and returned to the private sector.

Berlau suggested that the investors’ initial loss in court shows how long the route to legal victory would be. “I think it may make some kind of a deal possible” legislatively, Berlau said, “just because these investors now know it may take years going through the courts.”