Many people in businesses related to the U.S. housing industry feel that reform of U.S. housing finance is essential to avoiding another financial crisis. In an article published in American Banker, former FDIC counsel Michael H. Krimminger said that the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, remain wards of the state. This came as a result of the conservatorships they were placed under in 2008.

The rulings of the Federal Home Finance Agency (FHFA) have affected not only traditionally built housing, but modern manufactured housing as well. Krimminger says that “the government-sponsored entities’ current state of limbo is untenable. At best, the arrangement reinforces continued government dominance of the housing market.”

Krimminger continues by saying it distorts our housing finance system, preserves incentives to misprice mortgages, and creates the potential for a future housing crisis.

One action of the Conservator has resulted in protests and more than 20 lawsuits. This revolves around the decision in 2012 to change the terms of the agencies’ conservatorships and sweep 100 percent of Fannie’s and Freddie’s profits to the U.S. Treasury as dividends in perpetuity.

This is still occurring despite the fact that Fannie and Freddie have now paid back almost $40 billion more than they were originally loaned.

Krimminger says that “this prevents Fannie and Freddie from accumulating any cushion against future losses — potentially putting the taxpayers at further risk.” He adds that the perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law, and that the Housing and Economic Recovery Act of 2008 (HERA) was never meant to authorize permanent government control over the housing sector.

Under HERA, the FHFA and Treasury have the clear statutory authority to begin reform by ending the conservatorships of Fannie and Freddie, but will they do it?

Other voices have been raised in protest of the denial of any compensation to be paid to the GSE stockholders. In a recent lawsuit filed by Perry Capital and Fairholme Funds, investors sued for breach of contract regarding promised dividends and what they termed to be an illegal “taking” under the U.S. Constitution. U.S. District Judge Royce Lamberth ruled against the Plaintiffs.

An article in the November issue of The M Report discussed the fact that Judge Lamberth’s decision, denying any compensation to shareholders, was met with vehement response by many people.

“No way,” screamed numerous investors including consumer advocate Ralph Nader. They contend that giving the money to the Treasury is a violation of their Fifth Amendment rights against the seizure of private property for public use without just compensation.

Nader said, “This was deception of the first order. If any corporate executives engaged in something like this, even the slumbering SEC would have moved to action.”

Other legal experts also feel that a travesty has occurred. According to Richard A. Epstein, the Laurence A. Tisch professor of Law at NYU, the ruling handed down by Judge Royce Lamberth is seriously flawed. “First, the judge’s opinion seriously misstates the rights and duties of the Federal Housing Finance Agency (FHFA) as a conservator,” Epstein explained. “Second, it seriously misstates the authority of Treasury under HERA. Third, it ignores any evidence on the possible collusion between FHFA and Treasury in fashioning the Third Amendment.”

According to Epstein, the Third Amendment was not intended to return Fannie and Freddie to the private market, but was designed to ensure they would never be able to return to the market, no matter how profitable their operations had become.

He said that first, FHFA sold out its fiduciary duties as conservator to the Fannie and Freddie shareholders, and second, Treasury disregarded its obligations in ordering the dividend sweep, which if upheld, will render the stocks of the two companies worthless. Epstein feels that this is an example of the government taking over control of a company and paying out all dividends and capital to itself on a whim.

“What this means is that no private company is ever safe,” he explained. “No private party will ever rely on government assurances or guarantees if the Third Amendment is allowed to stand. The rule of law, which is critical to the proper functioning of free markets, has no meaning if it can be suspended whenever deemed convenient.”

Manufactured housing has additional and unique issues with FHFA and the GSEs. These include the failure to implement the Duty To Serve (DTS), lack of access to secondary markets and more. We will explore those in a future report. ##

(Photo credits: Michael H. Krimminger, American Banker. House on cash – Scott Lewis/FlickerCreativeCommons + FHFA Logo.)

Article submitted by Sandra Lane to – Daily Business News – MHProNews.