Rop v. Fed. Hous. Fin. Agency

Decision Date08 September 2020
Docket NumberFile No. 1:17-CV-497
Citation485 F.Supp.3d 900
Parties Michael ROP, et al., Plaintiffs, v. FEDERAL HOUSING FINANCE AGENCY, et al., Defendants.
CourtU.S. District Court — Western District of Michigan

Ashley Grace Chrysler, Matthew T. Nelson, Warner Norcross & Judd LLP, Grand Rapids, MI, for Plaintiffs.

Asim Varma, Howard Neil Cayne, Robert J. Katerberg, Arnold & Porter Kaye Scholer LLP, Washington, DC, D. Andrew Portinga, Miller Johnson PLC, Grand Rapids, MI, for Defendant Federal Housing Finance Agency.

Asim Varma, Howard Neil Cayne, Arnold & Porter Kaye Scholer LLP, Washington, DC, D. Andrew Portinga, Miller Johnson PLC, Grand Rapids, MI, for Defendant Mark A. Calabria.

Michael L. Shiparski, U.S. Attorney, Grand Rapids, MI, R. Charlie Merritt, U.S. Department of Justice, Washington, DC, for Defendant Department of the Treasury.


Paul L. Maloney, United States District Judge

This case represents yet another attempt by shareholders of Fannie Mae and Freddie Mac to undo an agreement struck by the conservator of those entities, the Federal Housing Finance Agency (FHFA), with the Department of the Treasury. That agreement secured unlimited funding for Fannie and Freddie from Treasury in exchange for almost all of Fannie's and Freddie's future profits. The shareholders were understandably disappointed by this arrangement because it rendered their shares worthless. Thus far, however, all attempts to unwind the agreement have failed in courts across the country. This case is headed for the same result.

I. Background

The agreement giving rise to this lawsuit is known as the "Third Amendment."

The Court of Appeals for the District of Columbia Circuit summarized the relevant factual background for the Third Amendment as follows:

1. The Origins of Fannie Mae and Freddie Mac
Created by federal statute in 1938, Fannie Mae originated as a government-owned entity designed to "provide stability in the secondary market for residential mortgages," to "increas[e] the liquidity of mortgage investments," and to "promote access to mortgage credit throughout the Nation." 12 U.S.C. § 1716 ; see id. § 1717. To accomplish those goals, Fannie Mae (i) purchases mortgage loans from commercial banks, which frees up those lenders to make additional loans, (ii) finances those purchases by packaging the mortgage loans into mortgage-backed securities, and (iii) then sells those securities to investors. In 1968, Congress made Fannie Mae a publicly traded, stockholder-owned corporation. See Housing and Urban Development Act, Pub. L. No. 90-448, § 801, 82 Stat. 476, 536 (1968) (codified at 12 U.S.C. § 1716b ).
Congress created Freddie Mac in 1970 to "increase the availability of mortgage credit for the financing of urgently needed housing." Federal Home Loan Mortgage Corporation Act, Pub. L. No. 91-351, preamble, 84 Stat. 450 (1970). Much like Fannie Mae, Freddie Mac buys mortgage loans from a broad variety of lenders, bundles them together into mortgage-backed securities, and then sells those mortgage-backed securities to investors. In 1989, Freddie Mac became a publicly traded, stockholder-owned corporation. See Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, § 731, 103 Stat. 183, 429-436.
Fannie Mae and Freddie Mac became major players in the United States’ housing market. Indeed, in the lead up to 2008, Fannie Mae's and Freddie Mac's mortgage portfolios had a combined value of $5 trillion and accounted for nearly half of the United States mortgage market. But in 2008, the United States economy fell into a severe recession, in large part due to a sharp decline in the national housing market. Fannie Mae and Freddie Mac suffered a precipitous drop in the value of their mortgage portfolios, pushing the Companies to the brink of default.
2. The 2008 Housing and Economic Recovery Act
Concerned that a default by Fannie and Freddie would imperil the already fragile national economy, Congress enacted the Recovery Act, which established FHFA and authorized it to undertake extraordinary economic measures to resuscitate the Companies. To begin with, the Recovery Act denominated Fannie and Freddie "regulated entit[ies]" subject to the direct "supervision" of FHFA, 12 U.S.C. § 4511(b)(1), and the "general regulatory authority" of FHFA's Director, id. § 4511(b)(1), (2). The Recovery Act charged FHFA's Director with "oversee[ing] the prudential operations" of Fannie Mae and Freddie Mac and "ensur[ing] that" they "operate[ ] in a safe and sound manner," "consistent with the public interest." Id. § 4513(a)(1)(A), (B)(i), (B)(v).
The Recovery Act further authorized the Director of FHFA to appoint FHFA as either conservator or receiver for Fannie Mae and Freddie Mac "for the purpose of reorganizing, rehabilitating, or winding up the[ir] affairs." 12 U.S.C. § 4617(a)(2). The Recovery Act invests FHFA as conservator with broad authority and discretion over the operation of Fannie Mae and Freddie Mac. For example, upon appointment as conservator, FHFA "shall ... immediately succeed to ... all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the regulated entity and the assets of the regulated entity." Id. § 4617(b)(2)(A). In addition, FHFA "may ... take over the assets of and operate the regulated entity," and "may ... preserve and conserve the assets and property of the regulated entity." Id. § 4617(b)(2)(B)(i), (iv).
The Recovery Act further invests FHFA with expansive "[g]eneral powers," explaining that FHFA "may," among other things, "take such action as may be ... necessary to put the regulated entity in a sound and solvent condition" and "appropriate to carry on the business of the regulated entity and preserve and conserve [its] assets and property[.]" 12 U.S.C. § 4617(b)(2), (2)(D). FHFA's powers also include the discretion to "transfer or sell any asset or liability of the regulated entity in default ... without any approval, assignment, or consent," id. § 4617(b)(2)(G), and to "disaffirm or repudiate [certain] contract[s] or lease[s]," id. § 4617(d)(1). See alsoid. § 4617(b)(2)(H) (power to pay the regulated entity's obligations); id. § 4617(b)(2)(I) (investing the conservator with subpoena power).
Consistent with Congress's mandate that FHFA's Director protect the "public interest," 12 U.S.C. § 4513(a)(1)(B)(v), the Recovery Act invested FHFA as conservator with the authority to exercise its statutory authority and any "necessary" "incidental powers" in the manner that "the Agency [FHFA] determines is in the best interests of the regulated entity or the Agency. " Id. § 4617(b)(2)(J) (emphasis added).
The Recovery Act separately granted the Treasury Department "temporary" authority to "purchase any obligations and other securities issued by" Fannie and Freddie. 12 U.S.C. §§ 1455(l)(1)(A), 1719. That provision made it possible for Treasury to buy large amounts of Fannie and Freddie stock, and thereby infuse them with massive amounts of capital to ensure their continued liquidity and stability.
Continuing Congress's concern for protecting the public interest, however, the Recovery Act conditioned such purchases on Treasury's specific determination that the terms of the purchase would "protect the taxpayer," 12 U.S.C. § 1719(g)(1)(B)(iii), and to that end specifically authorized "limitations on the payment of dividends," id. § 1719(g)(1)(C)(vi). A sunset provision terminated Treasury's authority to purchase such securities after December 31, 2009. Id. § 1719(g)(4). After that, Treasury was authorized only "to hold, exercise any rights received in connection with, or sell, any obligations or securities purchased." Id. § 1719(g)(2)(D).
Lastly, the Recovery Act sharply limits judicial review of FHFA's conservatorship activities, directing that "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator." 12 U.S.C. § 4617(f).
* * *
On September 6, 2008, FHFA's Director placed both Fannie Mae and Freddie Mac into conservatorship. The next day, Treasury entered into Senior Preferred Stock Purchase Agreements ("Stock Agreements") with Fannie and Freddie, under which Treasury committed to promptly invest billions of dollars in Fannie and Freddie to keep them from defaulting. Fannie and Freddie had been "unable to access [private] capital markets" to shore up their financial condition, "and the only way they could [raise capital] was with Treasury support." Oversight Hearing to Examine Recent Treasury and FHFA Actions Regarding the Housing GSEs Before the H. Comm. on Fin. Servs. , 110th Cong. 12 (2008) (Statement of James B. Lockhart III, Director, FHFA).
In exchange for that extraordinary capital infusion, Treasury received one million senior preferred shares in each company. Those shares entitled Treasury to: (i) a $1 billion senior liquidation preference—a priority right above all other stockholders, whether preferred or otherwise, to receive distributions from assets if the entities were dissolved; (ii) a dollar-for-dollar increase in that liquidation preference each time Fannie and Freddie drew upon Treasury's funding commitment; (iii) quarterly dividends that the Companies could either pay at a rate of 10% of Treasury's liquidation preference or a commitment to increase the liquidation preference by 12%; (iv) warrants allowing Treasury to purchase up to 79.9% of Fannie's and Freddie's common stock; and (v) the possibility of periodic commitment fees over and above any dividends.
The Stock Agreements also included a variety of covenants. Of most relevance here, the Stock Agreements included a flat prohibition on Fannie and Freddie "declar[ing] or pay[ing] any dividend (preferred or otherwise) or mak[ing] any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof" without Treasury's advance

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