Fannie Mae (FNMA) and its shareholders have reached a $170M settlement in a lawsuit accusing the entity of misleading the plaintiffs about its risk management, finances, and mortgage exposure prior to its seizure by the U.S. government during the financial crisis of 2008. Now, a court must approve the agreement.
The lead plaintiffs are the Tennessee Consolidated Retirement System, the State-Boston Retirement Board, and the Massachusetts Pension Reserves Investment Management Board, which are trying to obtain class action securities status for their case. The shareholders claim that Fannie Mae defrauded them, as well as inflated its stock via misleading and false statements about capitalization, internal controls, exposure to low-documentation “Alt-A” mortgages, subprime mortgages, and accounting.
Per the agreement, $123.8 million would go to common stockholder and Preferred stockholders would get $46.2 million. The stockholders would come from the period running from 11/8/06 to 9/5/08. During that time, Fannie Mae’s market value hit a peak of over $60 billion. Its current market value is $2.71 million.
In September 2008, the government placed Fannie Mae and Freddie Mac (FMCC) into a conservatorship under the supervision of the Federal Housing Finance Agency, which oversees them to this day. Together, both mortgage financing companies drew around $187.5 billion of bailout funds. They’ve given back about $218.7 billion as dividends to taxpayers.
Meantime, the U.S. Securities and Exchange Commission’s lawsuit against Fannie Mae’s ex-Chief Risk Officer Enrico Dallaveccia and Chief Executive Officer Daniel Mudd over the mortgage lender’s disclosures is still pending. The regulator claims that the men knew about and approved misleading statements that claimed the company had minimal holdings of high-risk mortgages.
Freddie Mac, Fannie Mae, and the Federal Housing Finance Agency recently drew up rules to loosen constricted lending standards. The purpose for this is to make mortgages more affordable and accessible even when a party has less than perfect credit. The rules follow criticism that banks have become too strict about loan criteria because they don’t want to be held liable for mortgages they sell to Freddie or Fannie that later fail.
When the mortgage market started to plunge in 2007, both Freddie and Fannie blamed lenders for loans that they said were poorly underwritten. Since then, banks have had to pay tens of billions of dollars to resolve claims that the faulty loans did not abide by the warranties and representations that were made when the loans were sold. The banks were ordered to buy back the loans.
According to the Los Angeles Times, the new guidelines are supposed to persuade lenders to lend to borrowers that are higher risk. For example, per the terms, financing firms would provide the criteria for when a bank should have to buy back a loan. The minimum down payment to qualify for selling the loans to Freddie and Fannie would be lowered to 3%, down from 5%. Bankers, however, have said that lawsuits over loans are still the biggest obstacle to widening credit.
Freddie and Fannie guarantee 59% of all mortgages.
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Fannie Mae, Freddie Mac reach deal to ease mortgage lending, Los Angeles Times, October 17, 2014
Fannie Mae settles shareholder lawsuit for $170 million, Reuters, October 24, 2014
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