S&P: Don't expect much change in U.S. backing for Fannie, Freddie

Despite political arguments and lawsuits, the U.S. Government is unlikely to change its current control over or support for Fannie Mae and Freddie Mac, argues  Nikola G. Swann and his team of analysts at Standard and Poor's, the credit rating agency that notoriously failed to predict the last housing crisis.

In a report to clients, Swann writes the political impasse in Washington, the fact Fannie and Freddie are now working reasonably well, and the more or less recovery of the housing markets makes the former radical schemes of privatization or full socialization unlikely. That could change, he adds: if Republicans or Democrats sweep both Presidency and Congress in next year's elections; when the housing market collapses again; or if the investor lawsuits accusing the U.S. Treasury of ripping off Fannie and Freddie shareholders threaten to cost the government hundreds of billions of dollars.

Here's what Swann says about the lawsuits: "The U.S. Treasury's decision to modify, in 2012, the Preferred Stock Purchase Agreements (PSPAs) governing the terms of its financial support to Fannie and Freddie led to the filing of a number of lawsuits against the government by private-sector shareholders of these two GREs. 

"The chief point of contention is the 'full income sweep,' which replaced a set 10% dividend payment on Treasury's preferred shares with an indefinite, quarterly sweep of every dollar of profit each firm earns." The plaintiffs, including Delaware and Wall Street-based investor Gary Hindes, say the government's "'full income sweep' amounted to unlawful seizure of private property, for which they are seeking compensation, and violated the conservatorship goal of restoring the companies to a 'sound and solvent condition.'"

Treasury has responded, Swann notes, "that it changed the terms to avoid Fannie or Freddie having to borrow from the Treasury to pay the set dividend, and noted that taxpayers continue to bear risks emanating from these entities, implying that this deserves compensation."

When and how will these suits be settled? S&P admits it has no idea (who does?)  

Sure, "if court decisions were to award substantial damages to the plaintiffs, this could draw significant political attention. In the extreme, were courts to rule that the Treasury's 2012 modifications to the [housing finance agencies] were illegal and must be reversed, this could provoke Congress to join the Administration in reacting, via new legislation... One could envision Congress and the Administration deciding that the government should distance itself from the two entities" and finally privatize them, after all.

Even so, the government is likely to keep backing existing Fannie and Freddie loans, Swann concludes.