Fannie and Freddie continue to move towards the ending of their conservatorships. While the progress made during the Trump administration fell short of its articulated goals, there were a number of positive developments in 2020.
The Preferred Stock Purchase Agreement ("PSPA") modification announced in January 2021 suspended the net worth sweep, allowing the GSEs to increase their maximum capital retention from $45 billion to over $300 billion. The amended PSPA, however, did not provide recognition that Treasury's Senior Preferred investment has been repaid and the balance due to Treasury continues to increase for every dollar of capital retained. We were not surprised that the Treasury's Senior Preferred remains unresolved in light of existing shareholder litigation.
In July, the U.S. Supreme Court agreed to hear appeals by both the plaintiff and the Federal Government from the Fifth Circuit Court of Appeals' decision in the Collins case. The Fifth Circuit, sitting en banc, ruled in favor of the plaintiff shareholders. On appeal to the Supreme Court, the parties argued about the legality of FHFA's structure, and the lawfulness of the net worth sweep, and the scope of various provisions under the HERA statute under which the Fannie and Freddie conservatorships were created.
We expect a decision by the Court by June 2021, which if a ruling is issued in shareholders' favor, would be a game-changing event. Regardless of the decision by the Court, we continue to believe that our investment in the GSEs is a valuable perpetual option on their eventual exit from conservatorship due to their widely acknowledged irreplaceable role in the U.S. housing finance system.