The Ninth Circuit Court of Appeals just affirmed a district court’s ruling that mega-mortgage companies Fannie Mae and Freddie Mac are private companies, not agents for purposes of the False Claims Act.

The plaintiffs in the case argued that Fannie Mae and Freddie Mac are Delaware corporations, so Delaware law applies to them. Since Net Worth Sweep is a violation under Delaware law, plaintiffs contend that the mortgage companies violate the law with Net Worth Sweep.

FMFM and the False Claims Act

Realtors in Nevada originally brought a suit in a Nevada district court against various lenders and loan companies. Dispute erupted when the realtors alleged that loans that had been purchased by Fannie and Freddie were unencumbered and clear of particular HOA liens, but weren’t. Additionally, it was alleged that false certifications made to the government sponsored enterprises characterizing them as instrumentalities of the United States. Plaintiffs argued that FHFA control made both Freddie and Fannie “government agencies,” according to Ninth Circuit papers.

Ninth: The Other Way Around

The Ninth Circuit found that the FHFA’s conservatorship of the two companies did not turn them in to federal instrumentalities, but reasoned that the arrangement placed the FHFA “into the shoes” of both companies, “not the other way around.”

Net Worth Sweep

The Ninth’s decision is likely to have persuasive effects on the opinions of courts around the country hearing investor’s claims seeking to enjoin the Net Worth Sweep, which pushes all Government Sponsored Enterprises into the pockets of the Treasury. Judge Steele, writing the Ninth Circuit opinion, said that the court’s holding is “contrary to Defendants’ arguments that federal law, not state law, governs [FHFA’s] power to implement the Net Worth Sweep.” Thus, state law will most likely apply, barring the sweep.

The Sweep started in 2012 following an amendment to the original $187 billion bailout which drew so much criticism from the American Public.

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