High Court Powers Up Fannie-Freddie Case Hinged on Presidential Powers
WASHINGTON (CN) — Congress designed the Federal Housing Finance Agency in violation of separation-of-powers rules, the Supreme Court ruled Wednesday, putting wind in the sails of a shareholder class action against Fannie Mae and Freddie Mac implicating billions of federal dollars.
Fannie Mae and Freddie Mac shareholders Patrick Collins, Marcus Liotta and William Hitchcock brought the case here two years ago, taking aim at congressional rules outlining how the Federal Housing Finance Agency operates and how its director can be removed. They also claimed that the federal government effectively nationalized the mortgage giants after the housing market crash of 2008.
A federal judge in Houston had nixed their class action, but the full Fifth Circuit ruled 9-7 that FHFA and its rules for removing its director were unconstitutional. In December oral arguments, the justices of the Supreme Court appeared split, questioning the applicability of the unitary executive theory anchoring the plaintiffs’ case.
The hearing came after the court’s June 2020 ruling in the case Seila Law v. CFPB where it found that limitations on the president’s power to remove federal agency officials “for cause” were constitutionally incompatible.
As with the FHFA, Congress created the Consumer Finance Protection Bureau in response to the Great Recession of 2008. Both agencies were designed as being led by a single director appointed by the president whom only the president can remove, and only “for cause.”
Justice Samuel Alito wrote in Wednesday’s majority opinion that such limitations violate the separation of powers.
After the court released its opinion, President Joe Biden announced that he’d replace FHFA Director Mark Calabria, a Trump-appointed libertarian economist. A White House official said Biden intended on appointing someone “who reflects the administration’s values.”
“I respect the Supreme Court’s decision and the authority of the president to remove the Federal Housing Finance Agency director,” Calabria said in a statement.
“When the housing markets experience a significant downturn, Fannie Mae and Freddie Mac will fail at their current capital levels,” he continued. “I wish my successor all the best in fixing the remaining flaws of the housing finance system in order to preserve homeownership opportunities for all Americans.”
Justice Sonia Sotomayor noted a partial dissent Wednesday that this marks the third time in just over a decade where the court has struck down the tenure protections Congress provided an independent agency’s leadership — a departure from precedent over “the greater part of a century since it last prevented Congress from protecting an Executive Branch officer from unfettered presidential removal.”
Sotomayor’s was one of several concurring opinions accompanying the majority ruling. In another, Justice Elena Kagan noted that she dissented “vehemently” from Seila Law v. CFPB.
Sotomayor, who was joined by Justice Stephen Breyer, took it further. “Seila Law expressly distinguished the Federal Housing Finance Agency, another independent agency headed by a single director, on the ground that the FHFA does not possess ‘regulatory or enforcement authority remotely comparable to that exercised by the CFPB,’” she recounted. “Moreover, the court found it significant that, unlike the CFPB, the FHFA ‘regulates primarily government-sponsored enterprises, not purely private actors.’
“Nevertheless, the court today holds that the FHFA and CFPB are comparable after all, and that any differences between the two are irrelevant to the constitutional separation of powers. That reasoning cannot be squared with this court’s precedents, least of all last term’s Seila Law. I respectfully dissent in part from the court’s opinion and from the corresponding portions of the judgment.”
Ahead of oral arguments in the FHFA case last year, the Constitutional Accountability Center urged the court to uphold the agency’s structure. Brianne Gorod, an attorney with that outfit, reflected Wednesday about the case’s outcome.
“It is deeply disappointing to see the court’s majority double down on its decision in Seila Law because, as the amicus brief we filed in Collins explains, the Constitution gives Congress broad power to shape the structure of federal agencies and to give their leaders a degree of independence from presidential policy control,” Gorod said in a statement.
Aaron Nielson, a Provo, Utah-based attorney with the Brigham Young University’s J. Reuben Clark Law School, emphasized the distinction in an amicus brief, noting that Seila Law dealt with “perhaps the most powerful unelected official in the history of the United States.”
The FHFA, by contrast, governs a handful of federally chartered entities.
“Because ’cause’ is a broad term, this statute is a modest restriction,” Nielson wrote. “In fact, this statute can be read to allow removal based on policy disagreement with the president, and must be read that way if necessary to avoid constitutional concerns.”
Rich Samp, senior litigation counsel for the New Civil Liberties Alliance, called Wednesday’s decision “an important victory for separation-of-powers principles.”
“The removal power ensures that Executive Branch officials serve the American people effectively in accordance with the policies that they elected the president to promote,” added Samp, whose group backed the shareholders in an amicus brief last year.
Mark Chenoweth, executive director and general counsel of the alliance, slammed the FHFA as “an unconstitutional abomination,” like the CFPB before it.
“The court has now addressed the problem with presidential control over these agency heads,” Chenowith said in a statement. “It still remains to address the unconstitutional way these agencies are funded.”
Alito said further proceedings are necessary “to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Brigham Young’s Nielson predicted in the 2020 amicus brief that a ruling for the shareholders “would have far-reaching effects.”
“Plaintiffs could target other single-headed agencies and even multimember agencies like the Federal Reserve with chairs who are separately nominated by the president and confirmed by the Senate,” he wrote. “Career civil servants, including many in leadership roles, also are not removable at will. Accordingly, unless the court — correctly — (i) limits the officials covered by Seila Law to those who exercise more authority than the FHFA director or (ii) holds that this ‘for cause’ tenure provision does not offend Article II, federal courts should expect many more separation-of-powers challenges that follow the blueprint from this litigation.”
Separate from this issue, the justices were unanimous in finding that the shareholders were barred from bringing statutory claims against the FHFA under the Housing and Economic Recovery Act of 2008, through which Congress created the agency. In addition to imbuing the FHFA with broad investigative and supervisory authority to ensure that companies adhere to their standards, this law empowers the agency to take control of companies’ assets and operations as needed. The FHFA isn’t funded through a regular appropriations process but from assessments it imposes on Fannie Mae, Freddie Mac and federal home loan banks.
Fatal to the shareholders’ statutory claim, Alito found, is that the Recovery Act does not mandate that the FHFA as a conservator always act in the best interests of its entities.
In this case, he wrote, “the FHFA chose a path of rehabilitation that was designed to serve public interests by ensuring Fannie Mae’s and Freddie Mac’s continued support of the secondary mortgage market.”
It was in response to the exploding financial crisis of that year that Congress formed the FHFA to oversee its bailouts of numerous banks, including a $200 billion cash infusion for Fannie Mae and Freddie Mac.
The corporations entered into a repayment agreement after negotiations in Congress, but their struggles to stay solvent soon brought amendments to the contract. The FHFA stipulated anew that dividends would not be paid at a fixed rate to the Treasury so long as Fannie and Freddie sustained losses. They were also instructed to hold a cash reserve of no more than $3 billion. If their revenues increased and their reserve exceeded that amount, then the Treasury could start collecting.
As alleged by the investors during Supreme Court oral arguments, however, the amendment came only once revenue started to tick up. They said, in effect, the FHFA was now boxing future shareholder revenue in by ensuring they were locked into a contract whose terms may never be able to be overcome.