Fannie, Freddie Shareholder Suit Faces En Banc Review

The Fifth Circuit Court of Appeals agreed to rehear an action by Fannie Mae and Freddie Mac shareholders after a divided three-judge panel concluded that the Federal Housing Finance Agency (FHFA) was unconstitutional.

In July, the panel concluded that the FHFA violates the separation of powers doctrine of the constitution and is insulated from executive oversight.

Three Fannie Mae and Freddie Mac shareholders sued the agency and the Department of Treasury in 2016 over agreements that arose out of the nationwide housing crisis.

The agreement between the Treasury and the FHFA was the subject of the lawsuit, referred to as “net worth sweeps.”

The shareholders challenged the agreement between the agency, where the Treasury gives Fannie and Freddie taxpayer money for capital in exchange for quarterly dividend payments. Among other issues, the shareholders claim the FHFA is unconstitutional because it is headed by a single director who is “removable only for cause, does not depend on congressional appropriations, and evades meaningful judicial review.”

The district court in Houston dismissed the action and found for the government agencies.

On appeal, a divided appellate court concluded that the FHFA acted within its authority, and the shareholders could not sue under the Administrative Procedure Act.

However, the way the agency is structured violates the separation of powers doctrine, the panel’s majority concluded.

“Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the panel’s majority wrote in the per curiam opinion.

Among other things, the agency “stands outside the budget- in stark contrast to nearly all other administrative agencies – and is therefore immune for presidential control,” the majority wrote.“There are no formal mechanisms by which the Executive Branch can control how the FHFA exercises authority.”

The panel was made up of Judge Catharina Haynes, Judge Don Willett, and Chief Judge Carl Stewart, who dissented on the constitutional issue.

After a poll of the en banc court, the court decided last week to rehear the case after both sides filed petitions following July’s decision.

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