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.