Justices Struggle With Fannie-Freddie Case Hinged on Presidential Powers

Federal Housing Finance Agency Director Mark Calabria testifies this past June before the Senate Banking, Housing, and Urban Affairs Committee. (Astrid Riecken/The Washington Post via AP, Pool)

WASHINGTON (CN) — In many ways echoing last year’s Consumer Financial Protection Bureau challenge, shareholders of Fannie Mae and Freddie Mac took on the authority of the federal agency that oversees the mortgage giants Wednesday in a Supreme Court battle implicating billions of dollars.

While most federal entities are subject to control by the president —constitutionally empowered to appoint or fire cabinet heads at will — the charter of the Federal Housing Finance Agency states its director can be ousted only “for cause.”

The high court found last June in the case Seila Law v. CFPB that limitations on the president’s power to remove federal agency officials “for cause” were constitutionally incompatible.

Likewise, in the case over the FHFA, Fannie and Freddie shareholders Patrick Collins, Marcus Liotta and William Hitchcock say its design represents a breach of separation of powers.

At oral arguments this morning in Washington, however, Chief Justice John Roberts was critical of the “rhetoric,” as he called it, from the shareholders that the FHFA nationalized Fannie and Freddie after the 2008 financial crisis.

“Your claim of nationalization is that your clients were left out in the cold and their holdings rendered worthless. But I checked this morning, and Fannie Mae is trading at $2.69 and Freddie Mac at $2.56. Your shares are not worthless. They’re worth something and presumably, largely based on judgments of what the future holds,” Roberts remarked to David Thompson, an attorney for the class with the firm Cooper & Kirk. 

“We can’t lose sight of the fact that this was a lifeline thrown to your clients and that has to be worth something, too,” the chief justice added.

The 2008 recession spurred by the housing crisis remains an integral facet of the case. Fannie Mae and Freddie Mac had been among the chief investors in subprime mortgages that triggered the recession, but Congress opted to bail out the companies to avert further collapse to the U.S. economy that could prove ruinous.

The Housing and Economic Recovery Act of 2008 propped up the companies with a near $200 billion cash infusion but also mandated FHFA oversight.

Lawmakers entered Fannie and Freddie into a contract with the Treasury Department to repay the bailout, with dividends set to increase each time the Treasury forked over more cash. 

Solvency was a struggle, however, and the original contract was amended in 2012. This time, it stipulated neither business would have to pay dividends at a fixed rate to the Treasury if they had losses. Instead, it allowed Fannie and Freddie to hold onto a cash reserve not to exceed $3 billion. Yet any profit earned over that amount, Congress ordered, would go straight to the Treasury.

The amendment was contentious, resulting in the now-consolidated lawsuits from shareholders. 

Collins alleged that the new agreement came just as profits were rising, effectively locking the quasi-public-private companies into an unconstitutional and “nationalized” outfit that brought the feds a tidy $124 billion windfall.

They claimed the amended agreement was bogus because the Treasury had no real authority make the amendment and anyway, they argued, the Federal Housing Finance Agency itself was unconstitutional. 

Initially a federal judge in Houston nixed the class action, but the full Fifth Circuit ruled 9-7 last year that FHFA and its rules for removing its director were unconstitutional.

The Supreme Court, it is thought, could follow the path laid out in Seila Law that effectively invoked the theory of the unitary executive, or the concept that the president has control over all aspects of the executive branch.

Justice Samuel Alito pressed Hashim Mooppan, counselor to the U.S. solicitor general, to distinguish relief appropriate here from the relief provided in Seila. 

“The most significant difference is the treasury secretary was a party to the challenge. Their constitutional claim is a claim that the agency action was unconstitutionally insulated from presidential supervision,” Mooppan said. “Unlike other cases, here, one of the parties is a treasury secretary who is, of course, removed at will by the president. No one can say the president didn’t have sufficient control over this agreement. You can’t set aside a multibillion agreement on the theory the president didn’t have enough control over it when the president’s treasury secretary signed it.”

Justice Sonia Sotomayor told Mooppan she saw “vast differences” between Seila and Collins. 

“The FHFA’s most notable power and the reason why we’re here today is because they can put certain government-affiliated companies under conservatorship,” Justice Sotomayor said.

And conservatorships, she added, are “never thought of” as an executive power.

“It’s historically been adjunct to the judicial power,” she said.

A decision is not expected until sometime next year. Collins marked the close of the Supreme Court’s oral arguments session until 2021.

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