The Supreme Court in a split decision found that the leadership structure of the FHFA was unconstitutional because of a provision that the president could only remove its director for cause, not at will. The widely anticipated decision mirrored the court’s ruling on the similarly structured Consumer Financial Protection Bureau last year.
The court also unanimously dismissed a claim by Fannie and Freddie shareholders who sued the government to invalidate the 2012 decision to send the companies’ profits directly to Treasury, the so-called “third amendment.”
Shares of the companies fell nearly 50 percent in the hour after the decision was announced, before rebounding slightly.
Former President George W. Bush’s administration took control of Fannie and Freddie in September 2008 to prevent their collapse during the housing crisis, and they remain under government conservatorship after years of debate over how to overhaul their operations.
“It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision” when it amended the government’s contract with the companies to sweep their profits to Treasury in 2012, Justice Samuel Alito wrote in the opinion of the court. “We conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim.”
The high court sent the case back to the Court of Appeals for the Fifth Circuit for further proceedings to “determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Fannie and Freddie, which buy mortgages from lenders and bundle them into securities for sale to investors, stand behind about half of the $11 trillion U.S. residential mortgage market.
The companies have sent about $300 billion in profits to the government since their federal takeover.
The Trump administration, keen to release Fannie and Freddie from government control, allowed them to start building capital again under Calabria, who also served as chief economist to former Vice President Mike Pence.
Isaac Boltansky, policy research director at the investment firm Compass Point, said Calabria would likely be dismissed “within the next few days.”
Boltansky said the new interim director would then likely negotiate with Treasury to unwind Trump-era changes to the legal contract governing Treasury’s stake in the companies, including a requirement that they reduce their market footprint.
Former Treasury Secretary Steven Mnuchin in January unveiled revisions to that contract in a final attempt to ease the path for Fannie and Freddie to be released from government control, with less than a week left in office.
“From a shareholder perspective, losing on the statutory claim is a clear disappointment, but this is not the absolute final word in the saga as their constitution claim will continue,” Boltansky said. “Shareholders will continue their battle on the remaining claims, but the most meaningful impact of this decision in the near-term is that we will almost certainly see a new FHFA Director who will focus intently on reversing some of Director Calabria’s less popular policies.”
Many Democrats are wary of releasing Fannie and Freddie, fearing that the newly privatized companies would focus less on affordable housing. The companies have also played a crucial role in the government’s response to the economic crisis caused by the pandemic by giving distressed borrowers the option to pause mortgage payments for up to 18 months.