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Supreme Court finds FHFA structure unconstitutional

Ruling gives President Biden the power to fire FHFA Director Mark Calabria

A Supreme Court decision in Collins v. Yellen has found the structure of the Federal Housing Finance Agency (FHFA) unconstitutional, allowing for the removal of its director.

The case questioned whether the Biden administration would have the power to fire the agency’s director, Mark Calabria, a Trump-appointee and vocal critic of the government-sponsored enterprises. The court found that restricting his removal was unconstitutional.

“The President must be able to remove not just officers who disobey his commands but also those he finds ‘negligent and inefficient,’… those who exercise their discretion in a way that is not ‘intelligen[t] or wis[e],’ … those who have ‘different views of policy,’” and “those who come ‘from a competing political party who is dead set against [the President’s] agenda,” the opinion reads.

“The President’s removal power serves important purposes regardless of whether the agency in question affects ordinary Americans by directly regulating them or by taking actions that have a profound but indirect effect on their lives,” Justice Samuel Alito wrote. “And there can be no question that the FHFA’s control over Fannie Mae and Freddie Mac can deeply impact the lives of millions of Americans by affecting their ability to buy and keep their homes.”

Fannie Mae’s share prices tumbled 35% from $2.40 to $1.42 upon the news from the Supreme Court.


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In a blow to Fannie Mae investors, the Supreme Court also dismissed claims that the FHFA exceeded its authority under federal law.

“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 opinion reads.

Few expect Calabria to stay in the role if the Biden administration can appoint a director more amenable to its priorities. Even if Calabria were to stay, the Biden administration would now have the ability to oversee operations at the agency.

The case stems from the restructuring of the agencies in 2008. A group of GSE investors alleged that the government knew the GSEs would turn a huge profit after a $100 billion bailout from the Treasury in 2008.

An agreement between FHFA and the Treasury Department promised the investors compensation in the form of stock, dividends tied to the amount of money invested in the companies and priority over other shareholders in recouping their investment.

But that agreement was modified in 2012, to require Fannie Mae and Freddie Mac to pay dividends to the Treasury pegged to the companies’ net worth. The arrangement greatly diminished private investors’ ownership interests in the GSEs. Investors cried foul.

“By August 2012, FHFA and Treasury knew that the Companies were on the verge of generating huge profits,” the plaintiffs argued in the suit.

In 2018, The Fifth Circuit Court of Appeals held that the FHFA was within its statutory authority when it enacted the “net worth sweep” of the GSEs’ dividends, but found that the FHFA was not constitutionally structured. In 2019, the Fifth Circuit Court of Appeals reversed its ruling on the “net worth sweep” and remanded the case back to the district court.

Also in 2019, the Fannie Mae shareholders appealed the Fifth Circuit Court of Appeals’ decision to the Supreme Court. The Supreme Court agreed to hear the case in July 2020. Oral arguments took place in December 2020.

With Calabria all but out the door, a number of agency changes could now ricochet through the housing market. A Biden appointed FHFA head could renew the GSE Patch, which currently expires July 1, and conflicts with the CFPB’s Qualified Mortgage rule compliance date.

The GSE Patch bestows QM status to loans approved by the GSEs’ underwriting platforms, even if they exceed the 43% DTI threshold. With that status comes crucial protection from litigation in case of foreclosure — protection that the Consumer Financial Protection Bureau may be looking to rethink.

A similar decision last summer found the CFPB’s structure to be unconstitutional, and eliminated the Bureau director’s protection from being fired by the president.

The previous CFPB director, Kathy Kraninger, stepped down just as Biden assumed office, at his request. After her resignation, Biden nominated Rohit Chopra, currently an FTC Commissioner, to the role. Chopra awaits confirmation by the Senate.

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