The Supreme Court ruled in a split decision that the governance structure of the FHFA was unconstitutional, as the President could only remove its director for an important reason and not at will. The eagerly awaited decision reflected the court’s ruling on the similarly structured Consumer Financial Protection Bureau last year.
The court also unanimously dismissed a lawsuit filed by Fannie and Freddie shareholders suing the government for invalidating the 2012 decision to transfer the company’s profits directly to the Treasury Department, known as the “third amendment”.
The companies’ stocks 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.
“We do not have to decide – and we do not decide – whether the FHFA made the best or even a particularly good business decision” when it changed the government contract with the companies in 2012 to transfer its profits to the Treasury. Judge Samuel Alito wrote in the court’s opinion: “We only conclude that the FHFA has not exceeded its powers as a conservator under the terms of the Recovery Act and therefore the injunction precludes the statutory rights of shareholders.”
The Supreme Court sent the case back to the Fifth District Court of Appeals for further hearing “to determine what legal remedies, if any, shareholders are entitled to on their constitutional claims.”
Fannie and Freddie, who buy mortgages from lenders and bundle them into securities for sale to investors, are behind roughly half of the US $ 11 trillion mortgage market.
The companies have transferred around $ 300 billion in profits to the government since their federal takeover.
The Trump administration, which wanted Fannie and Freddie out of government control, allowed them to start building capital again under Calabria, which was also chief economist to former Vice President Mike Pence.
Isaac Boltansky, policy research director at investment firm Compass Point, said Calabria would likely be laid off “within the next few days.”
Boltansky said the new interim director is likely to then negotiate with the Treasury Department to resolve changes to the Treasury Department’s legal contract for the Treasury’s stake in the Trump-era companies, including requiring them to reduce their market presence.
Former Treasury Secretary Steven Mnuchin unveiled revisions to that contract in January to pave the way for Fannie and Freddie to stay in office for less than a week.
“From a shareholder perspective, the loss of legal entitlement is a clear disappointment, but this is not the absolute last word in the saga as its constitutional entitlement will continue,” said Boltansky. “Shareholders will continue their battle for the remaining claims, but the most significant impact of this decision in the near future is that we will almost certainly see a new FHFA Director who will focus intensely on some of Director’s less popular policies To undo Calabria. ”
Many Democrats are reluctant to release Fannie and Freddie because they fear 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 allowing distressed borrowers to suspend mortgage payments for up to 18 months.