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Economy

Supreme Court Grants A Reprieve To Agency That Runs Fannie And Freddie

In 2008, amid the mortgage crisis, Congress created the Federal Housing Finance Agency to oversee the mortgage giants Fannie Mae and Freddie Mac.
In 2008, amid the mortgage crisis, Congress created the Federal Housing Finance Agency to oversee the mortgage giants Fannie Mae and Freddie Mac.

Updated June 23, 2021 at 1:30 PM ET

The Supreme Court on Wednesday declined to dismantle the federal agency that since the Great Recession has overseen the American mortgage giants commonly known as Fannie Mae and Freddie Mac. But the court made it easier for the president to remove the agency's head, who until now could only be fired for cause.

Hours after the opinion, a White House official, speaking on background, said that in light of the decision, President Biden "is moving forward today to replace the current Director with an appointee who reflects the Administration's values." Federal Housing Finance Agency Director Mark Calabria was appointed by former President Donald Trump.

The agency's "structure violates the separation of powers, and we remand for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim," Justice Samuel Alito wrote.

In a mostly unanimous decision, the court ruled against the companies' private shareholders, who initially filed the suit; they lost their claim to the $124 billion at stake in the case. The justices sent the case back to the 5th U.S. Circuit Court of Appeals to "determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim."

The case goes back to 2008 when calamity in the American housing market infected the rest of the economy. The two government-chartered companies meant to stabilize the housing market — Fannie Mae and Freddie Mac — managed to lose more in that one year than they had made in the previous 37.

To head off further disaster, Congress created the Federal Housing Finance Agency to oversee the mortgage giants. The FHFA was granted broad powers in order to meet the demands of the moment, and it temporarily assumed control of Fannie's and Freddie's financial affairs.

Hoping to save Fannie, Freddie and the rest of the mortgage market from financial free fall, the FHFA set up an agreement between the Treasury Department and the two companies. For a $100 billion investment in stock, Fannie and Freddie made payments back to the Treasury Department, like a standard interest fee. But the plan quickly fell apart because Fannie and Freddie couldn't afford their payments. So, the FHFA, fearing the companies would fall into insolvency and drag the housing market down with them, amended the agreement with Treasury. From 2012 forward, instead of making their regular payments, the companies simply handed over their profits and nothing more.

The private shareholders in Fannie and Freddie objected, complaining that all of the companies' profits were going to the government.

They urged the court not just to unwind the 2012 agreement but also return $124 billion to Fannie and Freddie. What's more, they also asked the court to disassemble the FHFA, effectively pushing the agency and all of its decisions into the dustbin and threatening other similar agencies, such as the Social Security Administration.

In a concurring opinion, Justice Elena Kagan wrote: "The SSA has a single head with for-cause removal protection; so a betting person might wager that the agency's removal provision is next on the chopping block."

The court followed a path like one it took last term in a similar case involving the Consumer Financial Protection Bureau. Instead of decimating the agency, the court agreed that the FHFA has a design flaw that violates the Constitution. The president must be able to remove the agency's director without cause. That flaw, however, does not doom the entire agency to extinction. The court opted to strike down the problematic removal provision from the law while letting the rest of it stand.

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