White House to replace Federal Housing Finance Agency director following Supreme Court decision
JUN 23, 2021 | REPUBLISHED BY LIT: JUN 23, 2021
Supreme Court Opinion; FHFA is unconstitutionally structured, June 23, 2021
President Joe Biden will replace the federal regulator who oversees mortgage giants Fannie Mae and Freddie Mac Wednesday in the wake of a US Supreme Court decision that made it easier to replace the current head appointed by former President Donald Trump, according to a White House official.
“In light of the Supreme Court’s decision today, the President is moving forward today to replace the current Director with an appointee who reflects the Administration’s values,” the official said in a statement.
White House press secretary Jen Psaki confirmed the move later Wednesday afternoon. She did not give an indication of who would fill the job.
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As part of its decision released Wednesday, the Supreme Court ruled that the Federal Housing Finance Agency structure was unconstitutional, and that Congress overstepped its authority in placing restrictions on the President’s ability to remove the agency’s head.
Under the Housing and Economic Recovery Act of 2008, Congress had created the agency after the national housing bubble burst and the market was suffering from record foreclosures and falling prices. Lawmakers placed the agency in charge of Fannie Mae and Freddie Mac in September 2008 and installed a director who would serve a five-year term and could only be removed by the president “for cause.”
Justice Samuel Alito, writing for a 7-2 majority, said that because the director of the agency can only be removed by the President for “inefficiency, neglect or malfeasance,” the restriction “violates the separation of powers.” The court held that leadership structure “clashes with constitutional structure” by “concentrating power in a unilateral actor insulated from Presidential control.”
“The President must be able to remove not just officers who disobey his commands but also those he finds negligent and inefficient,” Alito wrote.
The issue is of the utmost importance to those who criticize the so-called “administrative state” because they believe insulated agencies have unbounded and unreviewable authority in violation of the separation of powers. There has been a movement — supported by conservatives on the court — to rein in the independence of the agencies.
Last term, for example, Chief Justice John Roberts wrote for a 5-4 court invalidating the leadership structure of the Consumer Financial Protection Bureau.
The court also dealt a blow to shareholders, turning away a claim that the Federal Housing Finance Agency exceeded its statutory authority when it entered into an agreement with the Treasury Department that the shareholders claim cut them out of their share of profits.
But the court allowed the shareholders to go back and argue in the lower courts that the constitutional defect separately invalided the agreement.
The Treasury Department agreed to backstop the companies in exchange for senior preferred stock and quarterly fixed-rate dividends. It later replaced fixed-rate dividends with variable dividend payments. Fannie Mae and Freddie Mac’s shareholders argued that they lost billions of dollars when the government reduced their ownership interests.
They sought to have Treasury return the payments or recharacterize them as a payment on the government’s investment.
AMY HOWE FOR SCOTUSBLOG: OPINION ANALYSIS
Despite constitutional violation, court rejects broad relief for shareholders of mortgage giants
The Supreme Court on Wednesday had mostly bad news for shareholders of mortgage giants Fannie Mae and Freddie Mac in their lawsuit seeking to unwind a 2012 agreement that required the companies to transfer profits to the federal government.
The justices unanimously agreed that one of the shareholders’ claims could not go forward. And although the court agreed, by a vote of 7-2, that the structure of the federal agency that regulates Fannie and Freddie is at least in part unconstitutional, the court stopped short of ordering that the money be returned to the shareholders as a result of that constitutional defect.
Instead, the case now goes back to the lower courts, which will determine whether the shareholders are entitled to any relief.
Beyond the shareholders’ lawsuit, the decision is the second time in the past year that the court has rejected congressional efforts to limit the president’s ability to remove the heads of federal agencies.
Last June, the court struck down the removal limitations for the head of the Consumer Financial Protection Bureau. Wednesday’s decision did the same for the director of the Federal Housing Finance Agency, and a White House official indicated within an hour of the ruling that President Joe Biden intends to replace Mark Calabria, the Trump appointee currently heading the FHFA, “with an appointee who reflects the administration’s values.”
The case, Collins v. Yellen, has its roots in the 2008 housing crisis.
Fannie Mae and Freddie Mac – publicly traded companies that Congress created to buy and guarantee mortgages issued by lenders – sustained massive losses during the crisis, and many people feared the companies might fail.
Congress reacted by creating the FHFA to regulate the companies and, under certain circumstances, to take over as their “conservator” and manage their financial affairs.
The FHFA then entered into an agreement with the Treasury Department to provide funding for Fannie and Freddie in exchange for compensation tied to the department’s investment.
The lawsuit arose after the FHFA and Treasury changed the agreement in 2012 to require Fannie and Freddie to pay dividends linked to the companies’ net worth, rather than the size of Treasury’s investment.
In the years that followed, Fannie and Freddie paid Treasury approximately $200 billion – which, Justice Samuel Alito’s opinion for the court notes, is “at least $124 billion more than the companies would have had to pay” under the prior formula.
Three shareholders went to court to challenge the 2012 amendment. They made two arguments: first, that the FHFA and Treasury lacked the authority to enter into the amendment, and second, that the statute that created the FHFA is unconstitutional because it allows the president to fire the agency’s director only “for cause.”
The justices on Wednesday unanimously rejected the shareholders’ argument that FHFA and Treasury lacked the authority to enter into the 2012 amendment. Alito explained that the claim was barred by the Housing and Economic Recovery Act, which prohibits courts from taking “any action to restrain or affect the exercise of [the] powers or functions of the” FHFA as a conservator of Fannie and Freddie.
Under the Recovery Act, Alito reasoned, the FHFA also has the authority to act in the way that it determines is best for either the companies or for FHFA. “This distinctive feature of an FHFA conservatorship,” Alito emphasized, “is fatal to the shareholders’ statutory claim” because the FHFA entered into the 2012 amendment to benefit the members of the public “who rely on a stable mortgage market,” even if it wasn’t necessarily in the best interests of Fannie and Freddie or their shareholders.
Turning to the shareholders’ argument that the statute that created the FHFA is unconstitutional because it restricts the president’s ability to fire the agency’s director, Alito agreed.
He explained that last year’s decision on the CFPB director, Seila Law v. Consumer Financial Protection Bureau, “is all but dispositive” in this case.
In Seila Law, the court struck down restrictions that said the CFPB director can be removed only for “inefficiency, neglect of duty, or malfeasance while in office.”
Similarly, Alito concluded, the removal restrictions on the head of the FHFA violate the Constitution’s separation of powers because they infringe on the president’s authority over executive-branch decision-making.
The next question before the court was the remedy for the constitutional violation. The shareholders, Alito noted, wanted the 2012 amendment “completely undone,” and the dividends paid to Treasury returned to Fannie and Freddie.
Alito rejected that proposal because the head of the FHFA who was actually responsible for adopting the 2012 amendment was merely an acting director, not a Senate-confirmed director – and, Alito wrote, the statute’s removal restrictions do not apply to acting directors.
Alito also rejected the shareholders’ argument that actions by subsequent directors (to whom the removal restrictions did apply) required the 2012 amendment to be rescinded.
“[T]here is no reason to regard any of the actions taken by the FHFA in relation to the” 2012 amendment as void – and there is “no reason to hold that the” 2012 amendment “must be completely undone,”
However, the court left open the possibility that the shareholders (and others in a similar situation) could still be entitled to some damages if they could show that the removal provision caused them harm. The court therefore sent the case back to the lower courts for them to consider these arguments.
Justice Elena Kagan wrote an opinion (joined in part by Justices Stephen Breyer and Sonia Sotomayor) that concurred in part and concurred in the judgment.
Kagan – who dissented in Seila Law – stressed that the court’s holding on remedies “limits the damage of the Court’s removal jurisprudence.”
“In refusing to rewind those presidentially favored decisions,” she observed, “the majority prevents theories of formal presidential control from stymying the President’s real-world ability to carry out his agenda.”
She also emphasized that she believes the court of appeals in this case has already decided the question that the Supreme Court is now sending the case back for it to consider.
“So I join the Court’s opinion,” Kagan concluded, “on the understanding that this litigation could speedily come to an end.”
Sotomayor dissented in part, in an opinion joined by Breyer. She would have ruled that, unlike the CFPB, the structure of the FHFA was constitutional.
United States Court of Appeals for the Fifth Circuit