US Supreme Court holding off on Fannie Mae, Freddie Mac case
Author - Zach Fox
The Supreme Court of the United States appears to have put a hold on a legal challenge to the government's handling of Fannie Mae and Freddie Mac.
Lawyers say they believe the court is waiting until it decides a separate case with a similar constitutionality question, Seila Law v. the Consumer Financial Protection Bureau. The Seila Law case alleges that the CFPB is unconstitutionally structured due to its leadership of a single director who cannot be fired without cause. The case involving Fannie Mae and Freddie Mac, Collins v. Mnuchin, makes an identical claim against the Federal Housing Finance Agency, which is also led by a single director.
David Thompson, managing partner for Cooper & Kirk and one of the lawyers representing investors suing the FHFA, said Jan. 24 that the Supreme Court's inaction on the Collins v. Mnuchin case indicates the court is waiting to decide on the CFPB case.
"The court is waiting for the resolution or result from some other case, and in this instance, it's Seila Law," Thompson said on a media conference call. "It's the only logical inference because if they were going to deny the case, they would have already done so. If they were going to grant the case, they would have already done so."
The Supreme Court is set to hear the Seila Law case on March 3. Thompson expects a ruling in the last two weeks of June and the Fannie Mae and Freddie Mac case to be ruled upon within roughly one week afterward. There are two petitions in the Fannie Mae and Freddie Mac case: one that challenges the FHFA's structure as unconstitutional and another arguing that the net worth sweep — in which the Treasury Department collects all profits from the companies — violates the Housing and Economic Recovery Act of 2008, which required the government to operate the agencies in a safe and sound manner.
Willy Jay, a partner for Goodwin, said in an email that the court will review both petitions after deciding the Seila Law case. Jay expects the decision to likely come in late June or early July with "a very small possibility" that there is no action until late September or early October.
The lower court ruling, from the Fifth Circuit, found that the FHFA was unconstitutionally structured. Isaac Boltansky, an analyst for Compass Point Research & Trading, wrote in a September 2019 note that the decision "injects an overarching sense of urgency" into the administration's efforts to resolve the housing finance giants. Thompson also said the administration is under pressure to resolve the agencies' conservatorship as the 2020 election approaches.
"If these officials want to achieve their desired policy objectives, they have to cut a deal with us," Thompson said. "And they obviously have to cut a deal with us this year unless they're just going to roll the dice on the election."
Thompson said that while the Fifth Circuit's central decision was in favor of Fannie Mae and Freddie Mac shareholders — that the FHFA's structure is unconstitutional — the judges did not approve of shareholders' desired remedy to invalidate the net worth sweep. Rather, the justices ruled that the agency could be made constitutional by simply allowing the president to fire the director at will.
"The important question is whether the court cures the unconstitutional defect merely by giving the president the power to terminate the director without cause or instead effectively extinguishes the independent agency," Laurence Platt, a partner for Mayer Brown, said in an email. "If the former, the net sweep issue is not addressed. If the latter, everything the FHFA has done is called into question
