Fannie Mae and Freddie Mac shareholders return to the Supreme Court after Collins
By Kalvis Golde on Aug 19, 2022
Under the Fifth Amendment, “private property” cannot be “taken for public use” by the government “without just compensation.” This week, we highlight cert petitions that ask the court to consider, among other things, whether the government’s decision to essentially nationalize the country’s largest federally backed mortgage-securities companies in the wake of the Great Recession was an unconstitutional “taking” of private shareholders’ assets.
In 2008, with the housing market collapsing, the federal government placed the two companies that handled the vast majority of Americans’ mortgages, Fannie Mae and Freddie Mac, under control of a new federal agency and lent them enough money to stay afloat. Congress intended this conservatorship to be temporary. Four years later, however, with the companies on their feet, the government changed its mind. In what came to be known as the “net worth sweep,” the agency and the secretary of the Treasury Department amended a series of stock-purchase agreements to direct the companies to begin returning nearly all their net worth above a survival amount back to the U.S. Treasury each quarter. The money is distributed to American taxpayers.
Fannie and Freddie’s private shareholders, whose investments were originally saved by the government’s intervention, found themselves shut out of the earnings from their shares of the rebounded companies’ assets. They filed a series of lawsuits against the government.
The court heard one set of these suits in 2020, against the Treasury Department and the agency created as Fannie Mae and Freddie Mac’s conservator, the Federal Housing Finance Agency. The shareholders had challenged both Treasury and the FHFA’s decision to essentially nationalize the companies in 2012 as violating the decision-making rules that govern federal agencies, and also the constitutionality of the FHFA’s structure. The court in Collins v. Yellen agreed that Congress had unconstitutionally insulated the FHFA’s director from termination by the president. But it ruled that Congress had deprived federal courts of jurisdiction to hear the administrative challenge to the agencies’ decision to administer the 2012 amendment.
In Owl Creek Asia I, L.P. v. United States (and three related petitions), the shareholders return to the court to challenge the 2012 amendment under the takings clause of the Fifth Amendment. The government’s decision to redirect Fannie Mae’s and Freddie Mac’s surpluses to the treasury, the shareholders argue, deprives them of dividends and other payouts from their existing shares without any compensation. In response, the government argues that the shareholders lack the right to sue because the only parties possibly harmed by the arrangement, if any, are the companies themselves.
