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,” Alito wrote. 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.

This article was originally published at Howe on the Court.