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Case preview: The $124 billion questions – Justices to hear argument in dispute over Fannie Mae, Freddie Mac shareholder suit

The Supreme Court in June ruled in Seila Law v. Consumer Financial Protection Bureau that statutory restrictions on the president’s ability to remove the director of the Consumer Financial Protection Bureau violated the Constitution’s separation of powers. On Wednesday, the court will consider whether a different set of restrictions, governing the removal of the director of the Federal Housing Finance Agency, must suffer the same fate. The question arises in a lawsuit brought by shareholders of mortgage giants Fannie Mae and Freddie Mac, challenging a 2012 agreement between the FHFA and the Treasury Department that the shareholders say “nationalized” Fannie and Freddie, leading to an “astonishing windfall of $124 billion” for the federal government.


The Federal National Mortgage Association, also known by the nickname Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, are publicly traded companies created by Congress with private shareholders. With federal backing, the companies buy and guarantee mortgages issued by other lenders. In doing so, they help to ensure stability and liquidity in the mortgage market.

When the 2008 housing crisis began, Fannie Mae and Freddie Mac suffered what the federal government describes as “overwhelming losses” – “more in 2008 ($108 billion) than they had earned in the previous 37 years combined ($95 billion).” Out of concern that the two companies would fail, causing the collapse of the housing market and possibly even the financial system, Congress that year passed the Housing and Economic Recovery Act, which created the FHFA to regulate Fannie and Freddie.

In its role as conservator, the FHFA entered into a 2008 agreement with the Treasury Department in which the department would provide up to $100 billion in funding for Fannie Mae and Freddie Mac in exchange for compensation that included stock, dividends tied to the amount of money invested in the company, and priority over the other shareholders in recovering its investment.

In August 2012, the FHFA and Treasury changed the agreement to require Fannie Mae and Freddie Mac to pay dividends tied to the companies’ net worth, rather than the size of the Treasury Department’s investment. The plaintiffs in the case now before the Supreme Court contend that the FHFA knew that Fannie Mae and Freddie Mac “were on the verge of generating huge profits, far in excess of the dividends owed” under the current system.

Three individual shareholders went to federal court to challenge the 2012 amendment. They argued that it should be set aside for two reasons: The FHFA and the Treasury Department did not have the authority to enter into the amendment, and in any event the statute that created the FHFA is unconstitutional because it mandates that the president may fire the agency’s director only “for cause.”

The district court ruled for the FHFA and Treasury on both issues. The full U.S. Court of Appeals for the 5th Circuit then agreed to hear the case. It reinstated the shareholders’ challenge to the legality of the 2012 amendment against the FHFA, and it agreed that the removal restrictions violated the Constitution. But it refused to invalidate the 2012 amendment. Instead, it concluded, the proper remedy was to sever the removal provision from the rest of the Recovery Act, leaving the rest of the FHFA in place. Both the shareholders and the government then went to the Supreme Court, asking the justices to weigh in. Less than two weeks after the justices issued their decision in Seila Law, the justices granted review in Collins v. Mnuchin and Mnuchin v. Collins and consolidated the cases for one hour of oral argument.

The issues before the Supreme Court on Wednesday boil down to two questions. The first is whether the restrictions on the removal of the FHFA director are unconstitutional and, if they are, what the remedy for that constitutional violation should be. The second question is whether the 2012 amendment itself exceeded the FHFA’s powers.

The constitutionality of limits on the removal of the FHFA director

One of the questions that the justices agreed to decide is whether the FHFA’s structure violates the Constitution because the agency is headed by a single director who serves a five-year term and can be removed by the president only “for cause.” Because the Justice Department had not defended the removal restriction in proceedings before the 5th Circuit or in its brief opposing review in the Supreme Court, the justices appointed Aaron Nielson, a professor at Brigham Young University’s J. Reuben Clark Law School and a former law clerk to Justice Samuel Alito, to defend it instead.

The shareholders argue that their case is exactly like Seila Law, so that the limitation on the removal of the FHFA director violates the Constitution’s separation of powers. Like the CFPB before the Seila Law ruling, the FHFA is an independent agency with a single director who can be removed only for cause, and it operates outside the normal appropriations process. The FHFA and the CFPB also possess many of the same powers. “If anything,” the shareholders suggest, “from a separation of powers standpoint FHFA is worse than the CFPB,” because the government contends that most of the FHFA’s conduct cannot be reviewed by courts at all.

Because the leadership structure is unconstitutional, the shareholders continue, the proper remedy is to set aside the 2012 amendment. “In a long line of cases,” they assert, the Supreme Court has often invalidated conduct by federal officials who lacked the power under the Constitution to take such actions. First, the court has regarded such actions as void; second, the shareholders reason, any other remedy would “leave litigants with little incentive to bring separation of powers claims.”

The 5th Circuit ruled in this case that the 2012 amendment did not need to be set aside because it was harmless error – that is, it wasn’t clear that the removal restrictions affected the FHFA’s decision to enter into the 2012 amendment. The Supreme Court has never applied that rule in a case involving the separation of powers, the shareholders contend. Moreover, they add, the error was not harmless: If the agency hadn’t been independent, there is no way to know “who would have headed FHFA over the years” or what policies those hypothetical directors might have pursued.

The Trump administration agrees with the shareholders that the removal restrictions violate the Constitution. The FHFA director, the government notes, “is a single agency head who wields significant executive power” even if the agency does not regulate private citizens. But stressing that both the government and the markets relied on the amendment “for the better part of a decade,” the government parts ways from the shareholders on the question of a remedy for the unconstitutional removal restrictions: It urges the justices to separate the removal restrictions from the rest of the Recovery Act.

Defending the removal restrictions, Nielson argues that the leadership structure in this case is different from the one before the court in Seila Law in at least three ways. First, unlike the decision at the heart of Seila Law, the decision to enter into the 2012 amendment was made by an acting director – whom the president can remove at any time, for any reason. Therefore, to the extent that part of the FHFA’s structure is in question here, that part is consistent with the separation of powers.

Second, Nielson contends, even if the removal restrictions were properly before the court, they are still distinguishable from those at issue in Seila Law. In that case, the Supreme Court noted, the director of the CFPB could “bring the coercive power of the state to bear on millions of private citizens,” while – by contrast – the FHFA has much more limited authority, simply regulating “a handful of federally chartered entities.”

Third and finally, Nielson explains, the restrictions themselves are also different: Although the CFPB director could be removed only for “inefficiency, neglect of duty, or malfeasance in office,” the FHFA removal restrictions allow the president to remove the director “for cause” – a much more expansive term that “can be read to allow removal based on policy disagreement with the President.”

The challenge to the legality of the 2012 amendment

In addition to the constitutional challenge to the restrictions on the president’s ability to remove the FHFA director, the justices will also consider the shareholders’ challenge to the FHFA’s authority to enter into the 2012 amendment.

Much of the federal government’s argument centers on whether the shareholders can bring their suit at all. The government contends that they cannot, based on two provisions of the Recovery Act. The first, known as the “succession clause,” gives the FHFA, as the companies’ conservator, the companies’ “rights, titles, powers, and privileges.” Those rights include, the government contends, the right to bring a lawsuit on behalf of the company – thus precluding the suit by the shareholders, which contends that the 2012 amendment harms Fannie and Freddie by “requiring them to turn over their net worth” and seeks a ruling that would benefit the companies, such as requiring the Treasury Department to return to them the payments made under the amendment. The shareholders cannot rely on the Administrative Procedure Act, the federal law governing administrative agencies, to get around this ban, the government continues, because the right to sue under the APA does not overcome any limitations on review that would otherwise exist, and it cannot transform the shareholders’ claim into one directly against the FHFA, rather than on behalf of the companies.

The federal government pushes back against the shareholders’ argument that the succession clause does not apply because it would result in the FHFA having a conflict of interest: The FHFA, the shareholders theorize, would need to decide whether Fannie and Freddie should challenge the FHFA’s own actions as a conservator. But that argument, the government stresses, “has no basis in the statutory text or context,” which gives the conservator “all rights” of “any stockholder.”

A separate provision of the Recovery Act, known as the “anti-injunction clause,” prohibits courts from restraining the FHFA’s actions as a conservator when the FHFA is “exercising a function or power” authorized by the act, the government continues. The FHFA’s powers as a conservator are extensive, the government stresses. They include the authority to take action that may be “necessary” to put Fannie and Freddie “in a sound and solvent condition” and “appropriate” to “preserve and conserve the assets and property” of the two companies. Moreover, in its role as a conservator, the FHFA can consider a range of interests – not only those of the shareholders but also, as in this case, the public interest in ensuring that the two companies are able to fulfill their mission of helping to finance affordable housing going forward.

The shareholders counter that their claim is not barred by the succession clause because it is a claim brought directly by the shareholders, rather than one on behalf of the company. The plaintiffs have personal rights protected by the Recovery Act and were also injured directly by the 2012 amendment, which – the shareholders explain – “transferred their shares’ economic interest” in Fannie and Freddie and therefore effectively removed the plaintiffs from Fannie and Freddie’s capital structures.

And even if it were a claim that should normally have been brought on behalf of the companies, the shareholders continue, in this case the succession clause should be interpreted to allow the shareholders to bring claims challenging the conservator’s actions. Otherwise, they say, only the conservator could sue the conservator for exceeding its authority – which would “render the statute unconstitutional as a matter of procedural due process.”

The Recovery Act’s anti-injunction clause also does not bar the plaintiffs’ lawsuit, the shareholders add, because the FHFA exceeded its authority as conservator. Even if the Recovery Act gives FHFA some discretion in its duties as a conservator, the plaintiffs emphasize, nothing permits it to “affirmatively sabotage[e]” the companies’ recovery “through a self-dealing transaction” with the Treasury Department.

The FHFA’s imposition of the 2012 amendment went beyond its powers, the shareholders conclude: The Recovery Act instructs the FHFA to try to “preserve and conserve” Fannie and Freddie’s assets and “restore them to a sound condition.” “Whatever the scope of FHFA’s discretion as conservator,” the plaintiffs stress, “it exceeds its authority when it takes steps that are antithetical to its conservatorship mission.”

The justices have allotted 90 minutes for Wednesday’s oral argument, although it will likely last even longer with the justices taking turns to ask questions by telephone. With three lawyers arguing and both the constitutional and statutory questions before the court, they will have a lot to talk about.

This article was originally published at Howe on the Court.

Recommended Citation: Amy Howe, Case preview: The $124 billion questions – Justices to hear argument in dispute over Fannie Mae, Freddie Mac shareholder suit, SCOTUSblog (Dec. 9, 2020, 6:00 AM),