Welcome

Biden Ousts Fannie-Freddie Regulator After Supreme Court Ruling

June 24, 2021, 1:45 AM

President Joe Biden ousted Fannie Mae and Freddie Mac’s regulator Wednesday, replacing the Trump administration appointee on an acting basis with a long-term Federal Housing Finance Agency senior official.

The U.S. Supreme Court opened the door for Biden to remove FHFA Director Mark Calabria with a ruling that gave the president clear authority to fire the housing regulator. The White House replaced him with Sandra Thompson, who has been deputy director of the agency’s division of housing mission and goals since 2013, according to an FHFA statement released late Wednesday.

Read more: Fannie, Freddie Plunge as High Court Deals Blow to Investors

In addition to triggering Calabria’s removal, the Supreme Court also dealt a crushing blow to Fannie and Freddie shareholders who are challenging the government’s collection of more than $100 billion of the companies’ profits. The justices rejected claims that the FHFA exceeded its authority under federal law, leaving investors few options to get their hands on funds they’ve been seeking for years.

WATCH: The U.S. Supreme Court dealt a punishing blow to Fannie Mae and Freddie Mac investors in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises.
(Source: Bloomberg)

Fannie and Freddie shares cratered on the high court’s decision, with each plunging the most in intraday trading since 2013.

Calabria is a libertarian economist who has long supported releasing Fannie and Freddie from federal control. He’s also sought to reduce the companies’ footprint in the mortgage market, arguing that the extent of their operations puts taxpayers at risk.

In a statement, Calabria said he respects the Supreme Court’s decision and wishes his successor all the best in fixing the remaining flaws of the U.S.’s housing finance system.

No Rush

The Biden administration may not be in any rush to free Fannie and Freddie. That’s because it’s potentially easier to make the companies extend mortgage financing to underserved communities as long as they are wards of the state. Eliminating economic inequities is a top goal for the White House. Biden would likely name an acting FHFA director before nominating a permanent replacement.

Mark Calabria
Photographer: Astrid Riecken/The Washington Post/Bloomberg

Among issues Wall Street will be focused on is whether a new FHFA head will make it easier for borrowers to refinance their loans -- something that would have implications for investors in mortgage securities issued by Fannie and Freddie, said Ajay Rajadhyaksha, head of macro research at Barclays Plc in New York. He signaled it would be a mistake for the Biden administration to dramatically overhaul housing policy because it’s such a crucial component of the U.S. economy.

“Any policy changes should be incremental in nature instead of a ‘big bang’ so as not to disturb the critically important agency mortgage market and thereby the housing economy,” Rajadhyaksha said.

Determining what to do with Fannie and Freddie is the last major policy decision remaining from the 2008 financial crisis. The companies got into trouble when the housing market tanked in the run up to the Great Recession, prompting the government to rescue them with $187.5 billion in taxpayer funds. The firms have since become profitable again, paying out billions of dollars in dividends to the Treasury.

Little Hope

Fannie and Freddie don’t make loans. Instead, they buy mortgages from lenders and package them into bonds, guaranteeing payment to investors even if homeowners default. The process is is considered essential to the $10 trillion mortgage market and in keeping borrowing rates low.

In its ruling, the Supreme Court left Fannie and Freddie shareholders with little hope of making a windfall on their holdings.

Investors, the court said, might be able to win damages on a claim that some payments Fannie and Freddie have made to the government were illegal because the FHFA director was unconstitutionally insulated from being fired by the president. But the justices said they wouldn’t use that argument to toss out the entire policy decision -- made in 2012 -- that directed the companies to send their earnings to the Treasury.

The Supreme Court sent the case back to the lower-court level, where shareholders will get the chance to show they were harmed by the lack of presidential control over the FHFA.

--With assistance from Felice Maranz, Joe Light and Greg Stohr.

To contact the reporter on this story:
Jordan Fabian in Washington at jfabian6@bloomberg.net

To contact the editors responsible for this story:
Alex Wayne at awayne3@bloomberg.net

Jesse Westbrook

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

To read more articles log in.

Learn more about a Bloomberg Law subscription.