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.
The justices threw out a core part of the investors’ lawsuit, rejecting claims that the
Investors, the court said, might be able to win damages on a separate claim that some payments under the so-called profit sweep 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 profit sweep.
The justices sent the case back to the lower-court level, where the investors will have a chance to show they were harmed by the lack of presidential control over FHFA directors who implemented the agreements. But it means shareholders “can’t recover the bulk of the overpayments they sought,” said Bloomberg Intelligence analyst
The decision is a setback for firms including
The ruling means President
“This will allow the Biden administration to finally put an end to the course that Calabria has the nation’s mortgage market on, much to the relief of progressives and industry alike,” said Jim Parrott, who is a consultant for financial firms and was a senior housing adviser in the Obama White House when the net worth sweep was implemented.
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.
The suing investors targeted the 2012 agreements between the FHFA and Treasury Department. The accords let the federal government collect more than $300 billion in profits from Fannie and Freddie. That included $124 billion the investors said was an unwarranted windfall, beyond what the Treasury would have netted under earlier accords.
In his opinion for the Supreme Court, Justice
Alito said that provision applied because the FHFA was acting as a conservator when it agreed to the profit sweep.
“When the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the agency and, by extension, the public it serve,” Alito wrote. “This distinctive feature of an FHFA conservatorship is fatal to the shareholders’ statutory claim.”
Alito said Congress violated the Constitution with a 2008 law that said the FHFA director can be fired only for cause. He said the case was similar to the Supreme Court’s 2020
The removal power “works to ensure that these subordinates serve the people effectively and in accordance with the policies that the people presumably elected the president to promote,” Alito wrote.
But Alito said that flaw didn’t mean the profit sweep needed to be invalidated, in part because the FHFA was headed by an acting director, Edward DeMarco, at the time the agreements were signed. Alito said the job protections don’t cover acting directors.
Alito said the investors could seek damages only for actions taken by FHFA directors who were nominated by the president and confirmed by the Senate. The Senate confirmed
He said the possibility shareholders might have been harmed by the unconstitutional provision “cannot be ruled out.” Alito pointed to the investors’ contention that, with presidential oversight, a Senate-confirmed director “might have altered his behavior in a way that would have benefited the shareholders.”
The various issues in the case splintered the nine justices. Justices
The lead case is Collins v. Yellen, 19-422.
(Updates with Calabria comment in ninth paragraph.)
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