Another Assault On Treasury’s Infamous Third Amendment: The Struggle Over The GSEs Is Not Over

By Richard Epstein

Late this past May, Thomas and Ida Saxton brought suit against the Federal Housing Finance Agency (FHFA) in the Northern District of Iowa, and thus opened up a new front in the long-running litigation over the federal takeover of Fannie Mae and Freddie Mac, two Government Sponsored Enterprises, or GSEs, that had hybrid private and public status. Saxton v. FHFA marks perhaps the most noteworthy development since District Court judge, Royce Lamberth, granted the United States an unexpected and undeserved victory, on summary judgment no less, in Perry Capital LLC v. Lew, decided on September 30, 2014. In my capacity as an advisor to a number of institutional investors, I have discussed at length the many weaknesses of that opinion in earlier Forbes posts here , here, here, and here. In this article I will not restate the many defects of economics, statutory construction and constitutional law that pervade that opinion.

It is helpful to explain how the Saxton complaint artfully weaves together the various legal, legislative and economic strands of the case to mount a full-scale and well-considered attack on FHFA and Treasury for systematically exceeding the limited authority conferred on them by the Housing and Economic Recovery Act (HERA). The Saxton complaint consciously avoids any constitutional challenges to the government’s action, but does state forceful claims that both FHFA (and Ed DeMarco in his official capacity its then Director of FHFA) and Treasury acted beyond the scope of their statutory authority, that these actions were arbitrary and capricious when tested against the normal standards of administrative law, and, finally that their actions were in breach of their contractual and good faith obligations to the private shareholders of both Fannie and Freddie.

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