Supreme Court Decisions Clear the Way for Ending the Net Worth Sweep
- July 15, 2020
The U.S. Supreme Court wrapped for the year with a pair of decisions that could bode well for ending the government’s Net Worth Sweep of Fannie Mae and Freddie Mac’s earnings and help secure an equitable solution for shareholders in the government sponsored enterprises.
First, in Seila Law, LLC v. Consumer Financial Protection Bureau, the high court ruled 7-2 that the CFPB’s structure was unconstitutional and gave plaintiffs the right to challenge previous agency actions. That was an encouraging development in and of itself because the GSEs’ conservator, the Federal Housing Finance Agency, is structured the same way; essentially the heads of two agencies with a lot of authority were not answerable to the president. Allowing the president to dismiss the CFPB director “at will” rather than using the much more restrictive standard of having “cause” restores the constitutional tenet of separation of power among three equal branches.
A few days later, the Court also announced it would take up one of the many GSE shareholders suits that have been making their way through the courts over the last five years or more. The Court decided to review Collins v. Mnuchin. In that case, the 5th Circuit Court of Appeals ruled en banc that the FHFA’s structure, like the CFPB’s, violates the Constitution but that court required Fannie and Freddie shareholders to demonstrate a connection between the FHFA’s structure and harm they experienced as a result of the agency’s actions, namely the Sweep. That the Supreme Court wants to apply its conclusions about constitutional structure in Seila and consider remedies applicable to the FHFA and the Sweep is very positive development.
No doubt, the Court is aware that shareholders have for years challenged the legality of the government’s actions. In some of these cases, courts have said FHFA and Treasury reached well beyond the underlying statute, the Housing and Economic Recovery Act. The Court’s decisions on Seila and Collins mean the litigation could be over some time next year. Shareholders in the Collins case should have a good chance to prevail on either the constitutional and statutory arguments. They only need to win on one of them to get the Sweep voided but the government has to win on both claims.
This is a good time for the government to reassess its litigation position. It has an immediate opportunity to make good on long-stated policy goals even before the Court rules on Collins, which it could next spring. FHFA Director Mark Calabria knows the Sweep, initiated during the Obama Administration in 2012, flies in the face of HERA. Calabria helped draft that statute as a senior congressional aide. He also likely appreciates that the Sweep has undermined HERA’s requirement to restore the GSEs to a safe and sound position and hampered the policy goal of bringing more private capital into the mortgage finance system.
Now that the Court has affirmed that Calabria serves his five-year term at the president’s pleasure, he should expect that if Joe Biden wins the presidency he will be replaced at FHFA. That means he and Treasury Secretary Steven Mnuchin could have just a few months to dismantle the Sweep on terms they favor and make it very unlikely the next administration will reverse their decisions and start from scratch.
In the fall, they can start by finalizing the proposed capital rules and have the GSEs submit capital restoration plans. In addition, it is time to, once again, officially end the Sweep, tighten regulatory controls on the GSEs for the long haul, and end the conservatorship. This would serve aspiring homeowners, protect taxpayers, and honor legal obligations to shareholders.
The GSEs have paid back the government and more than compensated taxpayers for the nearly $190 billion provided to prevent their collapse. It is time for the government to acknowledge this and drop absurd arguments that the Sweep was about the government’s quest to expedite taxpayer reimbursement or to stem the need for additional GSE draws on taxpayer money. Remember, people in the government associated with the Sweep knew there was no “death spiral.” The Sweep was engineered to use the GSEs’ massive profits as a piggy bank, regardless of the fact that the companies belonged to shareholders.
With an assist by the Supreme Court, the Administration can take steps to end the largest unconstitutional and unauthorized taking in U.S. financial history and make it more likely investors and shareholders will infuse Fannie and Freddie with more capital, confident that the government can again be trusted to abide by the law. There has never been a better time to address the last piece of unfinished business from the 2008-09 financial crisis.