Supreme Court hears arguments in challenge to housing regulator’s constitutionality

The Supreme Court heard arguments Wednesday over whether it should find the structure of a key housing regulator unconstitutional and void an agreement struck with the Treasury Department over the handling of revenue from the government-sponsored enterprises it oversees.

The case, Collins v. Mnuchin, centers on whether the structure of the Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac, infringes on the president’s executive authority, thereby invalidating a 2012 agreement to exchange billions in Fannie and Freddie stock for capital infusions from the Treasury.

Congress created the FHFA in 2008 to obtain and oversee Fannie and Freddie, two government-sponsored enterprises that collapsed during the 2007 foreclosure crisis. The FHFA, led by a single director unfireable by the president unless “for cause,” regulates Fannie and Freddie, which purchase home mortgages and package them into securities.

A group of Fannie and Freddie shareholders led by Patrick Collins argued that the FHFA director has unconstitutional independence from the president’s oversight because they cannot be fired at will, making a 2012 contract with Treasury invalid. 

“FHFA sweeping claims to unlimited, standardless discretion powerfully illustrate the framers’ wisdom in refusing to vest executive authority in an unaccountable, fourth branch of government,” said David Thompson, an attorney for the shareholders.

The federal government agreed that the FHFA’s structure is unconstitutional, but insists that the 2012 agreement should stand since it was approved by an acting director and the Treasury secretary, both of whom can be fired at will by the president.

“My colleague hasn’t shown any presidential insulation on either side of the [agreement],” said Deputy Assistant Attorney General Hashim Moopan, arguing on behalf of the Treasury Department. “He hasn’t shown any reason why this court would construe the statute to create a constitutional problem rather than to avoid one.”

The court ruled 5-4 in a similar case in June that the nearly identical structure of the Consumer Financial Protection Bureau (CFPB) violated the Constitution, but solved the issue by striking down the director’s protection from at-will dismissal.

Aaron Nielson, a law professor at Brigham Young University appointed to argue in defense of the FHFA’s structure, said the agency should not be held to the same standard as the CFPB because it does not regulate privately run businesses and has less discretion than the bureau.

“The court is going to have to answer some very hard questions, including what is the constitutional basis for any of this,” he said. “Thankfully the court doesn’t need to answer any of them. Because an acting director doesn’t have 10 years to begin with.”

But arguments focused primarily on how the court should handle the 2012 contract, known as the “third amendment” to the FHFA’s original financing agreement, and less on the structure of the agency itself. 

The justices focused their questions on how far the court should go in settling the dispute over the third amendment if it found the agency’s structure unconstitutional and whether such a ruling would affect other FHFA actions.

“Does that mean that everything that happened in the course of the third amendment is then void as structurally invalid because at some point, a constitutionally invalid officer entered the scene?” asked Justice Amy Coney Barrett.

Several justices asked whether the enforcement of the agreement by confirmed directors and the actions of other regulators insulated from presidential firing could be illegal under those circumstances.

Justice Elena Kagan also asked if the court would have “to deal with a great deal more and invalidate the third amendment and everything that’s followed from it” if it found the FHFA’s structure to violate the Constitution.

Thompson responded that while the court would have to go back and assess which actions were taken by FHFA directors with unconstitutional protections, the Fannie and Freddie shareholders were only seeking a ban on any further payments under the third amendment and $18.9 billion to cover the additional amount Fannie and Freddie paid over what they would have been required to pay under the previous agreement.

“No conservator or receiver has ever before been permitted to operate its ward for the exclusive benefit of the federal government,” he said.