The case arises from the government’s 2012 decision to channel nearly all of Fannie and Freddie’s profits to the Treasury Department, a bid to reclaim more quickly taxpayer dollars that kept the firms afloat after they were bailed out during the 2008-09 financial crisis.
Shareholders argued that the profit sweep should be invalidated because the firms’ regulator—the Federal Housing Finance Agency—is structured unconstitutionally, with a single director who holds power that isn’t subject to appropriate checks by the president.
The Supreme Court agreed with similar arguments in a June decision that ordered a restructuring of the Consumer Financial Protection Bureau.
The case could have broad implications for the housing market, because the firms guarantee about half of the $11 trillion U.S. mortgage market. Fannie and Freddie make money by collecting fees on those guarantees. All told, they have sent more than $300 billion back to the government, compared with the roughly $190 billion it injected into the firms.
Shareholders allege that Fannie and Freddie made $124 billion in overpayments and are asking the Treasury to stop collecting future profits. They also say the companies are entitled to a $29.5 billion credit for future taxes.
Some justices appeared skeptical about whether the 2012 agreement could be voided even if they deem the agency’s structure unconstitutional.
“Your remedial ask is a big one and hard for us to swallow,” Justice
said during more than 90 minutes of oral arguments.
said it would be “counterintuitive, perhaps illogical” to rule anything more than that the FHFA director can be removed by the president at any time.
expressed skepticism about the shareholders’ premise that they were “left out in the cold and their holdings rendered worthless” when the companies were effectively nationalized. Justice Roberts said he checked the publicly traded stock prices of both companies on Wednesday morning and noted they are “not worthless.”
Earlier, though, the chief justice suggested shareholders’ claims might not be prohibited because the value of their investments was “wiped out in a unique way.”
Fannie and Freddie buy mortgages from lenders, package those mortgages into securities and sell them to investors. The securities are attractive to investors because the underlying mortgages are guaranteed, an arrangement that makes it possible to offer home loans at fixed rates of interest for 30 years.
The government stepped in to take over the firms in 2008 through a process known as conservatorship. In exchange, it received a special class of stock that paid a 10% dividend, along with warrants to acquire nearly 80% of Fannie’s and Freddie’s common stock for a nominal price.
“FHFA abandoned its conservatorship mission when it imposed the net worth sweep,” said
an attorney for the shareholders.
‘A lot of the people coming into the Biden administration were here during the Obama years and likely have a distaste for the current recap and release approach.’
The Trump administration argued that even if the FHFA director was unconstitutionally appointed, the profit sweep was agreed to by the Treasury Department, which is headed by a political appointee who answers to the president.
“You can’t set aside a multibillion-dollar agreement on the theory that the president didn’t have enough control over it when the president’s Treasury secretary signed it,” said Justice Department lawyer
A ruling in favor of the shareholders could force the government to return some of the profits to Fannie and Freddie, a move that could help put the companies on a more stable financial footing and pave the way for them to return eventually to private hands.
That, in turn, would have broad implications for the $11 trillion mortgage market and, ultimately, the cost of credit for borrowers, said Isaac Boltansky, director of policy research at Compass Point Research & Trading, which serves large institutional investors.
In contrast, a decision to uphold the validity of the profit sweep could make it less likely that Fannie and Freddie exit from government control soon. President-elect
has signaled his administration will be in no rush to kick the firms out of government control.
“A lot of the people coming into the Biden administration were here during the Obama years and likely have a distaste for the current recap and release approach,” said David Stevens, a former head of the Federal Housing Administration who now consults for the industry, referring to a Trump administration push to recapitalize and eventually release the companies to private hands.
A Supreme Court decision is expected by the end of June.
Corrections & Amplifications
Shareholders of Fannie Mae and Freddie Mac allege that the firms made $124 billion in overpayments and are asking the Treasury to stop collecting future profits. They also say the companies are entitled to a $29.5 billion credit for future taxes. An earlier version of this article incorrectly said the shareholders were asking the Treasury to stop collecting profits and return $124 billion to Fannie and Freddie. (Corrected on Dec. 9)
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