The government caretaker of Fannie Mae and Freddie Mac is unconstitutional, a federal court has ruled.
A three-judge panel for the U.S. Court of Appeals for the Fifth Circuit ruled that the Federal Housing Finance Agency, created in 2008 as the housing market collapsed, defies the Constitution because it does not answer to the president.
“We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the judges wrote in an unsigned opinion.
The particular issue is the fact that the FHFA is run by a single director who cannot be removed by the president except for cause. Unlike other federal agencies, the FHFA does not have a bipartisan commission and does not receive funding from Congress. Those features insulate it from executive oversight, in the court’s determination.
The panel, consisting of judges Carl Stewart, Catharina Haynes, and Don Willett, ruled that the law must be changed to allow for the president to remove the director at will.
The decision closely relates to ongoing court cases involving the structure of another independent agency, the Consumer Financial Protection Bureau. Federal courts have found that the CFPB, too, is unconstitutional because of its single-director format. Judge Brett Kavanaugh, President Trump’s nominee for the Supreme Court, wrote one of those decisions.
The issue is not an academic one. The FHFA director, Mel Watt, is an appointee of former president Barack Obama, and has received criticism from the Trump administration as recently as last week.
And the previous acting director under President Obama, Ed DeMarco, received criticism for his fiscally conservative management of Fannie and Freddie, with some liberals calling for Obama to attempt to fire him.
The FHFA became Fannie and Freddie’s caretaker, legally their conservator, when they required bailouts in 2008. Since then, the FHFA has steered their business, shaping the housing market. Fannie and Freddie facilitate a national secondary mortgage market by buying home loans from banks and other lenders and packaging them into securities for sale to investors.
The suit in question was brought by shareholders in Fannie and Freddie, who claimed that they had been cheated when the Treasury decided in 2012 to take all of the two companies’ profits rather than just a 10 percent dividend.
The court rejected that part of the suit, but accepted the shareholders’ claim that the agency is unconstitutional. Willett, though, a Trump appointee, dissented in part to write that the government had exceeded its authority in collecting all profits for itself.
