GSE Supreme Court Case Could Cost The Treasury $124B, Upend The Housing Market

A case currently before the U.S. Supreme Court, Collins v. Mnuchin, has the potential to invalidate the entirety of the federal government's efforts to prevent Fannie Mae and Freddie Mac from collapsing during the financial panic of 2008.

That could have uncertain consequences for the current housing market and mean the Treasury Department owes the government-sponsored enterprises $124B.

The Collins plaintiffs were shareholders in Fannie Mae and Freddie Mac who assert that a rule change that the Federal Housing Finance Agency made in 2012 (known as the "third amendment") deprived the GSEs' shareholders of $124B in subsequent profits that were paid to the U.S. Treasury instead. 

Previously, the GSEs had been obliged to pay Treasury-fixed dividends, which Fannie Mae and Freddie Mac were hard-pressed to do during the sluggish post-recessionary period between 2010 and 2012. The third amendment specified that they would both pay Treasury whatever they earned beyond a $3B capital reserve.

“One would be hard pressed to find a more egregious example of administrative overreach than the events that gave rise to this lawsuit,” the shareholders said in their written arguments to the Supreme Court.

In its argument to the high court, the Justice Department countered by characterizing the FHFA and its arrangement with the GSEs as a "multibillion-dollar contract on which the government and markets have relied for the better part of a decade.”

The plaintiffs also assert that the structure of the FHFA is unconstitutional because when Congress established the agency, it specified that the president of the United States could fire the head of the agency only for cause, and not at his discretion. That represents an abridgement of presidential power that Congress doesn't have under the constitution, the plaintiffs argue.

The Supreme Court might be sympathetic to that argument because in the June Seila Law case, the court ruled the structure of the Consumer Financial Protection Bureau, with its difficult-to-fire director, was unconstitutional and ordered its restructuring.

A decision for the plaintiffs would force the government to return money it collected from Fannie and Freddie, a move that might put the GSEs on better financial footing to eventually return to private control, The Wall Street Journal reports.

The case might also invalidate everything the FHFA has done, including its conservatorship of Fannie Mae and Freddie Mac. The case was previously heard by the United States Court of Appeals for the 5th Circuit, which invalidated the third amendment only. But there is nothing in Collins v. Mnuchin to keep the Supreme Court from tossing the entire actions of the agency, except the justices' reluctance to do so, considering that the GSEs now own or insure more than half of U.S. residential mortgages.

"If all of FHFA’s previous actions up to this point are invalid, then every part of the agreement with the Treasury — the original agreement and all three amendments — is invalid," writes Ian Millhiser in Vox. "It’s hard to even imagine how such an agreement could be unwound, and any attempt to do so could leave Fannie and Freddie completely insolvent."

The high court heard oral arguments in the case on Wednesday. A ruling is expected in June 2021.