The U.S. Supreme Court on Wednesday made it easier for President Joe Biden to remove the head of the federal housing finance agency - a move the White House said he intends to make right away - while also nixing separate claims brought by shareholders of mortgage finance companies Fannie Mae and Freddie Mac.
The court, in a 7-2 ruling, upheld part of a lower court's ruling that the Federal Housing Finance Agency's structure is unconstitutional under the separation of powers doctrine because its lone director is insufficiently accountable to the president.
But the justices unanimously faulted the lower court for allowing the shareholders to pursue separate litigation challenging a 2012 agreement between the FHFA and the Treasury Department arising from the government's rescue of the mortgage finance firms following the 2008 housing crisis.
The Democratic president in light of the ruling will replace the agency's current director, Mark Calabria, who was appointed to the post by Biden's Republican predecessor Donald Trump, the White House said.
A White House official, speaking on condition of anonymity, said Biden is "moving forward today to replace the current director with an appointee who reflects the administration's values."
The ruling was a body blow to the shareholders in their long-running battle contesting the government's total claim on the two companies profits despite winning on the constitutional issue. It likely also means the Fannie and Freddie will not be leaving their government conservatorship anytime soon.
The court, in an opinion authored by Justice Samuel Alito, sent the case back to lower courts on whether the shareholders can obtain compensation based on their constitutional claims. The court noted, however, that the shareholders could not seek to void the 20212 agreement altogether.
Alito also cast doubt on the notion that any subsequent FHFA decisions implementing the 2012 agreement could be cast aside either, saying "there is no reason to regard any of the actions taken by the FHFA ... as void."
The ruling triggered the largest sell off in Fannie Mae and Freddie Mac in years in late-morning trading. The 37% drop in Freddie Mac shares was the largest since 2017 while the 39% plunge in Fannie Mae's stock was the largest since 2013.
Their preferred shares, owned largely by hedge funds that had bet that the litigation would go their way and force the government to release the companies from the conservatorship under which they have operated following the 2008 financial crisis, fell even further.
Fannie's preferred "S" series and Freddie's preferred "Z" series - among the last private capital raisings by both before their government takeover - both sank more than 60%.
(Graphic: Fannie Mae & Freddie Mac shares dive, https://graphics.reuters.com/USA-COURT/HOUSING/xklpyxendvg/chart.png)
The FHFA is led by a single director who until Wednesday's ruling could be removed by the president only "for cause."
The Supreme Court ruling, in line with a similar decision last year concerning the Consumer Financial Protection Bureau (CFPB), will give Biden and future presidents the authority to remove the head of the agency at any time.
The Supreme Court in the CFPB case ruled in June 2020 that the agency's single-director structure was unconstitutional, deciding that the president should be able to fire the director at any time.
The 2012 agreement eliminated dividend payouts to various shareholders and required Fannie and Freddie to pay the U.S. Treasury an amount equal to their quarterly net worth each quarter, which now totals billions of dollars.
Fannie and Freddie shareholders Patrick Collins, Marcus Liotta and William Hitchcock sued the FHFA and the Treasury Department in federal court in Texas in 2016 arguing that the 2012 agreement, sometimes referred to as the "net worth sweep," exceeded FHFA's authority and should be invalidated.
Trump's administration appealed a 2019 ruling by the New Orleans-based 5th U.S. Circuit Court of Appeals.
The U.S. government in 2008 seized Fannie and Freddie, private enterprises set up by Congress, at the height of the financial crisis as they teetered on the brink of insolvency. The government took a majority stake in each and they were placed under the supervision of the FHFA, which was created at the same time.
The FHFA is headed by a director who is appointed to a five-year term by the president subject to confirmation by the U.S. Senate.