TWELVE LONG years after the federal government assumed control of them amid a financial panic, the ultimate fate of Fannie Mae and Freddie Mac, the housing-finance giants that back half of the $10 trillion U.S. mortgage market, remains undetermined. What everyone should agree on, however, is how not to resolve the issue: through an arcane constitutional lawsuit that would overturn government control at the risk of unintended consequences well beyond the housing. Yet just such a case is now before the Supreme Court, brought by speculators who would make a killing if they win.
At issue is the 2008 federal law that created Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), an independent agency whose director the president may remove only “for cause.” In 2012, FHFA agreed, on behalf of the two entities, to turn over their profits to the Treasury rather than build capital or pay dividends to stockholders. The latter, by that time, included hedge funds betting that they could persuade courts to order the entities’ re-privatization — and send the value of beaten-down Fannie and Freddie shares they had bought for pennies skyrocketing. Those efforts have so far failed: Courts generally have seen FHFA’s action as a lawful effort to buy time for a permanent legislative solution, and to protect taxpayers who had bailed out Fannie and Freddie to the tune of almost $200 billion. But last year, the New Orleans-based U.S. Court of Appeals for the 5th Circuit sided with the investors, setting the stage for Supreme Court review.
The investors’ constitutional claim, repeated in a Supreme Court hearing on Wednesday, is that a “for cause” limitation on the president’s power to fire the FHFA director violates separation of powers. This renders the 2012 profit “sweep” null and void, they maintain. It’s a sequel to a previous challenge to the law barring the president from firing the director of the Consumer Financial Protection Bureau except for “inefficiency, neglect, or malfeasance.” In a ruling this summer, the court found that stricter prohibition unconstitutional — but declined to invalidate the agency as a whole, or any of its past actions.
A similarly common-sense outcome is readily available in the FHFA case. Indeed, the court should find it easier: In the real world, the director who actually made the 2012 deal with the Obama Treasury Department was an acting official removable at will by the president. The court can therefore avoid the constitutional question entirely and decide the case on other grounds — which also support the legality of the FHFA’s actions.
This might please neither conservative Republicans, who see the case as an opportunity to weaken the “administrative state,” nor some liberal Democrats, who want to make it easier for President-elect Joe Biden to fire the current Trump-appointed FHFA director. However, the justices need to stay focused on the potential unintended consequences for the tenure of the Federal Reserve chair (who serves a four-year term, subject to presidential firing “for cause”) or the administrator of Social Security (appointed for six years, removable only for “neglect of duty or malfeasance in office”). If there were ever a case for judicial restraint, this is it.