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High Court Ruling Dashes Investor Hope That Fannie And Freddie Can Keep Their Profits

The U.S. Supreme Court has ruled that for the most part, the federal government is entitled to collect profits generated by Fannie Mae and Freddie Mac under a 2012 arrangement that saw the two government-sponsored enterprises taken over by the Federal Housing Finance Agency in the wake of their massive Great Financial Crisis losses.


Investors in the GSEs, such as Fairholme Funds, Paulson & Co. and Pershing Square Capital Management, had long challenged the “profit sweep” from the GSEs to the U.S. Department of the Treasury, asserting that the FHFA was exceeding its authority and that the statute that created the FHFA is unconstitutional because it stipulates that the president may dismiss the agency’s director only “for cause.” 

The high court disagreed in a 7-2 ruling on both questions, finding that the U.S. Treasury is entitled to collect payments from the GSEs and that the president may fire the head of the FHFA for any reason.

“The Constitution prohibits even ‘modest restrictions’ on the President’s power to remove the head of an agency with a single top officer,” Associate Justice Samuel Alito wrote in the court’s opinion. “The President must be able to remove not just officers who disobey his commands.”

In the wake of the ruling, President Joe Biden dismissed the head of the FHFA, Mark Calabria, who was appointed by Donald Trump and had pushed to privatize the GSEs. For now, Sandra Thompson will succeed Calabria as acting director of the FHFA. Thompson has been deputy director of the agency's Division of Housing Mission and Goals since 2013.

On Wednesday, an administration official said Biden was "moving forward today to replace the current director with an appointee who reflects the administration's values," Politco reports.

Biden is expected to appoint a new director more likely to allow Fannie and Freddie to ease mortgage credit, Bloomberg reports.

“MBA recognizes and appreciates the impact of the Supreme Court’s decision in Collins v. Yellen, as FHFA plays a critical role regulating entities that ensure liquid markets for single-family and multifamily mortgages,” Mortgage Bankers Association President and CEO Bob Broeksmit said in a statement. “We expect President Biden will move quickly to appoint a successor.”

Shares in the GSEs plunged after the decision. Fannie Mae dropped from $2.32 per share on Wednesday to $1.42 Thursday morning, and Freddie Mac fell from $2.32 per share to $1.36.

For the first quarter of 2021, Fannie Mae reported $5B in net income, compared with $4.6B for the fourth quarter of 2020 and considerably higher than its Q1 2020 net income of $500M, a figure impacted by the onset of the coronavirus pandemic. Freddie Mac reported net income of $2.76B for Q1 2021, down from $2.9B in the fourth quarter of 2020 but up from $173M in Q1 2020.

UPDATE, JUNE 24, 12:15 P.M. ET: President Joe Biden on Thursday dismissed Federal Housing Finance Agency Director Mark Calabria, and Sandra Thompson will take over as acting director.

Related Topics: Fannie Mae, Freddie Mac