Jurisprudence

A Scheme to Blow Up the Housing Market Backfired Spectacularly at the Supreme Court

Instead of winning billions for shareholders, the plaintiffs handed Joe Biden tighter control over the mortgage industry.

Alito speaks into a mic while seated at a table in a hearing room. Kagan looks on, sitting beside him.
Justices Samuel Alito and Elena Kagan testify before Congress in 2019. Chip Somodevilla/Getty Images

In 2016, a group of wealthy investors hatched a lawsuit to dislodge $124 billion from the United States treasury and transfer a chunk of the money to their own pockets. The investors attacked the Federal Housing Finance Agency, a powerful executive agency that regulates Fannie Mae and Freddie Mac. Their plan was to force a settlement that would enrich shareholders by transferring billions of dollars back to the mortgage giants and release them from government control.

It is difficult to overstate how badly this scheme backfired. On Wednesday, the Supreme Court affirmed the investors’ constitutional theory—then rejected their effort to claw back billions while deregulating the mortgage industry. In the process, they allowed President Joe Biden to appoint a new head of the FHFA, a progressive who will keep Fannie Mae and Freddie Mac funneling money to the government (instead of shareholders) indefinitely. The plaintiffs, in other words, did not just lose this case. They inadvertently defeated their ultimate objective, entrenching the very system they tried to topple.

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The roots of Wednesday’s decision in Collins v. Yellen go back to the Great Recession. In 2008, as the U.S. housing market collapsed, Congress created the FHFA to regulate the mortgage industry. The agency placed Fannie Mae and Freddie Mac into a conservatorship. Under this arrangement, the government gave Fannie and Freddie billions in federal funds—basically, a bailout—and received some money in return. Specifically, under a 2012 deal with the FHFA, Fannie and Freddie sent quarterly payments consisting of nearly their entire net worth to the U.S. treasury.

Predictably, Fannie and Freddie’s investors were displeased with this deal. It forced the companies to hand the government about $124 billion more than they would have under previous arrangements. And it left nothing for the companies’ private shareholders, who sued to recoup the money that, in their view, should’ve gone to them in the first place. The shareholders alleged that the FHFA had an unconstitutional structure because it was led by a single director whom the president cannot fire without cause. This structure, they asserted, violates the constitutional separation of powers by depriving the president of control over the executive branch. And, they reasoned, the solution is to invalidate the agency’s actions—namely, the 2012 deal that sent $124 billion to the U.S. treasury.

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This step would’ve set off a bomb in the housing market, throwing the mortgage industry into chaos while forcing the government to somehow unravel years of transactions amounting to billions of dollars. It may also have spurred the Biden administration to settle with the plaintiffs to stave off this disaster. The shareholders appeared eager to leverage a decision in their favor to end Fannie and Freddie’s conservatorship once and for all.

On Wednesday, the Supreme Court went in a very different direction. By a 7–2 vote, the court agreed that the FHFA director’s job protections violate the Constitution. This outcome was no surprise: Just last year, the court ruled that the president must be able to fire the head of a single-director federal agency; that decision dictated the result here. By an 8–1 vote, though, the court rejected the plaintiffs’ theory that the director’s actions are void because he is unconstitutionally shielded from removal. (Only Justice Neil Gorsuch sided with plaintiffs on this question.)

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As Justice Samuel Alito wrote in his majority opinion, the argument for a sweeping remedy “is neither logical nor supported by precedent.” The FHFA director was “properly appointed,” so “there is no basis for concluding” that he “lacked the authority to carry out the functions of the office.” As a result, the courts have no power to set aside his decisions, including the 2012 deal at issue in Collins. Put simply, the treasury does not have to return the money—and so, by extension, the shareholders get nothing. (Technically, Alito left open the possibility of some limited compensation if the plaintiffs could prove that the president tried and failed to remove the FHFA director. But no president did any such thing, and as Justices Elena Kagan and Clarence Thomas explained in separate opinions, such a claim will fail.)

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Here, in short, is where the Supreme Court left things: The FHFA stands. Fannie and Freddie remain in a conservatorship, still on the government’s tight leash, and the treasury can keep the billions it collected from them. Meanwhile, the shareholders, who pursued this case for five years, get nothing. Nothing, that is, except the satisfaction of the Supreme Court granting the president authority to fire the FHFA director.

But this result will not satisfy the shareholders at all, because it leaves them worse off than they were before. From 2019 until this week, the FHFA was led by Mark Calabria, a libertarian Donald Trump nominee whose term was set to stretch into 2024. Calabria intended to release Fannie and Freddie from the conservatorship—freeing the companies from strict government control, ending their transfer of money to the treasury, and allowing them to begin lining investors’ pockets once again. This goal angered Democrats, as the conservatorship furthers many progressive aims, including affordable housing and racial equity. Because of his protection against removal, Calabria was set to stay in office for three more years and wind down the conservatorship by the end of his tenure.

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Thanks to Collins, however, Calabria lost that protection. And Biden swiftly took advantage of the Supreme Court’s decision: He requested and received Calabria’s resignation within hours, then replaced him with a new acting director, Sandra L. Thompson, a liberal who joined the FHFA under President Barack Obama. (She is the first woman to lead the agency.) Thompson promptly announced her intention to continue regulating Fannie and Freddie, and to focus on “affordable housing and access to credit, especially in communities of color.” It’s clear that she has no intention of freeing the companies from the conservatorship, and it’s a safe bet that Biden’s eventual nominee to replace her will not either.

If Fannie and Freddie’s investors hadn’t filed suit, they might have secured their end goal: Calabria likely would have remained in office until 2024, dismantled the conservatorship, and restored the flow of funds to shareholders. (For better or worse, Biden seems unwilling to fire Trump holdovers with job protections until a court allows him to.) Instead, these investors are in the worst possible position. They won’t recoup a penny of the $124 billion they’re chasing, and Fannie and Freddie will remain in a conservatorship for the foreseeable future. Their ally, Calabria, is out, replaced by a Biden-picked progressive who will pursue policies they hate. The Collins plaintiffs did not just lose: They accidentally handed Democrats a major victory that no Democrat was even trying for.

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