Uncertainty for FHFA, Fannie, Freddie After Collins v. Mnuchin Decision

Abstract

In September 2019, the en banc Fifth Circuit in Collins held that the FHFA, which oversees the operations of Fannie Mae and Freddie Mac, exceeded its powers in entering into arrangement for financing with the Treasury Department. It further held that the FHFA’s structure is unconstitutional. With this case, the Fifth Circuit split from five other circuits and has cast uncertainty into the future of the FHFA, while simultaneously offering further possibility of investor recovery. After a January 2020 initial conference, the Supreme Court neither granted nor denied the parties’ appeals to hear the case. Concurrently, the Supreme Court is reviewing the constitutionality of the CFPB, a similarly structured agency to the FHFA. With a circuit split and the possibility of certiorari still pending for Collins, this case may still come before the Supreme Court, which would definitively rule on the constitutional status of the FHFA and the statutory claims.

TOPICS: Legal/regulatory/public policy, exchanges/markets/clearinghouses, information providers/credit ratings, financial crises and financial market history

Key Findings

• • If certiorari is granted and this case goes before the Supreme Court, it is uncertain whether the FHFA, which oversees the two biggest players in the RMBS sphere, will be allowed to operate.

• • Other independent agencies such as the CFPB that are structured in a similar way as the FHFA and may also not be constitutional in their current structure and previous actions taken by these agencies dating back to their inception may be unenforceable.

• • Investors chances of further recovery against Fannie Mae and Freddie Mac post-crisis are uncertain until the issue of the Treasury Sweep, an agreement between the FHFA and the Treasury Department funneling Fannie and Freddie’s profits to the Treasury, is resolved. Remedies for investors who have been affected by the Treasury Sweep are uncertain.