It’s hard to exaggerate just how much is at stake in Collins v. Mnuchin, a case that the Supreme Court heard on Wednesday. The plaintiffs in that case raise a $124 billion claim against the federal government, claiming that a federal agency, which was created to stabilize the housing market during the 2008 recession, acted illegally when it took certain actions to prevent mortgage finance giants Fannie Mae and Freddie Mac from collapsing.
One implication of the plaintiffs’ arguments is that every action taken by the Federal Housing Finance Agency (FHFA), the agency at the heart of the Collins case, could be declared void. Another implication is that agencies that are structured similarly to the FHFA, including the Consumer Financial Protection Bureau (CFPB) and the Social Security Administration, could also have years or even decades worth of work invalidated.
As Justice Elena Kagan noted at one point, the Social Security Administration has made 17 million separate decisions over the last quarter century, often involving questions of whether a particular individual is entitled to Social Security benefits. All 17 million of these decisions could potentially be declared invalid if the Court buys the plaintiffs’ legal theory in Collins.
The sheer complexity of trying to “unscramble the egg,” as Justice Clarence Thomas put it at one point, would be hard to fathom. President-elect Joe Biden would have to spend the better part of his first year in office trying to figure out how much of the government was just dismantled. And financial transactions that may have prevented a second Great Depression would potentially have to be unraveled.
And yet, for much of the oral arguments in Collins, it appeared likely that a majority of the Supreme Court would light much of the government on fire and then walk away as if they were Heath Ledger’s Joker. Justice Neil Gorsuch, in particular, spent much of the argument suggesting that every single action taken by the FHFA might be “void.”
The turning point in the arguments, however, came after Justice Samuel Alito took his turn questioning plaintiffs’ lawyer David Thompson. Alito isn’t just a staunch conservative, he is the most reliable Republican partisan on the Supreme Court. But as the sheer enormity of what the plaintiffs were asking him to do sunk in, Alito seemed to rebel.
It was Alito who first warned that, if his Court buys the plaintiffs’ arguments, that “everything ever done” by the leader of the Social Security Administration, over the last quarter century, might become void.
By the end, even Gorsuch appeared to be having second thoughts about whether he was the sort of man who just wants to watch the world burn. “Your remedial ask is a big one and hard for us to swallow,” Gorsuch told Thompson late in the proceedings.
It is still possible that the Collins plaintiffs will receive some of the relief they are seeking; perhaps the Supreme Court will send this case back down to a trial court to determine if some of the FHFA’s actions were unreasonable. But there are probably not five votes to set off the kind of cascading governmental failures that the plaintiffs’ arguments could trigger.
The FHFA’s oversight of Fannie and Freddie, briefly explained
The Collins plaintiffs are investors in the Federal National Mortgage Association (otherwise known as “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (otherwise known as “Freddie Mac”), two semi-private companies that were created by Congress to increase liquidity in the housing market. In 2008, FHFA became the primary federal agency overseeing Fannie and Freddie.
Fannie and Freddie buy home loans from banks and other lenders, pool these loans together, and then sell shares of these pooled loans as “mortgage-backed securities” to private investors. Mortgage-backed securities — especially securities compiled by private investment banks from especially risky mortgages — played a significant role in encouraging irresponsible behavior from lenders, and in triggering the 2008 recession. But such securities also provide many benefits to homeowners and to the overall economy.
As the government argues in its Collins brief, Fannie and Freddie “provide the lenders with additional funds that the lenders can then use to make additional loans; and by bundling loans into securities backed by the enterprises’ credit guarantees, the enterprises attract investors who might not otherwise have invested in mortgages—thereby expanding the pool of funds available for housing loans.”
Together, the two loan-backing companies own or guarantee about $5 trillion in mortgage assets, or about half of all home loans in the United States. Because of their extraordinary exposure to the US housing market, both companies were on the verge of collapse after housing prices fell precipitously in the late 2000s. Together, the companies lost $108 billion, more money than they’d earned in the previous 37 years combined.
Had Fannie and Freddie collapsed, moreover, they likely would have taken the US housing market with them and triggered a global depression. The FHFA was created as part of a broader effort to prevent such a catastrophe, and Congress gave the FHFA simply enormous authority over the two companies. By law, the FHFA may “take such action as may be . . . necessary to put [Fannie and Freddie] in a sound and solvent condition” and that is “appropriate to carry on the business” of the two companies “and preserve and conserve the assets and property of” Fannie and Freddie.
Shortly after its creation, the FHFA effectively took control of the two companies. It then entered the companies into an agreement with the Treasury Department. Under the original terms of this agreement, Fannie and Freddie could each draw up to $100 billion from the Treasury — and the agreement was amended twice to allow the two companies to draw even more money. The agreement also obligated Fannie and Freddie to pay a recurring “dividend” to the Treasury, and the amount of this dividend grew as the two companies drew more public dollars.
Before long, however, Fannie and Freddie owed so much money to the federal government that they had to draw more money from the Treasury just to pay the dividends that they owed to the Treasury. This situation was quite obviously unsustainable. So, in 2012, FHFA and the Treasury agreed to a third amendment to the agreement with Fannie and Freddie — an amendment that the Collins plaintiffs object to strenuously.
Under the terms of the amendment, each company is allowed to hold up to $3 billion in capital. Any money earned in excess of $3 billion, however, must be paid to the Treasury. Thus, this amendment pulled the two companies out of a death spiral, where they were effectively borrowing new money to pay back what they owed on previous loans, but it also stripped each company’s ability to earn a profit for as long as the third amendment is in effect.
The Collins plaintiffs claim that this amendment “netted the federal government an astonishing windfall of $124 billion,” and they insist the third amendment must be invalidated — and that all the money that Fannie and Freddie paid to the government under that amendment must be credited back to the two companies.
The stakes in the Collins case go far beyond the $124 billion sought by the plaintiffs
Among other things, the plaintiffs claim that the FHFA exceeded its statutory authority when it entered Fannie and Freddie into the amendment to its agreement with Treasury, and some of the justices appeared sympathetic to the possibility that the plaintiffs could prevail on this claim.
Justice Stephen Breyer, for example, suggested that maybe a lower court could hold a trial to determine whether the terms of that amendment are “unreasonable.” If that view ultimately prevails, the plaintiffs could potentially win some changes to the amended agreement after months or years of additional litigation.
The justices spent the bulk of their time, however, discussing the plaintiffs’ constitutional claim — and the truly astonishing remedy that the plaintiffs seek for this alleged constitutional violation.
The FHFA is one of a handful of federal agencies that is led by a single individual who can only be removed from their job “for cause.”
Most federal agencies are led by a cabinet secretary or other senior official who can be fired by the president at any time and for any reason. A few agencies, such as the Federal Reserve or the Federal Communications Commission, are led by a multi-member board whose members enjoy some protection against being fired. Thus far, the Supreme Court has said that either of these leadership structures are constitutional.
But, in Seila Law v. Consumer Financial Protection Bureau (2020), the Supreme Court held that the CFPB could not have a single director who cannot be removed by the president at will. It follows that other agencies led by a single individual with a degree of job security, such as the FHFA or the Social Security Administration, are also unconstitutional.
Fair enough. But the FHFA has also operated for the last dozen years under the assumption that it has the lawful authority to exercise its statutory authority, including its power to oversee Fannie and Freddie. What happens if this assumption was wrong?
The Collins plaintiffs seek an extraordinary remedy. They argue that the agency’s director must “be appointed in the manner specified by the [Constitution] and subject to oversight by the President,” and if this constraint is not met, “the official’s actions ... must be set aside.”
Taken to its logical conclusion, this means that literally everything ever done by the FHFA is invalid (the Collins plaintiffs, for what it’s worth, say that their preference is that the Court merely set aside the third amendment. Though they also say they have “no objection” to a court order that invalidates Fannie and Freddie’s entire arrangement with the Treasury). Moreover, because agencies like the CFPB and the Social Security Administration have a similar leadership structure, years’ worth of actions by those agencies would also be invalid.
Several justices spent much of the oral arguments feeling around for whether there is any way to limit the extraordinary relief sought by the plaintiffs. Justice Amy Coney Barrett, for example, asked several questions about the fact that the FHFA was led by an acting director when the third amendment took effect. The law may permit a president to remove an acting director at will, even if a Senate-confirmed director can only be removed for cause.
That could set up a confusing set of circumstances where past actions taking by acting directors are valid, but actions taken by Senate-confirmed directors are not.
Ultimately, however, it was Alito who threw up his hands at the sheer absurdity of what he and his colleagues were being asked to do. Suppose, he asked plaintiff’s attorney Thompson, that the director of the FHFA checked in every day with the president to see if the president wanted the director to leave office. “Would it follow,” Alito asked, “that everything done thereafter by the director is void?”
Alito’s point appeared to be that neither President Obama nor President Trump seemed bothered by the third amendment, or by the FHFA’s conduct generally. The reason why presidents should have the power to fire agency leaders, the Court explained in Seila Law, is so federal agencies remain democratically accountable by ensuring that agency leaders are “subject to the ongoing supervision and control of the elected President.” But if the president approves of an agency leader’s actions, then why should it follow that everything done by that leader is illegal?
Shortly after Alito’s questions, Kagan floated a much more moderate way to resolve this case than the remedy sought by the plaintiffs — “we’re trying to figure out what position you would have been in absent a constitutional violation.” Under Kagan’s proposed rule, the plaintiffs would have to show that the third amendment (or any other action taken by FHFA) would not have happened if the president had been able to remove the FHFA’s director at will.
Gorsuch, meanwhile, asked whether “a new constitutionally correct director” could “ratify” the FHFA’s past actions. Under this approach, President Biden could potentially appoint a new director (or perhaps simply grant his blessing to the existing director) who would immediately declare that everything that happened in the past was all fine and lawful.
One way or another, in other words, the Court appears likely to avoid the calamitous remedy sought by the Collins plaintiffs. Though some members of the Court flirted with granting that remedy early on in the arguments, by the end, even Gorsuch, who initially appeared very eager to toss several agencies into chaos, seemed to be looking for a way out.