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The Supreme Court decides not to light the housing market on fire

SCOTUS is forced to clean up a $124 billion mess of its own making.

Justice Samuel Alito.
Alex Wong/Getty Images

One of the conservative legal movement’s oddest obsessions involves something known as the “unitary executive,” the idea that all federal officers who execute federal law must be accountable to the president of the United States, which includes the president’s right to fire many senior government officials at will.

This obsession birthed a $124 billion Supreme Court case, Collins v. Yellen, that threatened to throw the entire US housing market into turmoil, unless a majority of the Court was willing to take a couple steps back away from its almost religious devotion to the unitary executive doctrine.

On Wednesday, the Court did just that. Although Justice Samuel Alito enthusiastically supported the unitary executive doctrine in the past, he wrote a majority opinion in Collins that walks back some of that doctrine’s most frightful implications. The vote in Collins was a bit messy, with different justices joining different parts of Alito’s opinion, but every member of the Court except for Justice Neil Gorsuch agreed that the plaintiffs in Collins asked for far too much.

Alito’s decision does not abandon the unitary executive, but it steps back from some of the more alarming aspects of the Court’s previous decisions applying this and similar doctrines. The Collins plaintiffs made an entirely plausible argument under those decisions that could have had devastating real-world consequences — in this case, an earthquake for the housing sector — but the Court chose to avoid that path.

The unitary executive had a previous test in front of the Supreme Court in Seila Law v. CFPB (2020). In that case, the Supreme Court struck down a federal law that gave the director of the Consumer Financial Protection Bureau a degree of independence from the president. Under that law, the CFPB director served a five-year term and could only be fired for “inefficiency, neglect of duty, or malfeasance in office.”

The premise of the unitary executive doctrine is that all officials who execute federal law must be accountable to the president. That means that the president typically must be able to fire agency leaders and other top government officials at will — a view that the Supreme Court upheld in 2020. After Seila Law, President Joe Biden or whoever else occupies the White House can fire the head of the CFPB whenever they want.

Collins involves a different agency, known as the Federal Housing Finance Agency, but it involves the exact same issue as Seila Law. A federal law provides that the head of the FHFA may only be fired “for cause.” The Court’s decision in Collins applies the Court’s holding in Seila Law, and holds that the president must have the power to fire the FHFA director at will.

But that’s only one part of the Collins decision. The real question in Collins is what consequences flow from the fact that, from 2008, when the FHFA was created, until the Court’s decision in Collins, the president did not have the power to fire the head of that agency. And the plaintiffs in this case claimed that some truly outlandish consequences follow.

The FHFA was created to repair the housing market turmoil that sparked the 2008 recession, and to prevent similar crises from occurring again. In carrying out this mission, the agency effectively took over Fannie Mae and Freddie Mac, two semi-public companies that play an important role in stabilizing the mortgage industry. Then it oversaw hundreds of billions of dollars’ worth of transactions with the Treasury Department to keep these two companies afloat.

The Court’s previous decisions, however, have some language suggesting that any action taken by an agency led by a director who is unconstitutionally shielded from presidential accountability is void — and that’s certainly how the plaintiffs in Collins read those decisions. They argued that literally every action taken by the FHFA since its creation 13 years ago must be declared invalid.

Had the Supreme Court agreed with this approach, it would have meant that all of the hundreds of billions spent to prop up Fannie and Freddie were spent illegally. It’s hard to even imagine how to unravel these transactions, and the process of doing so could have sparked another housing crisis similar to the catastrophic 2008 meltdown.

In any event, when confronted with the possibility of being responsible for one of the greatest financial crises in modern American history, Justice Alito blinked, as did most of his colleagues. Collins did not lead to an apocalyptic event; instead, it will stand as a warning of what can go wrong if the Court is too cavalier about remaking our constitutional system in a conservative image.

Why was so much at stake in this case?

To understand the dire consequences of a ruling for the plaintiffs in Collins, it’s important to go back and recount what happened during the 2008 housing crisis — and how the federal government responded to that crisis in ways that benefited millions of Americans, but that also cost certain investors a good amount of money.

Fannie and Freddie (also known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation) operate in an unusual gray area between the public and private sectors. Although both companies are publicly traded and have some private shareholders, they were chartered by Congress and are heavily regulated by the federal government. Among other things, the FHFA was given the power to effectively take control over both companies.

The two companies 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. As Alito explains in his Collins opinion, this process “relieve[s] mortgage lenders of the risk of default and free[s] up their capital to make more loans.” Rather than having to wait 30 years for a borrower to repay a loan, Fannie and Freddie allow banks to receive an immediate infusion of cash that they can re-lend.

Fannie and Freddie, however, are not the only players in this mortgage-backed securities market. In the lead-up to the 2008 housing crisis, many banks made expensive subprime loans to borrowers who lacked the means to pay them back. Some investment banks then bought up these risky loans and packaged them together as high-risk securities. And Fannie and Freddie got into this game in the mid- to late 2000s.

Then, in the late 2000s, housing prices started to drop. Many subprime borrowers found themselves with a loan they couldn’t afford to pay back, and a home that had lost so much value it was worth less than the amount they still owed on their loan. A wave of defaults ensued, driving housing prices even lower. The lending market started to dry up, and Fannie and Freddie lost $108 billion — more money than they’d made in the previous 37 years combined.

At the time, Fannie and Freddie either owned or guaranteed about $5 trillion worth of mortgage assets, or about half of all home loans in the United States. Many feared they were teetering on the brink of insolvency, and that they would have taken the entire US housing market with them if they did collapse.

To prevent such a cataclysm, the FHFA invoked its power to take charge of Fannie and Freddie. It then entered into a series of agreements with the Treasury Department to inject hundreds of billions of dollars into Fannie and Freddie’s coffers. The agreement between the two companies and the Treasury was amended several times, and, under the version that was in effect from 2012 until this January, the companies agreed to pay all money that they earned in excess of a $3 billion reserve back to the Treasury Department.

As it turns out, the companies’ fortunes improved shortly after this 2012 amendment went into effect, and Fannie and Freddie wound up paying the government $124 billion more than they would have under a previous version of their agreement with the Treasury Department. These lost profits enraged many of the two companies’ private investors, who wanted a share of that money for themselves.

And so the Collins litigation began. The plaintiffs hoped to invalidate the 2012 amendment to Fannie and Freddie’s agreement with Treasury, but they advanced a legal theory that was so sweeping in its implications that it could have thrown Fannie, Freddie, the FHFA, the Treasury Department, and the entire housing market into chaos.

Again, their argument was that any action taken by the FHFA while the agency’s director was shielded from termination is void. That would have meant that the FHFA and the Treasury Department would somehow have had to unravel more than a decade’s worth of transactions — transactions involving more money than the gross domestic product of Ecuador — that were taken for the explicit purpose of preventing an economic catastrophe unheard of since the Great Depression.

Alito and the Court’s “unitary executive” believers blink

If that prospect sounds bonkers, that’s because it is bonkers. The Collins case was the legal equivalent of a nuclear bomb set to detonate in the middle of the US housing market, unless at least five justices agreed to disarm it.

And yet the plaintiffs’ arguments were entirely reasonable within the context of previous Supreme Court precedents.

First of all, there was absolutely no question, after Seila Law, that the federal law protecting the FHFA director from being fired by the president is unconstitutional. As Alito writes in Collins, “the Recovery Act’s for-cause restriction on the President’s removal authority violates the separation of powers. Indeed, our decision last Term in Seila Law is all but dispositive.”

Second, earlier Supreme Court decisions imply that when an agency head is improperly shielded from being fired by the president, the proper course of action is to invalidate that agency’s actions unless they were later ratified by an official who is accountable to the president. As the Court suggested in Bowsher v. Synar (1986), an official who is not properly accountable to the president “may not be entrusted with executive powers.”

Or, as Justice Neil Gorsuch said, in a partial dissent in Collins that is Joker-esque in its nihilism, “unconstitutionally installed or improperly unsupervised” officials “cannot wield executive power,” and any “attempts to do so are void.”

But no other justice joined Gorsuch’s opinion, and Alito’s opinion for the Court can be summarized in one tweet:

To be clear, the unitary executive doctrine is still the law. And it could still create mischief in the future. Among other things, if all officials who exercise executive power must be subject to termination at the president’s whim, independent boards like the Federal Reserve could potentially lose that independence, allowing the president to pressure these boards into handing down purely political decisions.

But, at the very least, the Court appears unwilling to allow hyper-technical violations of this doctrine to bring down more than a dozen years of work that may have saved us all from a depression.

Though the head of the FHFA must be removable at will by the president, Alito argues in his opinion that “there was no constitutional defect in the statutorily prescribed method of appointment to that office” — that is, an FHFA director who is nominated by the president and confirmed by the Senate may still exercise executive power. Their previous actions are not void.

It’s as good a reason as any not to light the nation’s economy on fire.