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The $124 billion Supreme Court case that could throw the housing market into turmoil, explained

Collins v. Mnuchin is an early test of just how much chaos the Supreme Court’s new majority is willing to impose on the government.

Mark A. Calabria, director of the Federal Housing Finance Agency, during a hearing of the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on June 9, 2020, in Washington, DC.
Astrid Riecken/Getty Images
Ian Millhiser is a senior correspondent at Vox, where he focuses on the Supreme Court, the Constitution, and the decline of liberal democracy in the United States. He received a JD from Duke University and is the author of two books on the Supreme Court.

Collins v. Mnuchin (and a companion case called Mnuchin v. Collins) is the stuff that lawyers’ nightmares are made of. It involves a brain-twistingly convoluted array of issues, a complex set of transactions that may have saved the economy from a second Great Depression, and an astonishing amount of money: The plaintiffs argue that the federal government must give up as much as $124 billion.

Beginning in 2008, the federal government took extraordinary steps to prop up Fannie Mae and Freddie Mac, two semi-private companies that, combined, were tied up in about half of all mortgages in the United States. Had the federal government not spent hundreds of billions of dollars to prop up Fannie and Freddie, both companies could have collapsed, and that collapse would have rippled throughout the world economy and potentially triggered a global depression.

And yet, the Collins plaintiffs seek to unravel many of the steps — potentially even all of the steps — that the government took to save Fannie and Freddie.

The plaintiffs also invoke a constitutional theory known as the “unitary executive,” a theory that was once viewed as quite radical but that now enjoys fanatical support among much of the conservative legal movement — including justices who sit on the Supreme Court. The Collins plaintiffs, in other words, come to the Supreme Court with one foot already in the door because they raise constitutional arguments that much of the Court is very eager to advance.

Yet the relief they seek is quite radical. They don’t just argue that the federal government must give up enough money to fund the entire Department of Homeland Security for more than two years. The Collins plaintiffs also claim that everything the Federal Housing Finance Agency (FHFA), which was set up in 2008 in order to deal with the mortgage crisis that triggered a historic recession, has ever done is null and void.

Collins, in other words, tests whether the Court’s 6-3 Republican majority is willing to sow chaos into much of the federal government’s operations, and whether it is willing to do so just as a new president is trying to lift the nation out of a pandemic and another recession. The Court will hear this case on Wednesday.

Collins is a case about the housing crisis that sparked the 2008 recession, and the government’s efforts to fix that crisis

The plaintiffs in Collins are investors who own shares in the Federal National Mortgage Association (otherwise known as “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (otherwise known as “Freddie Mac”), two companies that exist in an unusual gray area between the public and private sectors.

Though Fannie and Freddie are publicly traded companies that are partially owned by private shareholders, they were chartered by Congress, and they are heavily regulated by the federal government. When Congress created the FHFA in 2008, that agency became the primary governmental body 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. Thus, banks that might otherwise have to wait decades for individual borrowers to repay their loans get an immediate infusion of cash, allowing those banks to make additional loans to other homebuyers. Congress created Fannie in 1938 and Freddie in 1970.

As the government explains 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.”

Yet while this process of bundling home loans together into investments has many benefits to the overall economy, it can also inject considerable risk into the mortgage industry. In the lead-up to the 2008 recession, many banks made expensive subprime loans to borrowers who lacked the means to pay back those loans. Meanwhile, some investment banks eagerly bought up these unwise loans and packaged them together into high-risk securities.

Though Fannie and Freddie were hardly the worst offenders, they also started investing in subprime mortgages in 2006.

Because there was a market for these high-risk securities, lenders kept making subprime loans to borrowers who were poised to default. Once these loans were made, investment banks frequently took these subprime loans off the lenders’ hands, so mortgage lenders saw little downside to continuing to offer mortgages to unreliable borrowers.

Then a series of catastrophic events occurred in rapid succession. Home prices fell precipitously in the mid- to late 2000s. That left many subprime borrowers with a loan they could not afford to pay off, and with a home that had lost so much value that it was worth less than the amount the borrower owed. Banks could foreclose on these borrowers, but then they’d be left holding the bag. Sure, the bank could sell the home to recover some of its losses, but the homes weren’t worth enough money to cover those losses in full.

And as more and more homes went into foreclosure, housing prices fell even further. The lending market started to dry up. And businesses with a significant stake in that market were hit hard. In 2008 alone, Fannie and Freddie lost $108 billion — more money than they earned in the previous 37 years combined.

Meanwhile, Fannie and Freddie either owned or guaranteed about $5 trillion worth of mortgage assets — approximately half of all home loans in the United States. So if the two companies had collapsed, the consequences could have been catastrophic. If they had fallen, they might have taken the US housing market with them, and most likely triggered a global depression in the process.

As Italy’s former finance minister Domenico Siniscalco said in 2008, “the bankruptcy of Fannie and Freddie would have meant Armageddon.” It would have meant the “meltdown of the financial system, the global financial system.”

As part of its efforts to prevent this cataclysm, Congress created the FHFA in 2008. Among other things, the FHFA has tremendous authority over Fannie and Freddie. By statute, the FHFA may “take such action as may be—(i) 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.

FHFA effectively took control of Fannie and Freddie in 2008 and entered the companies into an agreement with the Treasury Department. Under the original agreement between the Treasury and the two companies, the government agreed to give Fannie and Freddie up to $100 billion each — though the companies weren’t obligated to take all of this money if they did not need it. Two subsequent amendments to the agreement allowed Fannie and Freddie to draw even more money from the federal government.

In return, Fannie and Freddie (which, again, were under FHFA’s effective control) agreed to a significant number of concessions. Most importantly for the Collins case, they agreed to pay a recurring “dividend” to the government that would increase as the companies took more and more money from the Treasury.

But this growing dividend soon created problems of its own. Fannie and Freddie had to draw so much money from the Treasury in order to remain stable that they were soon obligated to pay dividends to the government that exceeded their overall earnings. Before long, they were drawing money from the Treasury just to pay the dividends — which were owed to the Treasury in the first place.

That led to a third amendment, in 2012, to Fannie and Freddie’s agreement with the Treasury, which the Collins plaintiffs hope to invalidate. Under the terms of this third amendment, Fannie and Freddie would no longer have to pay fixed dividends to the Treasury. Instead, each company would be allowed to maintain a capital reserve of up to $3 billion. Any money earned by either company that exceeded this $3 billion cap would be paid to the Treasury.

Thus, the third amendment eliminated the escalating dividend payments that threatened to overwhelm both Fannie and Freddie. But it also eliminated either company’s ability to earn a profit for as long as they were bound by the third amendment.

At least according to the Collins plaintiffs, Fannie and Freddie’s fortunes improved around the same time that this third amendment went into effect. The plaintiffs claim that this third 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 “unitary executive,” briefly explained

The Collins plaintiffs make several legal attacks on the third amendment to the Treasury agreement, including a statutory claim that FHFA exceeded its lawful authority when it made Fannie and Freddie enter into that amended agreement. Some of these statutory arguments are now before the Supreme Court, but the plaintiffs have to overcome some fairly daunting obstacles in order to prevail on these arguments.

A federal law, for example, provides that, with few exceptions, “no court may take any action to restrain or affect the exercise of powers or functions” of the FHFA when it takes control of Fannie or Freddie. It’s possible that this Supreme Court will try to find a way around this provision, but the provision is about as stringent as a bar to litigation as you can find in federal law.

The plaintiffs’ constitutional argument, meanwhile, rests on what was once a lonely crusade by the late Justice Antonin Scalia but that has now become one of the pet projects of much of the Court’s right flank.

Most federal agencies are under the full control of the president. If the president wants to fire a Cabinet secretary, for example, they may do so at any time and for any reason. And thus the president can use this ability to remove agency leaders to ensure that those leaders do not implement policies that the president finds objectionable.

The FHFA, however, is unusual in that its director serves a five-year term and can only be removed by the president “for cause.” Thus, the FHFA director has some job security in the event the president wants to remove them.

At least according to Scalia, such an arrangement violates the Constitution. The Constitution provides that “the executive Power shall be vested in a President of the United States.” This provision, according to Scalia’s dissenting opinion in Morrison v. Olson (1988), “does not mean some of the executive power, but all of the executive power.” Thus, if a federal official has the power to execute a federal law, they must be fireable either by the president or by someone else who is ultimately accountable to the president.

This theory, that all federal officials who execute federal laws must be accountable to the president, is known as the “unitary executive.” When Scalia embraced this theory, he was all alone — Morrison was a 7-1 decision with Scalia in a solitary dissent. But that dissent gained a cult following among conservative lawyers, some of whom now sit on the Supreme Court. Justice Brett Kavanaugh said in 2016 that he wanted to “put the final nail” in the Morrison majority opinion’s coffin.

For the moment, at least, Scalia’s vision remains a dream deferred. Current law allows for the existence of agencies such as the Federal Reserve or the Federal Communications Commission, which are led by multi-member boards made up of individuals who can only be fired for cause. But last June, in Seila Law v. Consumer Financial Protection Bureau, the Supreme Court held that it is unconstitutional for an agency to have a single director who cannot be fired at will by the president.

So that’s bad news for Mark Calabria, the incumbent head of the FHFA, whom President Trump appointed in 2019. Under Seila Law, the head of a single-director agency must be removable at will by the president, so President-elect Biden will almost certainly be able to remove Calabria.

The plaintiffs seek an extraordinary remedy for a hyper-technical constitutional violation

The Collins plaintiffs did not bring this case solely so they can get a court order allowing Biden to fire Trump’s FHFA director. To the contrary, they argue that radical consequences flow from the fact that directors of the FHFA have operated under the assumption that they can only be fired for cause. Senior executive branch officials, they claim, must “be appointed in the manner specified by the [Constitution] and subject to oversight by the President.” If these constraints “are not observed, the official’s actions are ultra vires and must be set aside.”

Taken to its logical extreme, this argument could mean that literally everything the FHFA has ever done in its 12 years of existence is invalid. Because the Court also invalidated the Consumer Financial Protection Bureau’s (CFPB) single-director structure in Seila Law, the Collins plaintiffs’ arguments also suggest that everything that the CFPB did prior to Seila Law may also be invalid.

The 2010 law creating the CFPB transferred considerable authority to that new agency. Among other things, CFPB enforces statutes prohibiting abusive debt collection practices, requiring lenders to be truthful with borrowers, and governing consumers’ credit reports. All of the CFPB’s actions to enforce these statutes could potentially be invalidated if the plaintiffs prevail in Collins. Indeed, if the Supreme Court were to embrace this position, the Biden administration could spend much of its first year dealing with the fact that years’ worth of government actions are suddenly invalid and must be rolled back.

It is far from clear why the Collins plaintiffs would want such a result. They are shareholders in Fannie and Freddie who believe that their investments have lost value because of the third amendment to Fannie and Freddie’s agreement with the Treasury. But if all of FHFA’s previous actions up to this point are invalid, then every part of the agreement with the Treasury — the original agreement and all three amendments — is invalid. It’s hard to even imagine how such an agreement could be unwound, and any attempt to do so could leave Fannie and Freddie completely insolvent.

The plaintiffs, for what it’s worth, say they have “no objection” to a court order that invalidates Fannie and Freddie’s entire arrangement with the Treasury, but their preference is for an order that merely invalidates the third amendment.

To be clear on what’s happening here: The plaintiffs’ arguments threaten a dozen years of work by a federal agency that very well may have rescued the US housing market and prevented what one country’s former finance minister described as “Armageddon.” Those plaintiffs offer constitutional arguments that, until fairly recently, were widely viewed as extreme and were rejected by the overwhelming majority of the Court. But then they ask for a carefully tailored remedy: invalidation of the third amendment of the Treasury agreement.

That makes no sense. If the FHFA lacks the power to act while its director cannot be fired at will by the president, then everything the FHFA has done up to this point is invalid. There’s no principled way to carve out the third amendment.

And yet seven of the 16 appeals court judges that heard this case voted to give the Collins plaintiffs exactly what they ask for: a court order invalidating the third amendment and only the third amendment. As Judge Don Willett wrote in a thinly reasoned dissenting opinion that barely explains why such a gerrymandered remedy could be justified, “the Third Amendment is the smallest independent agreement that caused the Shareholders’ injury, so that is what to rescind.”

I’ve spent a long time trying to understand the many twists and turns of this labyrinthine case, and I frankly find key prongs of the plaintiffs’ argument, such as the argument that only the third amendment should be invalidated, incomprehensible. Nevertheless, I cannot simply dismiss a legal argument that seven United States Court of Appeals judges signed onto — or, at least, I cannot dismiss the possibility that at least some members of the Supreme Court will find this argument persuasive.

Collins v. Mnuchin is a monster of a case. It is complicated. The potential consequences are enormous. And the amount of money at stake is more than the gross domestic product of the entire nation of Ecuador.

I don’t believe that a majority of the Court will give the plaintiffs the relief they seek. I have to believe that the Supreme Court hasn’t gone so far off the deep end that there are five justices willing to set a $124 billion fire. But Collins is likely to reveal a great deal about the Court’s new majority. Because, again, if seven court of appeals judges are willing to light such a fire, it’s likely that at least some members of the Court are just as willing to do so.

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