Fifth Circuit COA Ruled Government Regulator Federal Housing Finance Agency Is Unconstitutional

The Court of Appeals for the Fifth Circuit ruled this week that the Federal Housing Finance Agency is not constitutionally structured. The Federal Housing Finance Agency or FHFA is the oversight for Fannie Mae and Freddie Mac. The government created the FHFA was in the aftermath of the financial crisis of 2008 as a result of bailing out the GSEs.

The court also dealt with the question of the agency’s leadership structure. The lawsuit questioned if the FHFA director can wield absolute authority.

Shareholders didn’t like that the Federal Housing Finance Agency modified its conservatorship agreement with Fannie and Freddie. The modification swept all the profits from the GSEs into the government’s coffers.

Fannie Mae and Freddie Mac shareholders sued the government. Shareholders challenged the structure of the FHFA. They also refer to it as the “Third Amendment Sweep.”

Rather the government claimed they amended the terms of the GSEs’ conservatorship to ensure that the government had enough money to bail them out again if necessary.

As a result, a group of Fannie and Freddie shareholders sued the government. They claimed the arrangement was unnecessary. They also argued it was illegal as well.

The COA Agrees With Shareholders. The Federal Housing Finance Agency Leadership Structure Is Unconstitutional

The Court of Appeals held that the FHFA was not constitutionally structured. Yet, they did rule that the agency was within its statutory authority when it enacted the net worth sweep:

We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the ruling reads. “We reach this conclusion after assessing the combined effect of the: (1) for-cause removal restriction; (2) single-Director leadership structure; (3) lack of a bipartisan leadership composition requirement; (4) funding stream outside the normal appropriations process; and (5) Federal Housing Finance Oversight Board’s purely advisory oversight role.

Therefore, the Court of Appeals ruled the FHFA director should be removable at will. Yet, they left the remainder of the FHFA’s previous actions intact. Thus, the FHFA “survives as a properly supervised executive agency.”

In addition, FHFA said that it will not be commenting on the court’s ruling.

To read the court’s decision in full, click here.