09.30.21   •   Recent Articles

Collins v. Yellin

By Markell Corpus

Historical Background

Fannie Mae and Freddie Mac are two mortgage companies that we all know very well. These businesses were both created by acts of Congress and are known as GSEs (Government Sponsored Enterprises). Because they were created by a congressional charter, they have a unique government oversight that most other public and private companies don’t have.1 Both companies have a similar function – to buy and guarantee mortgages issued through lenders in the secondary market.

The 2008 housing crisis put a financial strain on both GSEs and they lost a combined $47 billion in their single-family mortgage businesses during the year as buyers started defaulting and lenders began filing for bankruptcy.2,3 The government decided to step in to avoid the collapse of Fannie Mae and Freddie Mac, which would have surely led to an even more drastic downturn in the economy. The Bush Administration placed Fannie Mae and Freddie Mac into government conservatorship and created the Federal Housing Finance Agency (FHFA) to act as conservator. They remain in conservatorship today.

What Is The Purpose of The Conservatorship?

According to the FHFA:

“Conservatorship is intended to stabilize troubled institutions with the objective of maintaining normal business operations and restoring financial safety and soundness.

As conservator, FHFA has the powers of the management, boards, and shareholders of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac continue to operate as business corporations.”4

Basically, the conservator’s goal is to make sure that Fannie Mae and Freddie Mac stay solvent and profitable and don’t further disrupt the American housing market. That sounds great, but there were a few issues that made the investors upset.

The issues that brought about the Collins v. Yellen case were instigated by the structure of the conservatorship. FHFA is run by a single director, appointed by the President and confirmed by the Senate for a five-year term. This person could only be fired by the President, and only for cause, not at will. Many investors believed this gave the conservator too much power and they believed the provision to be unconstitutional.

Another part of the agreement that caused problems between investors and the FHFA is that the FHFA had the ability to act in the best interest of Fannie Mae, Freddie Mac, or itself, meaning it could take actions that weren’t necessarily in the best interest of the companies, if it was in the best interest of the FHFA.

As part of the conservatorship, the US Treasury committed to invest up to $200 billion in preferred stock ($100 billion per company) and extend credit through 2009 to keep Fannie Mae and Freddie Mac operational. Quarterly cash infusions would be made depending on the current conditions of the market.5 In exchange for this infusion of cash, the Treasury purchased 1 million shares of Government Preferred Stock. Part of the benefit of owning this stock was that the Treasury was eventually entitled any net profits each company made that exceeded $3 billion. The $3 billion number would eventually decline by $600 million each year, until it disappeared in 20186. This is known as the “Net Worth Sweep.” This effectively meant that neither company could retain profits, rebuild capital, or return to being the companies they had once been. The GSEs that had once been considered too big to fail were now too regulated to thrive.

The Issues

Investors brought many issues to the Supreme Court, but the two main ones were:

  1. The conservator’s inability to be fired by anyone other than the President and only for cause was unconstitutional and violated the separation of powers principle, and,
  2. If the FHFA was unconstitutionally structured, then the actions it took were unconstitutional, and the Treasury should be required to repay the money it had taken since the net worth sweep was enacted.

The Outcome

The Supreme Court issued a ruling on this case on June 23, 2021. The Court agreed with the investors that the way the conservator could be fired only for cause was unconstitutional. They disagreed that this type of unconstitutional structure had enough of an effect on the decisions made by the FHFA to warrant the return of the funds received by the Treasury. The case was returned to the lower courts for further argument7.

Interestingly, very shortly after the Court issued its opinion, President Biden fired the FHFA director, Mark Calabria, a Republican who had been advocating for the removal of the conservatorship all together. Because the Supreme Court deemed the “for cause” part of the termination provision unconstitutional, the President can fire the Director of the FHFA for any reason.

Why Does It Matter?

The director of the FHFA is an important person for the housing industry. Their role allows them to have a large influence over who can qualify for a loan that can be bought by Fannie Mae or Freddie Mac. They can change policies, start new initiatives, and guide the tide of the mortgage industry in our country. Because of Collins v. Yellin, the President now can fire and hire directors for any reason. This will undoubtedly lead to changes in the FHFA administration every time the White House leadership changes from one party to another. We should expect more swings in FHFA policy whenever power moves from one party to the other.

Since the termination of Calabria, Sandra Thompson has been acting director of the FHFA, and has strong supporters advocating for her to remain in that position. She has reversed many of the policies of the previous director that many deemed detrimental to the housing market8. The nomination of the new director is President Biden’s choice, and must be confirmed by the Senate. Whether or not Thompson stays in the position is yet to be seen.

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  1. Marquit, M. (2021, June 22). Fannie Mae and Freddie Mac. Forbes. Retrieved September 21, 2021, from https://www.forbes.com/advisor/investing/fannie-mae-and-freddie-mac/.
  2. Norbert J. Michel, “Government Policies Caused The Financial Crisis And Made the Recession Worse,” The Heritage Foundation, January 28, 2015, available at http://www.heritage.org/government-regulation/commentary/government-policies-caused-the-financial-crisis-and-made-the;
  3. Griffith, J. (n.d.). 7 things you need to know About Fannie Mae and Freddie Mac. Center for American Progress. Retrieved September 21, 2021, from https://www.americanprogress.org/issues/economy/reports/2012/09/06/36736/7-things-you-need-to-know-about-fannie-mae-and-freddie-mac/.
  4. Get started here: Conservatorship | Federal Housing Finance Agency. (n.d.). Retrieved September 21, 2021, from https://www.fhfa.gov/Conservatorship.
  5. WP Company. (2008, September 7). Treasury to Rescue Fannie and Freddie. The Washington Post. Retrieved September 22, 2021, from https://www.washingtonpost.com/wp-dyn/content/article/2008/09/06/AR2008090602540_2.html?hpid=topnews.
  6. HOUS. FIN. AGENCY, OFFICE OF INSPECTOR GEN., ANALYSIS OF THE 2012 AMENDMENTS TO THE SENIOR PREFERRED STOCK PURCHASE AGREEMENTS, WPR-2013-002, 11-12 (Mar. 20, 2013), available at http://fhfaoig.gov/Content/Files/WPR-2013-002_2.pdf.
  7. Collins v. Yellen. Ballotpedia. (n.d.). Retrieved September 23, 2021, from https://ballotpedia.org/Collins_v._Yellen#.
  8. Sandra Thompson should be the permanent Fhfa director. HousingWire. (2021, September 16). Retrieved September 23, 2021, from https://www.housingwire.com/articles/sandra-thompson-should-be-the-permanent-fhfa-director/.