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On Shaky Foundation: Constitutionality of FHFA's Structure

a brick wall with a crack in it


Collins v. Mnuchin,

No. 19-422,
938 F. 3d 553 (5th Cir. 2019) (en banc),
cert. granted, 2020 WL 3865248 (U.S. July 9, 2020).

Mnuchin v. Collins,

No. 19-563,
938 F. 3d 553 (5th Cir. 2019) (en banc),
cert. granted, 2020 WL 3865249 (U.S. July 9, 2020).

Oral argument not yet scheduled.

Issues: (1) Whether the Federal Housing Finance Agency’s (FHFA) structure violates the separation of powers; and (2) whether the courts must set aside a final agency action that FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make FHFA independent.

During the Great Recession, Congress passed the Housing and Economic Recovery Act of 2008 (Recovery Act) to prevent catastrophic effects on the national housing market and the economy. The Recovery Act created the Federal Housing Finance Agency (FHFA). 12 U.S.C. § 4511. Congress made the FHFA an independent agency led by a director, appointed by the President subject to Senate confirmation, who could be removed only for cause. 12 U.S.C. § 4512(a) and (b)(1). The Recovery Act gave the FHFA broad powers to regulate Fannie Mae and Freddie Mac, the publicly traded, government-sponsored enterprises (together, the Enterprises) that were established to ensure a reliable and affordable supply of mortgage funds throughout the United States. The Enterprises operate in the secondary mortgage market, primarily buying home loans from private lenders, bundling them into mortgage-backed securities, and selling them to private investors.

In 2008, the Enterprises suffered overwhelming losses because of the decline in home prices and an increase in defaults on home loans. To prevent their collapse, FHFA appointed itself as conservator of the Enterprises under authority granted by the Recovery Act. 12 U.S.C. § 4617(a)(2). Shortly afterward, using its power as conservator, the FHFA executed a funding agreement with the Treasury Department to keep the Enterprises afloat. This agreement was amended twice in attempts to assist the Enterprises, which continued to face repeated losses and liquidity problems.

Shareholders in Fannie and Freddie sued FHFA and Treasury under the Administrative Procedure Act (APA) to set aside the agreement on two grounds. First, they argued that the FHFA and Treasury had exceeded their powers under the Recovery Act by agreeing to the third and final amendment. Second, they claimed the FHFA’s structure is unconstitutional and the agency’s decisions are, accordingly, invalid. Collins v. Fed. Hous. Fin. Agency, 254 F. Supp. 3d 841, 848 (S.D. Tex. 2017). The district court rejected both of these arguments and held that the Recovery Act barred the shareholders’ APA claims and that the structure of the FHFA is constitutional. See id.

The shareholders appealed to a panel of the Fifth Circuit, which affirmed the dismissal of the APA claims, but held that the FHFA is unconstitutionally structured because it is insulated from presidential oversight. Collins v. Mnuchin, 896 F.3d 640, 676 (5th Cir. 2018). All parties sought rehearing en banc, and a majority of the Fifth Circuit affirmed the holding that the FHFA’s structure is unconstitutional. See Collins v. Mnuchin, 938 F.3d 553, 563 (5th Cir. 2019).

While the parties’ cross-petitions for certiorari were pending, the Supreme Court held that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional and severed the “for cause” provision. See Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 2197, 2209 (June 29, 2020). The CFPB and the FHFA have similar structures, making it likely that the Court will also hold that the FHFA’s structure is unconstitutional.

The parties will likely devote significant briefing to the additional questions the Court will consider: severability and whether the agreement between the FHFA and Treasury should be set aside. The shareholders contend that the provision of the agreement at issue deprives them of all of their economic rights and that the Fifth Circuit, having concluded the agency is unconstitutionally structured, should have set aside that portion of the amendment. The government, on the other hand, argues that the structure of the FHFA did not prejudice shareholders because the Treasury Secretary, who is removable at will, also approved and signed the amendment. See Petition for Writ of Certiorari at 12-13, Mnuchin v. Collins, No. 19-563 (Oct. 25, 2019). The government also points out that the shareholders seek to invalidate the portion of the agreement that they dislike, while preserving the portions relating to the capital contributions that helped keep the Enterprises solvent. Id.


A decision adverse to FHFA is unlikely to have a big impact on the housing market right away, as the Court will probably remand the case to the lower courts to determine any remedy. An eventual remedy that requires the government to compensate the shareholders, however, may affect the government’s ability and willingness to act as backstop for the Enterprises in another recession. Given the Enterprises’ indispensable role in the housing finance system and the secondary mortgage market, any perceived weakness in their stability would likely restrict mortgage lending and put affordable homeownership out of reach for aspiring homeowners across the country.

An AARP study found that millions of older Americans carry mortgage debt. See Lori A. Trawinski, Nightmare on Main Street: Older Americans and the Mortgage Market Crisis, AARP Public Policy Institute (July 2016).  From 2007 to 2011, the foreclosure rate for the 50+ population increased nearly six-fold. Id. at 3. The foreclosure rate is disproportionately high for Black and Hispanic borrowers age 50+. Id. at 12. Older Americans once used home equity to finance health care, home maintenance, and other large expenses that arise during retirement, options that the housing market collapse has taken off the table for many. Id. at 3. Stable, affordable homeownership is a cornerstone of financial stability and well-being that should be open to all Americans, and the Supreme Court’s decision may have a substantial impact on that.

Ali Naini