It's hard to overstate how much is at stake in Collins versus Mnuchin, a case the Supreme Court heard on Wednesday. Plaintiffs are bringing a $ 124 billion lawsuit against the federal government. They claim that a federal agency established to stabilize the real estate market during the 2008 recession acted illegally when it took certain measures to prevent mortgage finance giants Fannie Mae and Freddie Mac from collapsing.
One implication of plaintiffs' arguments is that any action taken by the Federal Housing Finance Agency (FHFA), the agency at the heart of the Collins case, could be null and void. Another implication is that agencies structured similarly to the FHFA, including the Consumer Financial Protection Bureau (CFPB) and the Social Security Administration, may also invalidate years or even decades of work.
As Justice Elena Kagan noted at one point, the Social Security Administration has made 17 million separate decisions over the past quarter century, often with the question of whether a particular person is entitled to social security benefits. All 17 million of those decisions could potentially be invalidated if the court buys plaintiffs' legal theory in Collins.
The sheer complexity of trying to "untangle the egg", as Justice Clarence Thomas put it at one point, would be difficult to fathom. President-elect Joe Biden would have to spend most of his first year in office figuring out how much the government was running down. And financial transactions that may have prevented a second world economic crisis may have to be resolved.
And yet, for much of the oral argument in Collins, it seemed likely that a majority in the Supreme Court would set much of the government on fire and then walk away as if they were Heath Ledger's Jokers. In particular, Judge Neil Gorsuch has spent much of the argument suggesting that any and all action taken by the FHFA could be "void".
The turning point in the arguments, however, came after Judge Samuel Alito's turn to question plaintiffs' attorney, David Thompson. Not only is Alito a staunch Conservative, he's the most trusted Republican partisan on the Supreme Court. But when the sheer enormity of what the plaintiffs were asking of him subsided, Alito appeared to rebel.
It was Alito who first warned that if his court buys the plaintiffs' arguments, "anything the social security leader has ever done in the past quarter century" could be void.
In the end, even Gorsuch seemed to worry about whether he was the type of man who just wants to see the world burn. "Your remedy is great and difficult for us to swallow," Gorsuch told Thompson late in the proceedings.
It is still possible that the Collins plaintiffs could get some of the relief they seek; Perhaps the Supreme Court will send this case back to a court to see if some of the FHFA's actions have been inappropriate. But there are probably not five votes to spark the kind of cascading government failures that plaintiffs' arguments could spark.
The FHFA's oversight of Fannie and Freddie, briefly explained
The Collins plaintiffs are investors in the Federal National Mortgage Association (also known as "Fannie Mae") and the Federal Home Loan Mortgage Corporation (also known as "Freddie Mac"), two semi-private companies founded by Congress to provide liquidity to increase in the housing market. In 2008, the FHFA became the main federal agency overseeing Fannie and Freddie.
Fannie and Freddie buy home loans from banks and other lenders, pool those loans, and then sell portions of these pooled loans as "mortgage-backed securities" to private investors. Mortgage-backed securities – especially securities drawn from high-risk mortgages by private investment banks – played an important role in fueling irresponsible lender behavior and sparking the 2008 recession. However, such securities also offer many benefits to homeowners and the wider economy.
As the government argues in their Collins letter, Fannie and Freddie “are providing additional funds to lenders that lenders can use to make additional credit; By pooling loans into securities backed by corporate loan guarantees, companies attract investors who might otherwise not have invested in mortgages, adding to the pool of finance available for home loans. "
Together, the two loan support companies own or guarantee mortgage assets of approximately $ 5 trillion, or about half of all home loans in the United States. Due to their exceptional exposure to the US real estate market, both companies were on the verge of collapse after real estate prices fell sharply in the late 2000s. Together, the companies lost $ 108 billion, more than the past 37 years combined.
Had Fannie and Freddie collapsed, they would likely have swept the US housing market and sparked a global depression. The FHFA was formed as part of a broader effort to prevent such a disaster, and Congress simply gave the FHFA tremendous authority over the two companies. According to the law, the FHFA can “take the necessary measures. . . necessary to put (Fannie and Freddie) in a solid and solvent condition "and this is" appropriate to continue the business of the two companies "and to preserve and preserve the assets and property of Fannie and Freddie.
Shortly after its inception, the FHFA effectively took control of the two companies. The companies then reached an agreement with the finance department. Under the original terms of that agreement, Fannie and Freddie could each withdraw up to $ 100 billion from the Treasury Department – and the agreement was amended twice to allow the two companies to withdraw even more money. The deal also required Fannie and Freddie to pay a recurring "dividend" to the Treasury Department, and that dividend rose as the two companies drew more public dollars.
It wasn't long, however, before Fannie and Freddie owed so much money to the federal government that they had to pull more money from the Treasury Department to pay the dividends they owed the Treasury Department. This situation was obviously unsustainable. For example, in 2012 the FHFA and the Treasury Department agreed a third amendment to the agreement with Fannie and Freddie – an amendment that Collins plaintiffs strongly object to.
The changes allow any company to hold capital up to $ 3 billion. However, any money that earns more than $ 3 billion must be paid to the Treasury Department. This change got the two companies out of a death spiral where they were effectively borrowing new money to pay back what they owed on previous loans, but it has also robbed any company of the ability to make a profit while the third one There is indeed a change.
The Collins plaintiffs claim that this amendment "made a staggering $ 124 billion in profit for the federal government," and they insist that the third amendment must be invalidated – and that all of the money Fannie and Freddie in the frame that amendment paid to the government must be repaid to the two companies.
The stakes in the Collins case go well beyond the plaintiffs' target of $ 124 billion
Among other things, plaintiffs allege that the FHFA exceeded its legal authority by including Fannie and Freddie in the amendment to its agreement with the Treasury Department, and some of the judges agreed to the possibility that plaintiffs could enforce that request.
Judge Stephen Breyer, for example, suggested that a lower court may possibly hold a lawsuit to determine whether the terms of this amendment are "unreasonable". If that view ultimately prevails, plaintiffs could potentially win some changes to the amended agreement after months or years of additional litigation.
The judges, however, spent most of their time debating the plaintiffs' constitutional claim – and the truly amazing remedy the plaintiffs are seeking for this alleged constitutional violation.
The FHFA is one of the few federal agencies run by a single person who can only be removed from their place of work "for good cause".
Most federal agencies are headed by a cabinet secretary or other high-ranking official who can be dismissed by the president at any time for any reason. Some agencies, such as the Federal Reserve or the Federal Communications Commission, are run by a multi-member board whose members enjoy some protection against dismissal. So far, the Supreme Court has ruled that each of these governance structures is constitutional.
However, in the Seila Law v Consumer Financial Protection Bureau (2020) case, the Supreme Court ruled that the CFPB could not have a single director who could not be removed by the President at will. It follows that other agencies run by a single person with some level of job security, such as the FHFA or the Social Security Administration, are also unconstitutional.
Because of me. However, the FHFA has also operated for a dozen years on the assumption that it has legal authority to exercise its legal authority, including its authority to oversee Fannie and Freddie. What if that assumption was wrong?
The Collins plaintiffs seek an extraordinary means. They argue that the agency's director "must be appointed in the manner set out in the (Constitution) and supervised by the president" and, if this restriction is not met, "the official's actions … must be lifted".
In its logical conclusion, it means that literally everything ever done by the FHFA is invalid (the Collins plaintiffs say what they are worth that they prefer the Court to merely repeal the third amendment, when they too say they "have no objection" to a court order invalidating Fannie and Freddie's entire agreement with the Treasury Department). Since agencies like the CFPB and the Social Security Administration have a similar governance structure, the years of action taken by these agencies would also be invalid.
Several judges have spent much of the oral argument worrying about whether there is any way to limit it the extraordinary relief that the plaintiffs sought. For example, Judge Amy Coney Barrett asked several questions about the fact that at the time the third amendment went into effect, the FHFA was being led by an acting director. The law can allow a president to remove an acting director at will, even if a Senate-approved director can only be removed for good cause.
This could create confusing circumstances where previous actions by acting directors apply, but actions by Senate-approved directors do not.
Ultimately, however, it was Alito who threw his hands over the absurdity of what he and his colleagues had to do. For example, suppose he asked plaintiff's attorney, Thompson, that the FHFA's director checked in with the president every day to see if the president wanted the director to leave. "Would it follow," Alito asked, "that everything the director did after that is void?"
Alito's argument seemed to be that neither President Obama nor President Trump seemed bothered by the third amendment or the behavior of the FHFA in general. The reason presidents should have the power to dismiss agency leaders, the Court stated in the Seila Act, is to keep federal agencies democratically accountable by ensuring that agency leaders are "of constant oversight and scrutiny of the elected president ”. But if the president approves the actions of an agency director, why should it follow that everything that leader does is illegal?
Shortly after Alito's questions, Kagan floated a much more moderate way of resolving this case than the means sought by the plaintiffs – "We're trying to find out what position you would have been in had it not been for a violation of the Constitution." Under the rule proposed by Kagan, plaintiffs would have to demonstrate that the third amendment (or any other action taken by the FHFA) would not have occurred had the President removed the director of the FHFA at will.
Gorsuch meanwhile asked whether "a new constitutionally correct director" could "ratify" the earlier actions of the FHFA. Following this approach, President Biden could potentially appoint a new director (or maybe just bless the existing director) who would immediately declare that everything that has happened in the past is fine and lawful.
One way or another, in other words, the court appears to be avoiding the disastrous appeal sought by the Collins plaintiffs. Although some members of the Tribunal flirted with granting the drug early on in the arguments, in the end even Gorsuch, who was initially keen to throw several agencies into chaos, seemed to be looking for a way out.
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