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Mortgage

FHFA will not defend its constitutionality in court

Acting Director Otting agrees agency is unconstitutionally structured

The Federal Housing Finance Agency revealed it will no longer defend its own structure, calling itself unconstitutional.

Back in July, the Court of Appeals for the Fifth Circuit ruled that the federal government’s regulator of Fannie Mae and Freddie Mac is not constitutionally structured. The FHFA ruling deals with the agency’s leadership structure and whether a single director that wields as much authority as the FHFA director is a violation of the Constitution’s separation of powers.

Then in August, the FHFA appealed this ruling under former FHFA Director Mel Watt, petitioning for a rehearing en banc, meaning it wanted the entire court to hear the case.  

But Watt’s term recently expired, and a new director is stepping up to the helm. Going forward, the FHFA will be led by Comptroller of the Currency Joseph Otting, who was picked by President Donald Trump to serve as acting director of the FHFA while Mark Calabria is awaiting Senate confirmation to replace Watt on a permanent basis.

And now, Otting is moving a different direction, telling the court that the FHFA is under new leadership, and will no longer defend its structure. In a filing to the fifth circuit, Otting urged the court to dismiss the case and leave the previous judgment intact.

From the filing:

Under prior leadership, FHFA petitioned for rehearing en banc seeking consideration by the full Court of the Panel’s holding that FHFA’s structure, in particular its leadership by a single director removable only for cause, unconstitutionally limits the President’s ability to supervise FHFA. As of January 7, 2019, FHFA is led by a new Acting Director, who has reconsidered the issues presented in this case. For the reasons discussed herein, it remains FHFA’s position that it is unnecessary for this Court to reach the constitutionality of the Housing and Economic Recovery Act’s (“HERA”) for-cause removal provision in order to resolve this case and affirm the dismissal of Plaintiffs’ claims. To the extent the Court concludes it is necessary to reach the constitutional issue, FHFA will not defend the constitutionality of HERA’s for-cause removal provision and agrees with the analysis in Section II.A of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.

The case originally comes as the result of a lawsuit brought by Fannie and Freddie shareholders who challenged both the structure of the FHFA and the so-called “Third Amendment sweep.”

Read more about the sweep here from HousingWire Editor Ben Lane.

In this case, Patrick Collins, Marcus Liotta and William Hitchcock, referred to as Fannie and Freddie shareholders, challenged the FHFA’s structure and the “Net Worth Sweep.”

The Court of Appeals held that the FHFA was not constitutionally structured but ruled that the agency was within its statutory authority when it enacted the net worth sweep.

If left as-is, the court ruling would remain that the FHFA director should be removable at will, but leaves the remainder of the FHFA’s previous actions, including the Third Amendment Sweep, intact. Thus, in the eyes of the court, the FHFA “survives as a properly supervised executive agency.”

This is the third time in recent memory a government agency borne out of the housing crisis has been declared unconstitutional by a federal court. The first two times it was the CFPB.

This also isn’t the first time a leader in the Trump administration turned against a government agency in recent months.

Back in March 2017, the U.S. government unexpectedly switched sides on the CFPB when it filed an amicus brief in the PHH vs. CFPB case, a case which questions the CFPB’s constitutional structure, asking the court to rule the CFPB’s leadership structure unconstitutional and grant Trump the authority to fire the CFPB director at will.

Photo credit: Shutterstock.com

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