The U.S. Supreme Court has agreed to review whether the federal government can continue to collect hundreds of billions of dollars in quarterly dividends from Fannie Mae and Freddie Mac.
The two mortgage giants have operated under the conservatorship of the Federal Housing Finance Agency since the mortgage meltdown of 2008. In return for the Treasury Department’s capital commitment to the so-called government-sponsored enterprises (GSEs), they are required to pay Treasury their entire net worth on a quarterly basis, minus a small capital buffer.
Those transfers have so far amounted to nearly $246 billion.
In September 2019, the 5th U.S. Circuit Court of Appeals ruled that the dividend arrangement, or net worth sweep, unfairly eliminated payouts to private investors in Fannie Mae and Freddie Mac.
According to the Treasury Department, that ruling has “significant financial implications for the federal government, the enterprises, and market participants.”
“In addition, legal uncertainty resulting from the decision may frustrate the federal government’s proposed and ongoing efforts to reform the housing finance system and to end the ongoing conservatorships of the enterprises,” Treasury said in its petition for Supreme Court review.
Investors, meanwhile, asked the court to decide whether the leadership structure of the FHFA, whose director can only be removed for cause by the President and is exempt from the congressional appropriations process, is unconstitutional.
“Congress goes too far when it insulates from presidential control a principal officer who alone heads an executive agency,” the shareholders said in their own petition for review.
The Supreme Court ruled last month that the similar structure of the Consumer Finance Protection Bureau violated the Constitution’s separation of powers.
Litigation over the terms of the GSEs’ conservatorship has been going on for years, with the case now before the Supreme Court considered the last hope for investors. The Trump administration contends the Recovery Act, the 2008 law that created the FHFA, precludes legal challenges to the net profit sweep.