Shareholders of Fannie Mae and Freddie Mac got a mixed reception at the U.S. Supreme Court on a lawsuit that seeks billions of dollars and could affect the push to end government control of the mortgage giants.
Hearing arguments by phone Wednesday, the justices considered whether investors can challenge the 2012 agreements that let the federal government collect more than $300 billion in profits from Fannie and Freddie. A ruling in the investors’ favor in the case would give them a chance to collect a massive settlement.
Most justices directed tough questions at lawyers for both sides. Chief Justice John Roberts asked a government attorney to respond to the investors’ contention that “their stock was completely wiped out in a unique way.” But later Roberts told a lawyer for the investors that “this was a lifeline thrown to your client.”
As the argument began Fannie Mae and Freddie Mac’s common shares each jumped more than 20%, the biggest intraday rally for each since Nov. 20, before paring those gains later during the session.
The case will shape the future of companies that keep the U.S. housing market humming. Fannie and Freddie buy mortgages from lenders and package them into bonds that are sold with guarantees of interest and principal. The suing investors are pressing multiple lines of argument, angling to have at least one survive so the case can move forward.
With the argument over — and a ruling not likely for several months — investors will now turn their focus to Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria, who are in talks to amend the companies’ bailout agreements before President-elect Joe Biden’s inauguration.
Some investors said before the argument that a skeptical high court reception for the government could provide political cover for Mnuchin and Calabria to reduce or eliminate the Treasury Department’s preferred equity stake in Fannie and Freddie.
Constitutional Flaw
It’s not clear that the 100-minute argument gave them that cover. The session focused heavily on the investors’ contention that the so-called profit sweep is void because of a constitutional flaw with the structure of the Federal Housing Finance Agency, or FHFA, which oversees Fannie and Freddie. That argument drew pushback even from some of the court’s conservatives.
“Do you think that if a provision of a massive statute is held to be unconstitutional, a person who is not in any way affected by that provision is entitled to relief?” Justice Samuel Alito asked the investors’ lawyer, David Thompson.
The investors say the agency has an unconstitutional level of independence from the president because the director can be fired only for cause. The Supreme Court endorsed a similar argument earlier this year in a case involving the Consumer Financial Protection Bureau, but stopped short of abolishing that agency or invalidating a disputed document demand it issued.