(Bloomberg) — The U.S. Supreme Court dealt a blow to Fannie Mae and Freddie Mac investors in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises.
The justices threw out a core part of the investors’ lawsuit, rejecting claims that the Federal Housing Finance Agency exceeded its authority under federal law.
Common shares of Fannie Mae slumped as much as 42% and those of Freddie Mac plunged 44%, both posting their steepest intraday declines since October 2014. Fannie Mae was down 36% as of 11:05 a.m. in New York. Freddie Mac sunk 37%.
The court said investors might be able to win damages on a separate claim that some payments under the so-called profit sweep were illegal because the FHFA director was unconstitutionally insulated from being fired by the president. But the justices said they wouldn’t use that claim to toss out the entire profit sweep.
The justices sent the case back to the lower-court level, where the investors will have a chance to show they were harmed by the lack of presidential control over FHFA directors who implemented the agreements. But it means shareholders “can’t recover the bulk of the overpayments they sought,” said Bloomberg Intelligence analyst Elliot Stein.
The decision is a setback for firms including Paulson & Co., Pershing Square Capital Management and Fairholme Funds Inc. that have sought for years to persuade the government to release Fannie and Freddie from government control, thereby earning billions of dollars on their shares.
The ruling means President Joe Biden will be able to oust Mark Calabria, the FHFA director and an advocate for releasing the mortgage giants from government control. Biden will face pressure to remove Calabria and put in his place someone more likely to allow Fannie and Freddie to ease mortgage credit.
Here are Fannie and Freddie’s stock prices after The Supremes ruled against the contention that their regulator, FHFA, exceeded their authority.
Here I am testifying with FHFA’s Mark Calabria on housing finance in front of Congressman Barney Frank (D-MA).
FHFA Director Mark Calabria’s Statement on the U.S. Supreme Court’s Collins v. Yellen Decision
“I respect the Supreme Court’s decision and the authority of the President to remove the Federal Housing Finance Agency Director.
It has been the honor of a lifetime to serve as Director of the Federal Housing Finance Agency alongside world-class staff. During my tenure, FHFA has fulfilled its mission as the economy fluctuated from record-low unemployment and a strong housing market, to a pandemic-triggered recession that spared house prices but contracted supply. Through this cycle, FHFA has acted quickly and effectively to provide relief to homeowners and renters impacted by the COVID-19 pandemic, and to ensure Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System operate in a safe and sound manner, all while supporting historic growth in homeownership, especially among minority households.
However, much work remains. When the housing markets experience a significant downturn, Fannie Mae and Freddie Mac will fail at their current capital levels. I wish my successor all the best in fixing the remaining flaws of the housing finance system in order to preserve homeownership opportunities for all Americans.”
— Director Mark Calabria