Appellate Court Finds GSE Net Worth Sweep, FHFA Structure Unconstitutional

The full Fifth Circuit Court of Appeals on Friday found that the so-called net worth sweep—in which the Federal Housing Finance Agency directs Fannie Mae and Freddie Mac’s profits to the U.S. Treasury—exceeds FHFA’s statutory authority as the GSEs’ conservator. It also found that the agency’s structure—led by a single director appointed for a five-year term and removable only “for cause,” not at the president’s discretion—is unconstitutional.

In a majority opinion by Judge Don Willett, the court held that the net worth sweep—challenged by Fannie and Freddie shareholders—exceeded FHFA’s conservatorship powers, and moreover that the FHFA structure is itself unconstitutional. “The removal-protected FHFA director is a new innovation and falls outside the lines that Humphrey’s Executor recognized,” the court found. “Granting both removal protection and full agency leadership to a single FHFA director stretches the independent-agency pattern beyond what the Constitution allows.”

However, a separate majority opinion by Judge Catharina Haynes declined to invalidate the net worth sweep itself. “The shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the ‘for cause’ restriction is declared removed,” the court held. “We go no further.” The court’s ruling invalidating the FHFA’s structure sets it at odds with a 2018 ruling by the D.C. Circuit Court of Appeals ruling in the PHH case upholding the Consumer Financial Protection Bureau’s similar leadership structure.

In related news, Treasury Secretary Steven Mnuchin said on Fox Business today that Treasury and FHFA are working to modify the net worth sweep to allow Fannie and Freddie to rebuild their capital, as envisioned in recent Treasury recommendations for housing finance. “We expect in the very near term to reach an agreement to allow for capital to be built up,” Mnuchin said. “We’re in the process of working with the FHFA, and we’re going to try to see if we can do it in September. If not, it’ll be very soon after that.”