In September, an appeals court ruled the government’s net worth sweep of Fannie Mae and Freddie Mac to be unconstitutional, a decision the Trump administration is looking to reverse.
In July 2018, the Court of Appeals for the Fifth Circuit ruled that the Federal Housing Finance Agency is not constitutionally structured.
The ruling 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.”
Over the years, many observers have questioned whether it was necessary for the federal government to modify its conservatorship agreement with Fannie and Freddie to sweep all the profits from the government-sponsored enterprises into the government’s coffers, an arrangement referred to as the “Third Amendment Sweep” or the “Net Worth Sweep.”
At the time, the government claimed that the GSEs were on the brink of collapse, and amended the terms of the GSEs’ conservatorship to ensure that the government had enough money to bail them out again if necessary.
In the aftermath, a series of Fannie and Freddie shareholders sued the government, claiming the “Third Amendment sweep” was not only unnecessary but illegal as well.
But while the court ruled against the structure of the FHFA, saying a single director appointed to a five-year term and only fireable for cause, not at will by the president is unconstitutional, it rejected the idea that the net worth sweep was unconstitutional. The court cited several other previous rulings in other courts as background for a similar decision to uphold the sweep.
But then, in September, the full Fifth Circuit Court of Appeals found that the net worth sweep exceeds FHFA’s statutory authority as the GSEs’ conservator. It also found, like the previous ruling, that the agency’s structure, led by a single director, is unconstitutional.
And while the FHFA revealed in January that it will no longer defend its own structure, calling itself unconstitutional, it is fighting the ruling that the net worth sweep was unconstitutional.
The Department of Justice is now asking the Supreme Court to hear the case and rule on the net worth sweep.
The DOJ said in its petition that the 5th U.S. Circuit Court of Appeals in New Orleans “erred” in its recent decision regarding the net worth sweep, according to an article by American Banker. However, the department said it agreed with the court’s finding that the single-director leadership structure of the Federal Housing Finance Agency — Fannie and Freddie’s regulator — is unconstitutional.
Now, however, the FHFA has ended the practice of sweeping profits from the GSEs as they work to regain capital in preparation for exiting conservatorship.
At the end of September, the FHFA announced it would allow Fannie and Freddie to rebuild a portion of their capital reserves to a total of $45 billion combined.
FHFA Director Mark Calabria explained in his keynote speech at the Mortgage Bankers Association’s annual conference in Austin, Texas, that after just one-quarter of retention where Fannie and Freddie profits weren’t swept back, the companies doubled the capital.
And last week, the FHFA released its annual Scorecard for the government-sponsored enterprises, outlining the goals its regulator will use for judging their performance in 2020. There were three goals for the GSEs this year, including, “Prepare for transition out of conservatorship.”
