Changes are quickly coming to the regulatory body that oversees mortgage giants Fannie Mae and Freddie Mac, thanks to a decision released Wednesday by the U.S. Supreme Court.
In a decision written by Justice Samuel Alito that included many of the court’s nine justices dissenting on certain points, the Supreme Court ruled that the structure of the Federal Housing Finance Agency was unconstitutional. The decision allows President Joe Biden to fire the agency’s current director, Mark Calabria, who was appointed by former President Donald Trump.
A White House official told MarketWatch that Biden would move forward Wednesday to replace Calabria. The official did not say who the new director would be, but said the new agency head will reflect the Biden administration’s values. Before he was the director of the FHFA, Calabria had served as chief economist for Vice President Mike Pence.
The FHFA was created in 2008 in the wake of the subprime mortgage crisis as part of the Housing and Economic Recovery Act, and the FHFA quickly thereafter placed Fannie and Freddie into conservatorship. The case before the Supreme Court was brought by Fannie Mae FNMA, -33.48% and Freddie Mac FMCC, -33.18% shareholders who argued that the regulator overstepped its authority when it reached an agreement with the Treasury Department to sweep the mortgage giants’ profits to the federal government.
The profit sweeps began in 2012 to repay the funds used to bail Fannie and Freddie out.
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The case largely mirrored one the Supreme Court decided in 2020 where the court ruled in a 5-4 decision that the Consumer Financial Protection Bureau’s structure was unconstitutional. Like the CFPB, the FHFA has a single director, who is appointed by a president for a five-year term. Until now, the FHFA’s director could not be removed by a subsequent president.
The Supreme Court’s decision in the FHFA case, formally called Collins v. Yellen, was criticized by some in the financial services industry, as the widely-held expectation is that Biden will seek to fire Calabria.
“We’re disappointed in today’s decision as it removes political independence from an entity that affects the entire financial services marketplace,” said Jim Nussle, CEO and president of the Credit Union National Association. “Stability at the FHFA is vital to the stability of the entire secondary mortgage market.”
Biden will take a different approach to housing finance
Under Calabria’s leadership, the FHFA was focused on seeking an end to the conservatorships of Fannie and Freddie and recapitalizing the enterprises that specialize in securitizing mortgages. There were rumors this past winter that Calabria and the Trump administration were seeking to fast-track privatizing Fannie and Freddie. Some called the plan risky, though, saying that it could disrupt the nation’s housing market.
Whoever Biden appoints to fill Calabria’s role is unlikely to maintain that same approach. Prior to the presidential election, Beacon Policy Advisors partner Brandon Barford said that Biden was likely to use the FHFA as “a tool to help with racial justice and economic inequality,” which would represent a return to the approach taken under the Obama administration.
Since Biden took office, his administration has worked to reinstate policies and regulations focused on promoting fair housing that were eliminated under Trump.
“I don’t think there’s any desire to have [Fannie and Freddie] be released under a Biden administration, or necessarily to have them hold higher capital, because that makes the pool they have to purchase mortgages smaller,” Barford told MarketWatch last October.
Others previously suggested that Biden could attempt to go a step further and see Fannie and Freddie recast as utilities, a plan that some argue could reduce the risk the two enterprises pose to taxpayers. The utility model has been endorsed by some powerful lobbying groups, including the National Association of Realtors.