FHFA will no longer defend agency's constitutionality in court

WASHINGTON — The Federal Housing Finance Agency will no longer defend the constitutionality of its single-director leadership structure in court, according to a new case filing with the U.S. Court of Appeals for the Fifth Circuit in Texas.

In July, the federal appeals court reversed the previous court’s decision and agreed with the shareholders that the FHFA was “unconstitutionally insulated from executive control” since its single director — as opposed to a board or commission — cannot be fired by a sitting president without cause. If upheld, the decision could render the agency’s actions void.

Investors have argued that the FHFA violates the separation of powers because its single-director structure means shareholder interests may not be properly considered.

Andrew Harrer/Bloomberg

The appeals court also validated a dividend agreement requiring the government-sponsored enterprises to deliver nearly all of their profit to the Treasury Department, which has long been challenged by the shareholders of the mortgage giants Fannie Mae and Freddie Mac.

The ruling on the FHFA’s constitutionality will face a larger panel of judges in an "en banc" review, with both sides presenting oral arguments Jan. 23 in New Orleans.

However, acting FHFA Director Joseph Otting “reconsidered the issues presented in this case,” and will not defend the agency’s constitutionality in court, according to a supplemental brief filed by the counsel for the FHFA on Monday.

“To the extent the Court concludes it is necessary to reach the constitutional issue, FHFA will not defend the constitutionality of [the Housing and Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in Section II.A of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority,” the brief said.

The Treasury Department’s supplemental brief —which was filed last week — defended the dividend agreement, but also agreed with the appeals court and the FHFA that the agency’s leadership structure is unconstitutional.

“A panel of this Court was correct that the FHFA Director’s for-cause removal protection unconstitutionally interferes with the President’s control of Executive power under Article II,” the brief said. “As the panel recognized, HERA’s for-cause removal provision ‘impair[s] the President’s ability to fulfill his Article II obligations.’”

The decision by the FHFA is similar to how the Trump administration has viewed claims that the single-director structure of the Consumer Financial Protection Bureau — an agency created under the Obama administration — is unconstitutional. In 2017, the Department of Justice sided with the mortgage lender PHH Corp., which had challenged the constitutionality of the CFPB.