WASHINGTON—The Biden administration ousted the head of the Federal Housing Finance Agency after the Supreme Court ruled it was structured unconstitutionally, dealing the latest blow to investors betting that mortgage giants Fannie Mae and Freddie Mac would be returned to private hands after more than 12 years of government control.
The White House decision to replace Mark Calabria as head of the FHFA paves the way for President Biden to install his own appointee to oversee Fannie and Freddie, which are regulated by the agency and back roughly half of the $11 trillion mortgage market. The Biden administration has signaled it won’t be in a hurry to privatize the companies.
The Supreme Court ruling on Wednesday also rejected most claims by a group of investors who challenged a government decision to channel the firms’ profits to the Treasury Department. The most commonly traded class of Fannie Mae preferred shares, which are widely held by hedge funds, closed at $2.52 a share Wednesday, down about 62% from its close a day earlier.
Mr. Calabria is a Trump administration holdover who pushed aggressively to end government control over the firms. His term was set to expire in 2024. Mr. Biden plans to replace Mr. Calabria “with an appointee who reflects the administration’s values,” a White House official said.
The White House selected longtime FHFA official Sandra Thompson as the regulator’s acting director, the agency announced late Wednesday. She is expected to lead the agency until the Senate confirms a full-time replacement for Mr. Calabria.
Fannie and Freddie are central players in the market for home loans, buying mortgages from lenders and packaging them for issuance as securities that are guaranteed by the firms. The arrangement allows lenders to offer the popular 30-year fixed-rate mortgage.
In the run-up to the 2008 housing crisis, Fannie and Freddie got into trouble by taking on increasing risks, primarily to compete with Wall Street firms and later because lawmakers wanted them to support a weakening housing market.
The government effectively nationalized them as mortgage defaults mounted. In return for injecting about $190 billion into the companies, the government got a new class of stock—senior preferred shares—that paid an annual 10% dividend, along with warrants to acquire nearly 80% of the firms’ common stock.
Political and legal developments have sent Fannie and Freddie shares on a wild ride since hedge-fund investors—including
Bill Ackman’s Pershing Square Capital Management LP and Perry Capital—began buying up the stock after the financial crisis.
In 2012, the Treasury revamped its bailout agreement to require nearly all the firms’ profits be swept away to the government as dividend payments on its preferred shares, upending hedge funds’ bets. Some investors filed suit over the change, arguing in part that the head of the FHFA held too much unchecked power.
The Obama administration, in which Mr. Biden served as the vice president, believed that releasing the companies would restore a structural flaw that helped trigger the financial crisis. But broad efforts to overhaul housing finance foundered in Congress.
The Trump administration called for putting Fannie and Freddie on a more stable financial footing by returning them to private hands after imposing new limits on their business activities and raising the fees they charge lenders.
Early in the Trump administration, investors had hoped that policy makers would eventually privatize the companies, and that once that path became clear, the value of the shares in these companies would increase sharply. That never happened, and now the companies could remain in so-called conservatorship indefinitely.
“Our mortgage system is a Frankenstein monster, and it’s far from perfect,” said
director of policy research at investment bank Compass Point Research & Trading LLC. “But Washington has neither the will nor the capacity to alter it because despite all of its faults, the system works.”
The plaintiffs in Wednesday’s case, investors in corporate shares issued by Fannie and Freddie, argued the government profit sweep constituted an illegal end-run to prevent the firms from building capital that could eventually be available to private investors.
The federal government argued the FHFA enjoyed broad legal authority to ensure the mortgage giants’ solvency and protect the U.S. investment in them. Potential problems with the agency’s structure didn’t undermine that power, the government argued.
The Supreme Court, in a Wednesday opinion by Justice Samuel Alito, unanimously ruled the profit sweep didn’t exceed the agency’s statutory authority and ordered the dismissal of shareholder claims on that issue.
The FHFA’s authority is expansive, and the agency reasonably could have concluded that its approach “was in the best interests of members of the public who rely on a stable secondary mortgage market,” Justice Alito wrote.
The ruling wipes out the potential for the type of outsize gains some hedge funds had long been banking on. One shareholder on Wednesday described his holdings in Fannie and Freddie as a long-term “call option” he planned to hold should a future administration prove more amenable to the companies’ privatization.
On the question of the FHFA’s structure, the court said Congress made the agency too insulated from the White House because the president couldn’t easily remove a director whose policies were contrary to his own. That part of the decision, which splintered the court, frees a president to fire the agency’s director at will.
Under the prior arrangement, Mr. Calabria could only be fired for cause. The ruling follows a similar decision by the court a year ago that the Consumer Financial Protection Bureau was structured unconstitutionally because its director had too much power free from White House control.
The high court sent the case back for more lower court proceedings to determine whether the litigating shareholders suffered any actual harm because the agency had been shielded from stronger White House input.
“I respect the Supreme Court’s decision and the authority of the president to remove the Federal Housing Finance Agency director,” Mr. Calabria said in a statement. “I wish my successor all the best in fixing the remaining flaws of the housing finance system.”
An attorney for the litigating shareholders didn’t respond to requests for comment.
Though Mr. Calabria pushed to return the companies to private hands, the Biden administration has signaled its approach would be different. That could mean using the companies to address key policy priorities, such as closing the racial homeownership gap.
“It would be hard to overstate how important a shift this will bring,” said Jim Parrott, an Obama administration housing adviser now working as an industry consultant. “A Biden-led FHFA will focus instead on how the GSEs can actually support the nation’s housing needs,” referring to the acronym for government-sponsored enterprises.
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