WASHINGTON — A federal appeals court in Texas has ruled that the single-director structure of the Federal Housing Finance Agency is unconstitutional but validated a dividend agreement requiring the government-sponsored enterprises to deliver nearly all of their profit to the Treasury Department.
The U.S. Court of Appeals for the Fifth Circuit in Texas 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.
The court panel consisted of Chief Judge Carl Stewart and Judges Catharina Haynes and Don Willett. Haynes agreed with the court’s decision, while Stewart dissented on the constitutionality issue. Willett also dissented on the profit sweep issue.
However, the ruling also delivered a blow to investors who have been seeking to upend Fannie Mae and Freddie Mac's profit sweep into the Treasury through the Third Amended Dividend Agreement.
Fannie and Freddie shareholders have questioned the net-worth sweep rule since it was enacted in 2012, arguing that it is illegal, but the appeals court dismissed those claims, agreeing with other courts that the Housing Economic and Recovery Act of 2008 placed restraints on judicial review.
Yet the judges' skepticism of the agency's leadership structure was a positive for the shareholders.
Investors have argued that the FHFA violates the separation of powers because, with a single director who can be removed only with cause, shareholder interests may not be properly considered.
The case “concern[s] the transfer of all minority shareholder economic rights to a single majority shareholder,” the judges said in their opinion.
The FHFA declined to comment.
