Trump administration wants Supreme Court to back GSE profit sweep

WASHINGTON — The Department of Justice wants the Supreme Court to hear a case to decide the fate of Fannie Mae and Freddie Mac's profits and resolve questions about the companies' regulator.

The government opposes a recent appeals court ruling that called into question the so-called net worth sweep — a set of agreements requiring the government-sponsored enterprises to return profits to the Treasury to pay for their federal bailout.

The Justice Department 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. 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.

Trump administration officials have already argued against a similar leadership structure for the Consumer Financial Protection Bureau in a case that the Supreme Court has already agreed to hear.

The solicitor general’s petition comes just a month after Fannie and Freddie shareholders filed their own petition asking that the Supreme Court consider their case. In July of last year, judges for the 5th Circuit in Texas validated the net worth sweep agreement, before a larger panel of judges reversed course and appeared to side with the GSEs' shareholders.

Previously, other courts in similar litigation found that the Housing Economic and Recovery Act of 2008, which established the FHFA, put restraints on judicial review.

The net worth sweep was originally instituted in a third amendment to Treasury’s preferred stock purchase agreements.

Al Drago/Bloomberg

“The court of appeals’ resolution ... creates conflicts with the decisions of several other courts of appeals and has significant practical importance,” the petition says.

The most recent court decision “raises the possibility that the Third Amendment will be set aside, with significant financial implications for the federal government, the enterprises and market participants,” the Justice Department argues.

Efforts to undo the net worth sweep and the continuing legal uncertainty could also hinder the Trump administration’s work to end the conservatorships of Fannie and Freddie and reform the housing finance system, according to the petition.

But the Justice Department concurred that the FHFA's structure is unconstitutional.

“We adhere to the panel’s reasoning and conclusion that FHFA's design, and independent agency with a single director removable only ‘for cause’ violates the separation of powers,” the petition says. “A single agency director lacks the checks inherent in multilateral decision making and is more difficult for the president to influence.”

The Supreme Court agreed Oct. 18 to take up a separate case challenging the constitutionality of the CFPB, addressing whether a provision in the Dodd-Frank Act that allows a president to oust the CFPB director only “for cause” is unconstitutional. Experts have argued that the decision in that case would have implications for the similarly structured FHFA.