Collins v Yellen, (2021), was a United States Supreme Court case dealing with the structure of the Federal Housing Finance Agency (FHFA). The case follows on the Court's prior ruling in Seila Law LLC v Consumer Financial Protection Bureau, which found that the establishing structure of the Consumer Financial Protection Bureau (CFPB), with a single director who could only be removed from office "for cause", violated the separation of powers; the FHFA shares a similar structure as the CFPB. The case extends the legal challenge to the federal takeover of Fannie Mae and Freddie Mac in 2008.
In a two-part decision, the Supreme Court ruled that the restriction on removal of the FHFA director by the President was unconstitutional in light of Seila Law, and secondly, dismissed the lawsuit brought against the FHFA by shareholders of Fannie Mae and Freddie Mac as the takeover of these firms was an established power of the agency under terms of the Housing and Economic Recovery Act of 2008.
Background.
Part of the contributing factors to the subprime mortgage crisis from 2007 to 2010 was the role of Fannie Mae and Freddie Mac, for-profit government sponsored enterprises (GSE) that purchase mortgages and backed almost half of the mortgages in the United States. Analysis had found that the two GSEs had purchased a number of risky mortgages, those offered at below the prime interest rate as to encourage home ownership, during the housing market peak in 2005 and 2006 and represented a large risk should they fail. At the start of the crisis, the rationalization of the number of these low-interest mortgages disrupted the banking system, causing some larger banks to go into bankruptcy or seek means to avoid this, which disrupted the credit system and further exacerbated the crisis and caused a recession.
Congress passed the Housing and Economic Recovery Act of 2008 in July of that year to try to stave off the effects of the recession. Among the law's goals included the formation of the Federal Housing Finance Agency (FHFA), merging the existing Federal Housing Finance Board (FHFB) and Office of Federal Housing Enterprise Oversight (OFHEO). The new FHFA was run by a single Director, with James B. Lockhart III, the prior Director of OFHEO, named to the initial position. In September 2008, Lockhart issued an order to bring in Fannie Mae and Freddie Mac under FHFA's authority for the purposes of stabilizing both GSEs using funds allocated by Congress as a means to alleviate the mortgage crisis.
As part of this takeover, once the mortgage crisis was subdued in 2012, the FHFA routed the ongoing profits earned by Fannie Mae and Freddie Mac to the Treasury Department on the basis that these funds were needed to offset the taxpayers' costs of the government's intervention to resolve the crisis. The decision also prevents both GSEs from using Treasury funds to pay their shareholders. Shareholders of both companies challenged the government's actions, stating that these decisions prevents the company from building capital and is excessive governmental overreach.
