Collins v. Mnuchin, 071618 FED5, 17-20364

Docket Nº:17-20364
Opinion Judge:PER CURIAM.
Judge Panel:Before STEWART, Chief Judge, and HAYNES and WILLETT, Circuit Judges. CARL E. STEWART, Chief Judge, dissenting in part: WILLETT, Circuit Judge, dissenting in part:
Case Date:July 16, 2018
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Shareholders challenged a 2012 agreement between the FHFA, as conservator to Fannie and Freddie, and the Treasury Department. Under the agreement, Treasury provided billions of taxpayer dollars in capital and, in exchange, Fannie and Freddie were required to pay Treasury quarterly dividends equal to their entire net worth (net worth sweep exchange). The Fifth Circuit found the FHFA acted within... (see full summary)





No. 17-20364

United States Court of Appeals, Fifth Circuit

July 16, 2018

Appeal from the United States District Court for the Southern District of Texas

Before STEWART, Chief Judge, and HAYNES and WILLETT, Circuit Judges.


A decade ago, the United States was engulfed in perhaps the worst financial crisis since the Great Depression. Toxic mortgage debt had poisoned the global financial system. Hoping to reverse a national housing-market meltdown, Congress passed the Housing and Economic Recovery Act of 2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654 (codified in various sections of 12 U.S.C.). Among other things, HERA created a new independent federal entity-the Federal Housing Finance Agency ("FHFA")-to oversee two of the nation's largest financial companies, government-chartered mainstays of the U.S. mortgage market: the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").

Since their inception, these twin mortgage-finance giants have always been government-sponsored entities ("GSEs"). But Fannie and Freddie are also private corporations with private stockholders, and many investors are disenchanted with the Federal Government's management. This case is the latest in a series of shareholder challenges to an agreement between the FHFA, as conservator to Fannie and Freddie, and the Treasury Department. Under the 2012 agreement, Treasury provided billions of taxpayer dollars in capital. In exchange, Fannie and Freddie were required to pay Treasury quarterly dividends equal to their entire net worth. This exchange is known as the "net worth sweep," and aggrieved investors are unhappy with the bailout terms.

Plaintiffs-Appellants Patrick J. Collins, Marcus J. Liotta, and William M. Hitchcock (collectively "Shareholders") are Fannie Mae and Freddie Mac shareholders. They sued the FHFA and its Director, as well as Treasury and its Secretary, arguing that the agreement rendered their shares valueless. They contend that Treasury and the FHFA (collectively the "Agencies") exceeded their statutory authority under HERA and that the agreement was arbitrary and capricious under the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) ("APA"). They also claim that the FHFA is unconstitutionally structured in violation of Article II, §§ 1 and 3 of the Constitution because, among other things, the agency is headed by a single Director removable only for cause, does not depend on congressional appropriations, and evades meaningful judicial review. The district court dismissed the Shareholders' statutory claims and granted summary judgment in favor of the Agencies on the constitutional claim.

Because we find that the FHFA acted within its statutory authority by adopting the net worth sweep, we hold that the Shareholders' APA claims are barred by § 4617(f). But we also find that the FHFA is unconstitutionally structured and violates the separation of powers. Accordingly, we AFFIRM in part and REVERSE in part.

I. Background

A. Fannie and Freddie

The foundation of the United States housing market is built on two entities: Fannie Mae and Freddie Mac. Congress created Fannie Mae in 1938 to "provide stability in the secondary market for residential mortgages," to "increas[e] the liquidity of mortgage investments," and to "promote access to mortgage credit throughout the Nation."2 Congress created Freddie Mac in 1970 to "increase the availability of mortgage credit for the financing of urgently needed housing."[3] Both Fannie and Freddie are now publicly traded, for-profit corporations. Together, they purchase and guarantee mortgages originating in private banks and bundle them into mortgage-backed securities. In doing so, these GSEs leverage shareholder investments to provide liquidity to the residential mortgage market, ensuring that homeownership is a realistic goal for American families.

B. The Recession

In 2007, the housing market collapsed, 4 and the United States economy fell into a severe recession. At the time, Fannie and Freddie controlled combined mortgage portfolios valued at approximately $5 trillion-nearly half of the United States mortgage market. As essential players in the housing market, Fannie and Freddie suffered multi-billion dollar losses. Indeed, the GSEs lost more in 2008 ($108 billion) than they had earned in the previous thirty-seven years combined ($95 billion).5 Yet the GSEs remained solvent. Because they had taken a relatively conservative approach to the riskier mortgages that were issued in the years preceding the recession, they remained in comparatively sound financial condition. As a result, Fannie and Freddie continued to support the United States home mortgage system as distressed banks failed.

C. The FHFA and HERA

During the summer of 2008, President Bush signed HERA into law in an effort to protect the fragile national economy from further losses. HERA established the FHFA as an "independent" agency and classified Fannie and Freddie as "regulated entit[ies]" subject to the direct "supervision" of the FHFA.[6] Separately, HERA granted Treasury temporary authority "to purchase any obligations and other securities" issued by the GSEs, 7 so long as Treasury determined that the terms of purchase would "protect the taxpayer, "8and imposed "limitations on the payment of dividends."9 HERA terminated Treasury's authority to purchase securities on December 31, 2009.10 After that, Treasury was only authorized to "hold, exercise any rights received in connection with, or sell, any obligations or securities [it] purchased."11

How Congress chose to structure the FHFA through HERA is central to this appeal.

1. Authority

The FHFA possesses broad discretion to exercise regulatory and enforcement authority over the GSEs' operations.

We first outline the FHFA's regulatory authority. HERA charges the FHFA Director with the broad duty to "oversee the prudential operations" of the GSEs and to ensure that: the GSEs "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls;" "the operations and activities of each regulated entity foster liquid, efficient, competitive, and resilient national housing finance markets;" and the GSEs' activities "are consistent with the public interest."[12] The Director may issue "any regulations, guidelines, or orders necessary to carry out" this duty.[13]

Next, we turn to FHFA's enforcement authority. For one, the Director may issue and serve a "notice of charges" to the GSE or an entity-affiliated party if the party is, or is reasonably suspected of, engaging in "unsafe or unsound practice[s] in conducting the business" of the GSE or otherwise violating laws, rules, or regulations imposed by the Director.14 The notice of charge schedules a formal hearing, during which the FHFA determines whether to issue a cease and desist order.15 After the hearing, the Director may issue the order and may require the entity to take "affirmative action to correct or remedy" the violation.16 The Director can also: (1) obtain an injunction17 in federal court to enforce his cease and desist orders; (2) seek judicial enforcement of outstanding notices or orders that the FHFA issued;18 and (3) issue subpoenas, [19] which may be enforced in federal court.20 Finally, the Director may "require the regulated entity to take such other action as the Director determines appropriate."[21]

Under certain circumstances, the Director may impose civil monetary penalties "on any regulated entity or any entity-affiliated party."22 The Director must abide by certain conditions before imposing a penalty, such as providing notice to the entity and providing the opportunity for a hearing23before the FHFA. There are tiers of potential penalties depending on the severity of the offense, and the Director has wide discretion to determine the appropriate penalty.24 The penalty "shall not be subject to review, except" by the D.C. Circuit.[25] If the penalized entity does not comply, the Director may sue to obtain a monetary judgment and "the validity and appropriateness of the order of the Director imposing the penalty shall not be subject to review."[26]

HERA also authorizes the FHFA Director to appoint the FHFA as either conservator or receiver for the GSEs, "for the purpose of reorganizing, rehabilitating, or winding up the[ir] affairs."27

Once appointed conservator or receiver, the FHFA enjoys sweeping authority over GSE operations. For example, the FHFA "may . . . take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity."[28] The FHFA may also "collect all obligations and money due," "perform all functions of the regulated entity in the name of the regulated entity which are consistent with the appointment as conservator or receiver," "preserve and conserve the assets and property of the regulated entity," and "provide by contract for assistance in fulfilling any function, activity, action, or duty of the Agency as conservator or receiver."29And upon appointment, the FHFA "immediately succeed[s] to all rights, titles, powers, and privileges of such regulated entity with respect to the regulated entity and the assets of the regulated entity."[30] The FHFA also has discretion to "transfer or sell any asset or liability of the regulated entity in default, and may do so without any...

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