GSE Investors’ Hidden Win

Judge Brown

The big news yesterday was that the US Court of Appeals for the DC Circuit ruled in the main for the federal government in Perry Capital v. Mnuchin, one of the major cases that investors brought against the federal government over the terms of the Fannie and Freddie conservatorships.

In a measured and carefully reasoned opinion, the court rejected most but not all of the investors’ claims.  The reasoning was consistent with my own reading of the broad conservatorship provisions of the Housing and Economic Recover Act of 2008 (HERA).

Judge Brown’s dissent, however, reveals that the investors have crafted an alternative narrative that at least one judge finds compelling. This means that there is going to be some serious drama when this case ultimately wends its way to the Supreme Court. And there is some reason to believe that a Justice Gorsuch might be sympathetic to this narrative of government overreach.

Judge Brown’s opinion indicts many aspects of federal housing finance policy, broadly condemning it in the opening paragraph:

One critic has called it “wrecking-ball benevolence,” James Bovard, Editorial, Nothing Down: The Bush Administration’s Wrecking-Ball Benevolence, BARRONS, Aug. 23, 2004, http://tinyurl.com/Barrons-Bovard; while another, dismissing the compassionate rhetoric, dubs it “crony capitalism,” Gerald P. O’Driscoll, Jr., Commentary, Fannie/Freddie Bailout Baloney, CATO INST., http://tinyurl.com/Cato-O-Driscoll (last visited Feb. 13, 2017). But whether the road was paved with good intentions or greased by greed and indifference, affordable housing turned out to be the path to perdition for the U.S. mortgage market. And, because of the dominance of two so-called Government Sponsored Entities (“GSE”s)—the Federal National Mortgage Association (“Fannie Mae” or “Fannie”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “Freddie,” collectively with Fannie Mae, the “Companies”)—the trouble that began in the subprime mortgage market metastasized until it began to affect most debt markets, both domestic and international. (dissent at 1)

While acknowledging that the Fannie/Freddie crisis might justify “extraordinary actions by Congress,” Judge Brown states that

even in a time of exigency, a nation governed by the rule of law cannot transfer broad and unreviewable power to a government entity to do whatsoever it wishes with the assets of these Companies. Moreover, to remain within constitutional parameters, even a less-sweeping delegation of authority would require an explicit and comprehensive framework. See Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001) (“Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.”) Here, Congress did not endow FHFA with unlimited authority to pursue its own ends; rather, it seized upon the statutory text that had governed the FDIC for decades and adapted it ever so slightly to confront the new challenge posed by Fannie and Freddie.

*     *     *

[Congress] chose a well-understood and clearly-defined statutory framework—one that drew upon the common law to clearly delineate the outer boundaries of the Agency’s conservator or, alternatively, receiver powers. FHFA pole vaulted over those boundaries, disregarding the plain text of its authorizing statute and engaging in ultra vires conduct. Even now, FHFA continues to insist its authority is entirely without limit and argues for a complete ouster of federal courts’ power to grant injunctive relief to redress any action it takes while purporting to serve in the conservator role. See FHFA Br. 21  (2-3)

What amazes me about this dissent is how it adopts the decidedly non-mainstream history of the financial crisis that has been promoted by the American Enterprise Institute’s Peter Wallison.  It also takes its legislative history from an unpublished Cato Institute paper by Vice-President Pence’s newly selected chief economist, Mark Calabria and a co-author.  There is nothing wrong with a judge giving some context to an opinion, but it is of note when it seems as one-sided as this. The bottom line though is that this narrative clearly has some legs so we should not think that this case has played itself out, just because of this decision.

The Fate of the CFPB

photo by Lawrence Jackson

President Obama Nominating Richard Cordray to Lead Consumer Financial Protection Bureau, with Elizabeth Warren

The United States Court of Appeals for the District of Columbia issued a decision in PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (October 11, 2016), that found an important aspect of the structure of the CFPB to be unconstitutional:  the insulation of the Director from Presidential supervision. While this decision will almost certainly be appealed, even if it is upheld, it will allow the the CFPB to continue functioning much as it has.

I was interviewed about the decision on NPR’s All Things Considered in a segment titled, Appeals Court Orders Restructuring Of Consumer Financial Protection Bureau (audio available). The transcript reads,

AUDIE CORNISH, HOST:

A federal appeals court has mandated big changes to the Consumer Financial Protection Bureau. The three-judge panel says the consumer watchdog agency is set up in a way that’s unconstitutional. In its ruling, the court says the agency will have to restructure. NPR’s Yuki Noguchi reports.

YUKI NOGUCHI, BYLINE: The suit was brought by a mortgage lender called PHH, which asked the court to invalidate a $109 million enforcement action against it and scrap the agency, too. The D.C. Court of Appeals sent the fine back to the bureau for review.

But it also ruled that the CFPB’s director has too much power to write and enforce rules without enough oversight from another branch of government. The remedy, the panel says, is that the CFPB should fall under the president’s control. And the president should be able to remove the director at will.

The CFPB’s opponents in the financial services industry declared victory. Bill Himpler is executive vice president for the American Financial Services Association.

BILL HIMPLER: Our issue is still with the authority given to a single director. That is, as the court pointed out, not subject to a lot of oversight.

NOGUCHI: Himpler instead supports a CFPB run by a bipartisan commission, similar to others like the Securities and Exchange Commission. David Reiss, a law professor at Brooklyn Law School, says the ruling is not an existential challenge to the CFPB or its past decisions.

DAVID REISS: The decision does not invalidate the CFPB’s actions. This is more about its structure going forward.

NOGUCHI: Reiss says an appeal to the Supreme Court is all but guaranteed. Indeed, the CFPB says it disagrees with the conclusion. In an emailed statement, a spokesperson says the ruling does not change its mission and that it is, quote, “considering options for seeking further review of the court’s decision.”

Dennis Kelleher is CEO of Better Markets, a group that advocates for stronger financial regulation. He says the bureau’s actions on banks have made the financial sector more determined to undercut the agency.

DENNIS KELLEHER: They do not want a consumer watchdog on the Wall Street beat. That’s what this fight is about.

NOGUCHI: The decision was not unanimous on all the issues. Judge Karen Henderson dissented in part, saying the panel overreached in calling the bureau’s structure unconstitutional. Yuki Noguchi, NPR News, Washington.