July 19, 2018.
Like the CFPB, the FHFA just had its day in court. And like the CFPB, judges declared the FHFA unconstitutional because of its single-director structure.
The Federal Housing Finance Agency, or the FHFA, formed through the Housing and Economic Recovery Act of 2008 (HERA). The FHFA supervises Freddie Mac, Fannie Mae, and the Federal Home Loan Bank System. In 2008, the FHFA also became the conservator of Fannie Mae and Freddie Mac, both government-sponsored enterprises (GSE) created by Congress.
On July 16, 2018, a Texas federal appeals court ruled against the FHFA’s single-director structure, calling it unconstitutional. In order to be upheld as constitutional by the U.S. Court of Appeals for the Fifth Circuit in Texas, the FHFA would need a commission or a board to run it.
The ruling from the U.S. Court of Appeals’ panel of three judges came about after shareholders brought a lawsuit against Freddie Mac and Fannie Mae. Shareholders in the suit alleged they were cheated when the Treasury took all of Freddie Mac and Fannie Mae’s profits in 2012, instead of a 10 percent dividend.
The court ruled 2-1. The finding showed the FHFA within its authority to conduct a “net worth sweep.” It also deemed the organization’s structure unconstitutional and in violation of its separation of powers. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” Chief Judge Carl Stewart and Judges Don Willett and Catharina Haynes wrote.
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Fannie Mae and Freddie Mac shareholders who called the net-worth sweep illegal didn’t benefit from the initial ruling. But the unconstitutionality judgment supports the shareholders’ claims. So far, the FHFA has declined comment.
The problem — and the reason for the ruling — is that the FHFA director is “insulated from executive control,” the judge said. The sitting president can’t fire the director without cause. So, the FHFA is currently unconstitutional, and if the ruling is upheld, it will nullify the agency’s actions. The Court of Appeals approved the FHFA’s Third Amendment Sweep, but now, the director of the FHFA must be removable at will so it can continue to function as a “properly supervised executive agency.” The court’s full ruling can be read here.
Just last month, the CFPB faced the same fate when Judge Loretta Preska, a New York federal court judge, ruled the bureau’s single-director structure unconstitutional. The ruling blocked the CFPB from taking legal action against a cash advance company alleged to mishandle NFL concussion and 9-11 settlement member payouts.
The first two strikes of unconstitutionality went to the CFPB. Now that the FHFA has earned strike three, homebuyers have questions.
Keeping the FHFA structure intact as a result of this ruling is a move that’s most likely to benefit buyers. Fannie Mae and Freddie Mac, regulated by the FHFA, were created to stabilize the mortgage market and make it affordable — to first-time buyers in particular.
The FHFA’s management of these GSEs also benefits mortgage lenders, helping out their borrowers by proxy. Fannie Mae and Freddie Mac purchase home loans from mortgage lenders. This gives lenders cash so they can take on more borrowers and maintain low loan fees. Creating this continuous cash flow in the mortgage market allows buyers and investors to continue buying homes at reasonable rates.
As the economy bounces back and the housing market booms with it, homebuyers are already seeing big changes. Home equity has recently reached its highest recorded point, and those who buy now may see speedier growth in their investment. Because of this economic growth, the Federal Reserve rate has increased several times, impacting mortgage rates indirectly. According to a recent Redfin survey of over 4,000 participants, the majority of homebuyers still plan to buy this year, even when faced with rising but historically low mortgage rates. Only 5 percent of homebuyers said they would quit the house hunt if mortgage rates rose above 5 percent.
Mortgage rates have dipped recently and within the next few months, Freddie Mac’s Chief Economist Sam Khater said it could happen again. “What that means for buyers is good news. Mortgage rates may have a little more room to decline over the very short term,” Khater said.
Despite the ripples in the housing market, loan officers believe it’s still a great year to buy. The first — and the easiest — step toward homeownership is getting prequalified for a mortgage. Get prequalified in 15 minutes and do it all online.* Then, connect with a friendly and local loan officer who has more loan options than many other lenders and get home fast.
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For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.