Collins v. Yellen: the Most Important (and Overlooked) Implication

The Supreme Court's decision in Collins v. Yellen has garnered a fair amount of attention because it resulted in a change in the leadership at the Federal Housing Finance Agency and largely dashed the hopes of Fannie and Freddie preferred shareholders in terms of seeing a recovery of diverted dividends. But the commentary has missed the really critical implication of the decision:  the Biden administration can undertake a wholesale reform of Fannie and Freddie by itself without Congress.

GSE reform has been on the Congressional agenda for the last decade. Let me say it plain: it's not going to happen short of another massive housing market meltdown. The substantive policy visions for the future of the GSEs are too far apart and there's no political upside to anyone in Congress from GSE reform: very few Americans have any idea what Fannie and Freddie do, much less appreciate how much they are saving on their mortgages because of the GSEs' existence.

So where does that leave things, if Congress is never going to reform the GSEs? There are three possible futures for Fannie and Freddie. One is status quo—an indefinite conservatorship. The second is release from conservatorship without material reform. That means privatization, which had been the goal of the Calabria FHFA (something the Collins litigation helped stymie, thankfully). The third, is a release after a restructuring. It's this third option that no one talks about very much that is now clearly possible thanks to the Collins decision. 

The transaction that was challenged in Collins was the third amendment to the Treasury's agreement to purchase a substantial amount of GSE stock. Treasury gave the GSEs a massive credit line and in exchange, Treasury got to sweep all of the GSEs' profits. This has turned out to be a great deal for Treasury. What we learned from Collins is that the transaction is kosher. And if Treasury can sweep all of the GSEs' profits, what else can it do?  For example, could Treasury further amend its stock purchase agreement to obtain board representation at the GSEs or to restructure the GSEs' governance or impose other operating requirements? FHFA would have to sign off, but now that FHFA is no longer really an independent agency, it's hard to think that there's much of an obstacle to the right hand of the unitary executive negotiating with the left hand. Put another way, if the Biden administration wants to reform Fannie and Freddie, it has substantial ability to do so thanks to Collins.