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. 

Comments

[Ed Boltz]

It could consent to judicial mortgage modification in bankruptcy, rectifying one of the great failures of the Obama/Biden administration-the failure which clearly lead to some of despairing disgust upon which first the Tea Party and then Trump rose

[Adam]

Neat idea. There shouldn't be anything to prevent a creditor from consenting to a modification, although 1322(b)(2) doesn't have a consent alternative, so maybe there's a 1325(a)(1) problem.

[Ed Boltz]

1325(a)(5)(A) provides in bridged and abridged pertinent parts that "... the court shall confirm a plan if ... with respect to each allowed secured claim provided for by the plan ... the holder of such claim has accepted the plan."

Mel Watt, when he was the head of the FHFA under Obama, was urged, unfortunately to no avail, by NACBA and others to do exactly that. The response wasn't that agreeing to judicial mortgage mods was prohibited, but that it wasn't the policy choice wanted (by Sec. Geithner)

Also, to go back to the drum I keep banging in your ear elsewhere on Creditslips, while "accepted the plan" in Chapter 11s is usually interpreted as a lack of objections, in consumer cases the same bankruptcy courts often require affirmative acknowledgement (in open court, while standing on a stack of Bibles) by creditors that they're willing to accept a plan that the Code couldn't compel.

[christian herzeca]

"Treasury gave the GSEs a massive credit line and in exchange, Treasury got to sweep all of the GSEs' profits."

this is incorrect. treasury gave a massive credit line in 2008-9, and treasury stole the entire equity upside in 2012...for reasons having to do with funding ACA in the most part. the two transactions are separate and the one cannot support the other

[Chad]

It seems that you and most writers regurgitate the same tired lies. Please try and be honest journalist there seems to be a lack of honest journalism here in the once great country. We know that this was a hostile take over to bail out the banks. Good luck with you lack of integrity, bu I guess this is the American way,

[Michael Meyer]

The SCOTUS ruling drove home the point (9 to 0) that private citizens equity shares could be subordinated to US Govt. interests...but those interests cannot be taken without compensation. FOR CERTAIN THIS CLAIM CONTINUES IN THE FEDERAL COURT OF CLAIMS. Regardless of how that ruling plays out, the US Government will not lose the equity in the GSE'S. In 2026 to 2028, the US Govt. will monetize $130 billion of equity from GSE warrants. Only at that time, will preferreds and common once again have dividends...while it may take some more years, this greedy administration will acknowledge through action that $130 billion is greater than $34 billion if preferred claims and common equity in a 'newco' would not be worth anything for the US Govt. Shame on the Sebate Banking Committee, Obama's unaffordable health care, and a failure by Steve Mnuchin to take this forward.

[Robert from Yahoo Board]

Professor Levitin, I thought your brief written and oral testimony in the SBC, “Housing Finance Reform: Should There Be a Government Guarantee?”
September 13, 2011
10:00 am
Was the BEST analysis ever written!

The SCOTUS just gave the Government Conservator in HERA legal permission to do whatever is in the FHFAS interests or the public it serves! Never heard of a Conservator with the power to grant itself all the future profits of its wards into perpetuity, I'm certain that was Congress's intent, aren't you? God forbid during the next inevitable financial crisis that the government wants to save millions of hard working Americans jobs but given the real possibility of the Nationalization of their companies, private corporations choose Chapter 11 or 13.

The government conservator may self deal but given decisions like Cedar Point Nursery, the 5th Amendment Takings Clause may provide some limitation of this virtually unlimited new found power of a SUPER CONSERVATOR under HERA!

Thank you Professor for your time and attention to this almost uniquely American system of mortgage finance and all the benefits it delivers for millions of unaware Americans!

This 12.75 year saga of the gses, is truly one of the most bizarre stories I have ever witnessed and its ending (if ever) is truly still unknown.