1st Circuit Holds Fannie and Freddie Are Not Government Actors

The U.S. Court of Appeals for the First Circuit recently held that Fannie Mae and Freddie Mac are not government actors for purposes of Fifth Amendment claims.  The Court also held that the Federal Housing Finance Agency (FHFA) was not a government actor for similar purposes while acting as a conservator for Fannie Mae and Freddie Mac.

The appellants obtained mortgages to purchase property in Rhode Island that were later assigned to Fannie Mae.  The mortgage agreements gave Fannie Mae the right to foreclose on property without judicial proceeding.  Sometime after, the appellants defaulted on their mortgage, and their loan servicer initiated foreclosure without judicial proceeding, consistent with Rhode Island law.  During that time, Fannie Mae was under a conservatorship, and FHFA was the appointed conservator, as permitted by the Housing and Economic Recovery Act of 2008 (HERA). 

The appellants filed a putative class action against Fannie Mae, FHFA and their loan servicer alleging that non-judicial foreclosures violated their due process rights under the Fifth Amendment.  Fannie Mae and FHFA moved to dismiss, arguing that they were not government actors.  The district court granted Fannie Mae and FHFA’s motions, and declined to follow an earlier decision that had held that Fannie Mae and Freddie Mac were government actors in similar situations.

On appeal, the Court held that Fannie Mae and Freddie Mac were not government actors.  A private corporation is considered a government actor for purposes of certain constitutional claims against it when 1) the government creates the corporation by special law; 2) the corporation is created for furtherance of governmental objections; and 3) the government retains permanent authority to appoint a majority of the directors of the corporation.  The Court held that FHFA’s temporary conservatorship did not constitute permanent authority because it was limited to reorganizing, rehabilitating, or winding up Fannie Mae and Freddie Mac’s affairs.  The Treasury’s ownership rights in both did not change the Court’s analysis.  For that reason, the Court declined to determine whether FHFA’s private actions as conservator constituted state actions.

The Court also held that FHFA was not a government actor because, as conservator, it had stepped into Fannie Mae and Freddie Mac’s shoes as private government-sponsored enterprises.  Under HERA’s succession clause, FHFA succeeded to all their rights, titles, powers, and privileges, one of which was the right to non-judicially foreclose on appellants’ mortgages.  The Court rejected the appellants’ attempt to create a legal distinction between FHFA acting as a conservator and FHFA acting as a receiver.