When you’re shopping for a home, you might encounter certain homes listed as FSBO. Short for “for sale by owner,” these are properties that homeowners are selling on their own, typically to
FHFA Finalizes Rule On Living Wills For Fannie And Freddie
Dated: May 5 2021
The Federal Housing Finance Agency (FHFA) finalized a rule on Monday that will require Fannie Mae and Freddie Mac to develop plans that would ensure upon their eventual exit from conservatorship, they won’t do any large scale harm to the financial system.
Should the FHFA be appointed receiver for the government-sponsored entities under the Housing and Economic Recovery act of 2008 (HERA), the so-called “living wills” would facilitate a “rapid and orderly resolution” from conservatorship, the agency said Monday.
After the capital rule, the finalization of the living will rule is one of the last major regulatory pieces needed to give effect to Congress’ intent in HERA, said Mark Calabria, Director of the FHFA.
“Just like other large financial institutions, these plans will provide Fannie Mae, Freddie Mac and FHFA with a roadmap for preserving business continuity should they fail again,” said Calabria. “This rule helps create a stronger, more resilient housing finance system by protecting taxpayers and the mortgage market from harm if either Enterprise fails.”
Under the new final rule, the FHFA is requiring:
The GSEs identify their core business lines (CBL) that would be most important to continue operating, including any services, functions or support the CBL requires
The GSEs must submit their initial resolution plans two years after the release date of the final rule and subsequent resolution plans must be submitted every two years after that
A strategic plan must be drafted out by Fannie and Freddie that would require them to identify weaknesses or roadblocks that could cause broader economic harm, and how to address them
The final rule also requires a number of assumptions be made throughout the planning process, including that exiting conservatorship could have severe adverse economic effects and the GSEs can no longer assume “extraordinary support” from the U.S. government. By prohibiting that assumption, the FHFA alluded that the Senior Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury may be negatively perceived as too much support from the government.
At the same time the Enterprises entered conservatorship, the PSPA was designed to provide each Enterprise financial support up to a specified amount. Because this agreement was contractual, both Fannie and Freddie publicly commented on the proposed rule released in December for further clarification on PSPAs.
“There is the potential for ambiguity regarding the scope of the assumption,” Fannie Mae said. “To eliminate this ambiguity, Fannie Mae believes that the final rule should clarify that this prohibited assumption means that the PSPAs would be assumed to have been terminated in their entirety. This would include being able to assume that without the PSPAs there are no restrictions on the Enterprises’ freedom to raise debt or equity or transfer all or any portion of their assets without the U.S. Treasury Department’s consent, and that the senior preferred stock will have been retired at no additional cost to the Enterprises.”
Freddie Mac responded in a similar fashion, noting its concerns over the distinction between support that might be provided and support that is already secured.
Calabria had previously commented on the need for another round of PSPA amendments in a panel at the Mortgage Bankers Association’s spring conference, noting the regulator was taking a close look at the current agreements.
“So for us to really be able to bring in the kind of capital that we needed to Fannie and Freddie for them to be able to support the mortgage market, we need to restructure the balance sheet, and that needs to be another round of PSPA and of course all the things in the PSPA are on the table,” he said. “I think it’s also worth remembering that the PSPAs themselves are not meant to be permanent, these are temporary bridges to getting Fannie and Freddie fully capitalized.”
Overall, the final rule is similar to a rule issued by both the Federal Reserve Board and the Federal Deposit Insurance Corporation under the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires many large financial institutions to submit living wills.
The FHFA said it will work with the Enterprises when developing their initial plan which will be partially made public, while other areas will remain confidential.
For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 30 years in the industry, Mark has gained experience in ....
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