FHFA finalizes rule that requires Fannie Mae and Freddie Mac to develop plans to prepare for an orderly resolution.
The Federal Housing Finance Agency has issued a final rule requiring Fannie Mae and Freddie Mac (the Enterprises) to develop plans to facilitate their rapid and orderly resolution in the event FHFA is appointed receiver. The proposal would require the Enterprises to prepare resolution plans/living wills similar to those that large banking organizations have been required to submit since 2012 under the Dodd-Frank Act. The final rule is effective July 6, 2021.
As regulator and supervisor of the Enterprises, the FHFA’s duties include ensuring that the Enterprises operate in a safe and sound manner; foster liquid, efficient, competitive, and resilient national housing finance markets; and operate in a manner that is consistent with the public interest.
According to the FHFA, this requirement would support FHFA’s efforts as receiver for the Enterprises to minimize disruption in the national housing finance markets by providing for the continued operation of an Enterprise’s core business lines (CBLs) by a limited-life regulated entity (LLRE); ensure that private-sector investors in Enterprise securities, including Enterprise debt, stand to bear losses in accordance with the statutory priority of payments while minimizing unnecessary losses and costs to these investors. In addition, the FHFA states that resolution planning will help foster market discipline in part through FHFA publication of "public" sections of Enterprise resolution plans.
FHFA’s current Strategic Plan includes the objective of responsibly ending the conservatorships. In preparation, the FHFA is developing a more robust prudential regulatory framework for the Enterprises, including capital, liquidity, and stress testing requirements, and enhanced supervision. FHFA believes a resolution planning rule is also an important part of developing such a framework and is a key step toward the robust regulatory post-conservatorship framework FHFA is developing.
Proposed rule and comments. In January 2021, the FHFA issued a notice of proposed rulemaking that would require the Enterprises to develop credible resolution plans, which would facilitate a rapid and orderly resolution that could be put into place in case of receiverships. The rule is similar to those issued by the Federal Reserve Board and Federal Deposit Insurance Corporation requiring many large financial institutions to submit living wills.
The final rule notes that these Enterprise conservatorships have lasted for over twelve years, which is considerably longer than any conservatorship under the auspices of the FDIC or the Resolution Trust Corporation (which was established to resolve failed thrifts following the 1989 thrift crisis and since abolished.).
In the rule, the FHFA describes how it expects to maintain stability by transferring GSE assets and operations to a LLRE. The Enterprise resolution planning process would begin with identification of an Enterprise’s CBLs—those business lines of the Enterprise that plausibly would continue to operate in the LLRE, considering the Enterprise’s statutory purposes, mission, and authorized activities.
One part of the proposal that received multiple comments was the proposed prohibition of the Enterprises, when developing their resolution plans, from assuming "the provision or continuation of extraordinary support by the United States to the Enterprise to prevent either its becoming in danger of default or in default. This includes support obtained or negotiated on behalf of the Enterprise by FHFA in its capacity as supervisor, conservator, or receiver of the Enterprise, including Senior Preferred Stock Purchase Agreements (PSPAs).
Commenters also raised questions or requested clarification about how the prohibited assumption, as related to the PSPAs, should be given effect when the Enterprises develop their resolution plans. FHFA has carefully considered comments received on the proposed prohibited assumption and believes it should remain in the final rule as it was proposed, without change.
Although FHFA is not changing the prohibition against assuming the provision or continuation of extraordinary government support, it states that questions commenters raised about the treatment of other aspects of the PSPAs in Enterprise resolution planning should be addressed. The PSPAs remain in effect. In prohibiting the Enterprises from assuming the provision of support through the PSPAs, FHFA does not intend the Enterprises to plan, today, for a future resolution that occurs after they are out of conservatorship and well-capitalized. Likewise, FHFA does not intend an Enterprise to assume that the PSPAs have been terminated in their entirety. Resolution plans that could result from either of those approaches could be conjectural and less useful to FHFA and the Enterprises, where more useful resolution plans will reflect the Enterprise’s assets and obligations at the time the plan is developed.
Finally, FHFA stated that its interpretation of comments advocating for FHFA’s reservation of discretion or express waiver authority regarding the assumption against extraordinary government support as comments calling for eliminating this assumption from the final rule.
Companies: Fannie Mae; Freddie Mac
MainStory: TopStory DoddFrankAct FinancialStability GCNNews GovernmentSponsoredEnterprises PrudentialRegulation
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