The Mortgage Bankers Association (MBA) has weighed in on the proposed framework for conservatorship and receivership operations for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks set forward by the Federal Housing Finance Agency (FHFA).  

In a letter to FHFA General Counsel Alfred M. Pollard, Esq., MBA President and CEO John A. Courson and Chairman-Elect Michael D. Berman said their concerns about the framework are threefold:  it is "overly theoretical;" it is unclear what the trigger would be for placing the entities into receivership, and third, the goals of any receivership are unclear.

FHFA was established by the Housing and Economic Recovery Act of 2008 (HERA), replacing three other agencies with various responsibilities for regulating Fannie Mae, Freddie Mac (the Enterprises), and the 12 Federal Home Loan Banks (FHLBanks).  At the time the agency came into being, the Enterprises were already in conservatorship with one of those agencies.  A conservatorship differs from a receivership in that the former does not imply the liquidation of the entity or, necessarily, any abrogation of creditor or stockholder rights.  For much of the two years since the conservatorship began there was an active market in Freddie Mac and Fannie Mae common stock (recently FHFA ordered that the stock be delisted from major exchanges) and the two businesses continued to operate under FHFA control.   

On July 9, FHFA published a framework in the Federal Register that covers the following issues:

  • The powers of FHFA as a conservator or receiver.
  • The authority and time limits to review and enforce contracts.
  • Alternative procedures and time period for determination of claims.
  • Priority of expenses and unsecured claims.
  • The process for setting up a limited-life regulated entity (LLRE) to assume or succeed to the assets and liabilities of a regulated entity in default or danger of default.
  • The authority of an LLRE to obtain credit;
  • Capital distribution while in conservatorship,
  • Payment of securities litigation claims of the conservatorship

The MBA letter says the organization's comments are not meant to promote any specific course of action but are meant to illustrate the type of issues the agency needs to address "as openly and quickly as possible so that market participants can see what could potentially change in the near future."  The letter states that past operating practices and norms to not provide appropriate guidance in such a unique situation and that every action FHFA and the Enterprises take will have a financial impact on counterparties and different creditors.

The Proposal is "too theoretical."

 The letter states that FHFA already has the advantage of knowing exactly what it has to deal with and thus should be able to make it clear how various claimants will be treated once the Enterprises are placed into receivership.  While it is clear that common and preferred stockholders will be wiped out, nothing is said about subordinated debt holders or whether the claims of senior debt holders will be treated differently than those of MBS holders

The letter suggests that FHFA more closely follow guidelines used by FDIC in repudiating contracts.  The Enterprises' MBS guarantees essentially constitute two separate businesses; those that are sold on the secondary market and those that are retained in their own portfolios.   The portfolio businesses, the letter said, are analogous to thrifts funded with debt rather than consumer deposits therefore FHFA might consider splitting the portfolio and guarantee businesses and liquidating them separately.   If they do follow FDIC practices FHFA could determine whether it wishes to continue to pay the contracted interest rates on debt or simply pay off the debt at par.  The power to eliminate no-call provisions in debt contracts would appear to fall under the FHFA's authority to repudiate contracts and FHFA could then seek cheaper short term bridge financing to fund the portfolios during liquidation.  It should, however, say whether or not this is a possibility.

FHFA would have to liquidate the portfolios in a fashion similar to what FDIC follows and sales must be accomplished in a manner that does not impact the market prices.  Perhaps Treasury or the Federal Reserve could provide a long term home for the portfolios which would then allow FHFA to treat the guarantee business separately.  This is important because the guarantees cannot be sold to the highest bidder but rather to a bidder sufficiently capitalized to absorb any potential losses not covered by the guarantee fee stream.

Most important according to the letter is that FHFA protect all the cash flows associated with the MBS from the demands of any other class of claimants.  This is vital to the continued value of the MBS and the potential role they might play in a new secondary market system.

The framework also needs to make clear that servicing arrangements and agreements will not be candidates for repudiation and that keeping existing servicing rights in place would be a precondition of any sale or transfer to a qualified purchaser.

Finally, FHFA should indicate what current operations and departments of the Enterprises will be retained in receivership.  It is important to retain the talent and industry knowledge in the areas of MBS accounting, technical support, and credit management while some other areas such as SEC compliance will be superfluous in receivership.

Triggering Receivership

The Enterprises have survived so long in conservatorship, MBA states, solely because Treasury has provided the funds to allow their operations.  With that support continuing, there is no clear mention of what will eventually cause FHFA to put them into receivership.  It is, the letter says, "not unlike a brain dead patient who is being kept alive indefinitely by artificial life support."  Absent some objective and transparent criteria, the timing of any move to put the Enterprises into receivership will appear to be arbitrary.  FHFA should discuss the criteria particularly because the ultimate costs will increase as long as the decision is postponed and there is still a debate over whether those costs will be borne by taxpayers or future homebuyers.

Competing Goals in Receivership   

FHFA must also make explicit what its goals will be under receivership.  Potential goals can either assist in the transition or be additional hurdles to be overcome.  For example, banking regulators follow a least-cost resolution rule which gives them latitude in determining whether to sell the institution whole or piecemeal or operated short term by FDIC but the Enterprises are unique and FHFA should make it clear whether it intends to follow least-cost resolution or take into account other considerations.  FHFA must also consider the degree to which the assets of the Enterprises are used to seed the new secondary market structure