InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
8th Circuit rules Fannie Mae, Freddie Mac net worth sweep payments acceptable under FHFA statutory authority
On August 23, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s dismissal of claims brought by shareholders of Fannie Mae and Freddie Mac (GSEs) against the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), alleging that FHFA exceeded its powers under the Housing and Economic Recovery Act (HERA) and “acted arbitrarily and capriciously” when it entered an agreement with the Treasury Department requiring the GSEs to pay their entire net worth, minus a small buffer, as dividends to the Treasury every quarter. In so holding, the 8th Circuit joined the 5th, 6th, 7th, and D.C. Circuits, each of which has previously “rejected materially identical arguments” presented by other GSE shareholders. (See previous InfoBytes coverage on the 5th Circuit decision here.) The shareholders sought an injunction to set aside the so-called “net worth sweep,” asserting that “HERA’s limitation on judicial review does not apply when FHFA exceeds its statutory powers under the Act . . . [and] that the net worth sweep exceeds, and is antithetical to, FHFA’s statutory powers.” However, the appellate court agreed with the lower court and found, among other things, the net worth sweep payments to be acceptable because HERA “grant[s] FHFA broad discretion in its management and operation of Fannie and Freddie” and permits, but does not require, the agency “to preserve and conserve Fannie’s and Freddie’s assets and to return [them] to private operation.” The court also noted that HERA “authorize[d] FHFA to act ‘in the best interests’ of either Fannie and Freddie or itself,” thus affording FHFA more discretion than common law conservators. Finally, the appellate court held that HERA’s anti-injunction provision, which states that “no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver,” also precludes enjoining the Treasury Department from participating in the net worth sweep because doing so would “restrain or affect” FHFA.
FHFA reports results of Fannie Mae, Freddie Mac annual stress tests
On August 7, the Federal Housing Finance Agency (FHFA) published a report providing the results of the fifth annual stress tests conducted by government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs). According to the report, Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario—which provides modeled projections on possible ranges of future financial results and does not define the entirety of possible outcomes—the GSEs will need to draw between $42.1 billion and $77.6 billion in incremental Treasury aid under a “severely adverse” economic crisis, depending on how deferred tax assets are treated. The losses would leave $176.5 billion to $212 billion available to the companies under their current funding commitment agreements. Notably, the projected bailout maximum is lower this year than FHFA reported last year, which ranged between $34.8 billion and $99.6 billion.
FHFA extends comment deadline for proposed rule on capital requirements for Freddie and Fannie
On July 31, the Federal Housing Finance Agency announced a 60-day extension on the public comment period for a proposed rule that would implement a new regulatory capital framework for Freddie Mac and Fannie Mae. Among other things, the proposed rule would implement: (i) a new framework for risk-based capital requirements; and (ii) two alternative approaches to setting minimum leverage capital requirements. (Previously covered by InfoBytes here). The previous deadline for comments was September 17, and the deadline is now November 16.
White House proposes to fully privatize GSEs in broad government reorganization plan
On June 21, the White House announced a government reorganization plan titled, “Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations.” The plan covers a wide-range of government reorganization proposals, including several related to the federal government’s involvement in mortgage finance. Among other things, the White House is proposing to end the conservatorship of Fannie Mae and Freddie Mac (GSEs) and fully privatize the companies. The plan notes that a “[f]ederal entity with secondary mortgage market experience would be charged with regulatory oversight” of the GSEs, but does not state whether this would be done by the Federal Housing Finance Agency (FHFA), the GSEs current primary regulator. According to the proposal, this structure would ensure the government’s role “is more transparent and accountable to taxpayers,” as HUD would assume the primary responsibility for affordable housing, and the GSEs would solely focus on secondary market liquidity.
FHFA proposes rule on capital requirements for Freddie and Fannie
On June 12, the Federal Housing Finance Agency (FHFA) announced a proposed rulemaking, which implements a regulatory capital framework for Freddie Mac and Fannie Mae (the Enterprises) including (i) a new framework for risk-based capital requirements; and (ii) two alternative approaches to setting minimum leverage capital requirements. Regulatory capital requirements for the Enterprises have been suspended since the Enterprises were placed in conservatorship in September 2008, and these new requirements would continue to be suspended while the Enterprises remain under conservatorship. FHFA stated that the purpose of the rulemaking effort is to develop a risk measurement framework to better evaluate each Enterprise’s business decisions while in conservatorship. As a result, the proposed risk-based capital requirements would “provide a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going-concern buffer components.” The two options for minimal leverage capital requirements include (i) requiring the Enterprises to hold capital equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities; and (ii) requiring the Enterprises to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets. Comments on the proposed rulemaking must be submitted within 60 days of publication in the Federal Register.