The Federal Housing Finance Agency (FHFA) has published a final rule requiring Fannie Mae and Freddie Mac to develop and release their “living wills”: detailed, actionable plans that would ensure a “rapid and orderly resolution of the enterprises should FHFA be appointed their receiver.”
“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 the Housing and Economic Recovery Act of 2008,” says FHFA Director Mark Calabria. “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.”
The final rule is similar to a rule issued by both the Fed and FDIC under the Dodd–Frank Act, which requires many large financial institutions to submit living wills. The U.S. Department of Treasury’s 2019 Housing Reform Plan highlighted the need for a credible resolution framework for the GSEs, and the Financial Stability Oversight Council endorsed GSE living wills in early fall 2020.
Under the final rule, Fannie and Freddie must demonstrate how business would be maintained to ensure continued support for mortgage finance and stabilize the housing finance system – without extraordinary government support – to prevent them from being placed in receivership, indemnify investors against losses, or fund their resolution.
Among the final rule’s key requirements:
Identification of core business lines – The GSEs must identify “core business lines” (CBL): those business lines that plausibly would continue to operate in a limited-life regulated entity (LLRE). Identification of CBLs would include identification of associated operations, services, functions and supports necessary for the CBL to be continued.
Understanding CBLs will enable FHFA and the GSEs to determine the operations of the LLRE, and what assets and liabilities must be transferred from the GSEs to the LLRE in order to carry out those operations.
Timing of resolution plan and interim update submissions – The rule requires the GSEs to submit their initial resolution plans two years after the effective date of the final rule, and subsequent resolution plans to be submitted every two years thereafter.
Required and prohibited assumptions – The rule provides a set of required and prohibited assumptions the resolution plans should reflect, which include the assumption of severely adverse economic conditions; the prohibition of assuming the provision or continuation of extraordinary support by the U.S. government; and the reflection of statutory provisions that obligations and securities of the GSEs issued pursuant to its charter are not guaranteed by the U.S. and do not constitute a debt or obligation of the U.S.
Content of resolution plans – The rule requires that resolution plans contain a strategic analysis and information sufficient to provide an understanding of a GSE’s CBLs and facilitating their continuation in a LLRE established by FHFA as receiver.
Each GSE’s strategic plan would also be required to identify and describe potential material weaknesses or impediments to rapid and orderly resolution as conceived in its plan, and any actions or steps taken or proposes to take to address the identified weaknesses or impediments.
Confidentiality – The rule sets out the requirement that the resolution plans include a public section and a confidential section. FHFA expects to work with Fannie and Freddie when developing their initial public sections to ensure that portions of resolution plans are made available to the public while balancing the need for candor and to preserve confidentiality of some information.
FHFA review – The rule explains the process for FHFA’s review of the resolution plan, including the determination that a plan is incomplete or substantial additional information is necessary, the identification of deficiencies or shortcomings, the provision of feedback, and resubmission to FHFA.