MBA Letters Address GSE Liquidity Requirements, ‘Living Wills’

The Mortgage Bankers Association submitted two comment letters yesterday to the Federal Housing Finance Agency.

The first letter offers recommendations on how FHFA can improve its framework for codifying new liquidity requirements for Fannie Mae and Freddie Mac. The second letter addresses an FHFA proposal to require Fannie and Freddie to develop and maintain “living wills” in the event one or both of them becomes insolvent. 

In the first letter, MBA addresses an FHFA proposal to codify new liquidity requirements for Fannie Mae and Freddie Mac. MBA President & CEO Robert Broeksmit, CMB, noted the proposed rule is intended to provide a framework that is far more robust than that which governed the Enterprises’ liquidity risk management before 2008.

MBA offered several recommendations on how they could improve this framework and also call out the need for more information about how the proposed requirements differ from those already in place through conservatorship. MBA recommended refinements to the proposed rule that would better calibrate the types of assets that satisfy various liquidity requirements. MBA also recommended adjustments to certain assumptions regarding expected cash inflows during stressed economic environments.

Additionally, MBA said FHFA should provide stakeholders with additional information regarding how the requirements and assumptions in the proposed rule differ from those currently in place. “This information is necessary to better understand the market impact of the proposed rule,” Broeksmit said.

The second letter addresses an FHFA proposal to require Fannie and Freddie to develop and maintain “living wills” in the event one or both of them becomes insolvent. Broeksmit said while MBA acknowledges living wills may be helpful in that situation, he said “more important reforms that are needed to decrease the likelihood of the GSEs failing or minimize the damage that their failure(s) would cause.”

“MBA recognizes the importance of ensuring that FHFA is well-equipped to address the potential insolvency of one or both Enterprises, while also acknowledging the existence of the Senior Preferred Stock Purchase Agreements (PSPAs) that make support available from the U.S. Treasury Department to the Enterprises,” Broeksmit said. “Establishment of resolution plans is a reasonable and prudent step to advance this objective.”

MBA said detailed and specific resolution plans should help FHFA undertake receivership activities in the most efficient manner in the event it ever were required to do so. Despite this expected benefit of the proposed rule, however, MBA said FHFA should acknowledge that it is “highly unlikely that the development of resolution plans would prevent severe market disruption if one or both Enterprises were to be put into receivership.”

“Resolution plans may help FHFA achieve a more efficient process of instituting receivership, but they are unlikely, on their own, to make such a receivership process ‘rapid and orderly’ with respect to the broader impact on both the primary and secondary mortgage markets,” Broeksmit wrote. “The inability of well-crafted resolution plans to avert market turmoil in the event of an insolvent Enterprise, however, is not a reason for FHFA to abandon this effort. FHFA instead should recognize this reality in its own preparations for a potential receivership of one or both Enterprises.”

More broadly, MBA said, the expected market turmoil due to an insolvent Enterprise highlights the critical need for reforms – many of which are legislative in nature – that would reduce the likelihood of an Enterprise’s insolvency or reduce the severity of any resulting market disruption. These reforms include those related to an improved safety-and-soundness framework, utility-style regulation, FHFA chartering authority for new guarantors, and an explicit federal guarantee on pass-through securities issued by the Enterprises.