MBA Expresses Concerns Over GSE Receivership Framework

by devteam September 10th, 2010 | Share

The Mortgage BankersrnAssociation (MBA) has weighed in on the proposed framework for conservatorship</aand receivership operations for Fannie Mae, Freddie Mac, and the Federal HomernLoan Banks set forward by the Federal Housing Finance Agency (FHFA).  </p

In a letter to FHFArnGeneral Counsel Alfred M. Pollard, Esq., MBA President and CEO John A. Coursonrnand Chairman-Elect Michael D. Berman said their concerns about the frameworkrnare threefold:  it is “overlyrntheoretical;” it is unclear what the trigger would be for placing the entitiesrninto receivership, and third, the goals of any receivership are unclear.</p

FHFA was establishedrnby the Housing and Economic Recovery Act of 2008 (HERA), replacing three otherrnagencies with various responsibilities for regulating Fannie Mae, Freddie Macrn(the Enterprises), and the 12 Federal Home Loan Banks (FHLBanks).  At the time the agency came into being, thernEnterprises were already in conservatorship with one of those agencies.  A conservatorship differs from a receivership inrnthat the former does not imply the liquidation of the entity or, necessarily, anyrnabrogation of creditor or stockholder rights. rnFor much of the two years since the conservatorship began there was anrnactive market in Freddie Mac and Fannie Mae common stock (recently FHFA orderedrnthat the stock be delisted from major exchanges) and the two businessesrncontinued to operate under FHFA control.   </p

OnrnJuly 9, FHFA published a framework in the Federal Register that covers thernfollowing issues: </p<ul class="unIndentedList"<liThe powers of FHFA as a conservator or receiver.rn</li<liThe authority and time limits to review andrnenforce contracts.</li<liAlternative procedures and time period forrndetermination of claims. </li<liPriority of expenses and unsecured claims. </li<liThe process for setting up a limited-lifernregulated entity (LLRE) to assume or succeed to the assets and liabilities of arnregulated entity in default or danger of default. </li<liThe authority of an LLRE to obtain credit; </li<liCapital distribution while in conservatorship, </li<liPayment of securities litigation claims of thernconservatorship</li</ul

The MBA letter says the organization’srncomments are not meant to promote any specific course of action but are meantrnto illustrate the type of issues the agency needs to address “as openlyrnand quickly as possible so that market participants can see what couldrnpotentially change in the near future.” rnThe letter states that past operating practices and norms to not providernappropriate guidance in such a unique situation and that every action FHFA andrnthe Enterprises take will have a financial impact on counterparties andrndifferent creditors.</p

ThernProposal is “too theoretical.”</p

 The letter states that FHFA already has thernadvantage of knowing exactly what it has to deal with and thus should be ablernto make it clear how various claimants will be treated once the Enterprises arernplaced into receivership.  While it isrnclear that common and preferred stockholders will be wiped out, nothing is saidrnabout subordinated debt holders or whether the claims of senior debt holdersrnwill be treated differently than those of MBS holders</p

The letter suggests that FHFA more closelyrnfollow guidelines used by FDIC in repudiating contracts.  The Enterprises’ MBS guarantees essentiallyrnconstitute two separate businesses; those that are sold on the secondary marketrnand those that are retained in their own portfolios.   Thernportfolio businesses, the letter said, are analogous to thrifts funded withrndebt rather than consumer deposits therefore FHFA might consider splitting the portfoliornand guarantee businesses and liquidating them separately.   Ifrnthey do follow FDIC practices FHFA could determine whether it wishes to continuernto pay the contracted interest rates on debt or simply pay off the debt atrnpar.  The power to eliminate no-callrnprovisions in debt contracts would appear to fall under the FHFA’s authority tornrepudiate contracts and FHFA could then seek cheaper short term bridgernfinancing to fund the portfolios during liquidation.  It should, however, say whether or not thisrnis a possibility.</p

FHFA would have to liquidate the portfoliosrnin a fashion similar to what FDIC follows and sales must be accomplished in arnmanner that does not impact the market prices. rnPerhaps Treasury or the Federal Reserve could provide a long term homernfor the portfolios which would then allow FHFA to treat the guarantee businessrnseparately.  This is important because thernguarantees cannot be sold to the highest bidder but rather to a bidder sufficientlyrncapitalized to absorb any potential losses not covered by the guarantee feernstream.</p

Most important according to the letter isrnthat FHFA protect all the cash flows associated with the MBS from the demandsrnof any other class of claimants.  This isrnvital to the continued value of the MBS and the potential role they might playrnin a new secondary market system.</p

The framework also needs to make clear thatrnservicing arrangements and agreements will not be candidates for repudiationrnand that keeping existing servicing rights in place would be a precondition ofrnany sale or transfer to a qualified purchaser.</p

Finally, FHFA should indicate what currentrnoperations and departments of the Enterprises will be retained inrnreceivership.  It is important to retainrnthe talent and industry knowledge in the areas of MBS accounting, technicalrnsupport, and credit management while some other areas such as SEC compliance willrnbe superfluous in receivership.</p

Triggering Receivership</p

The Enterprises havernsurvived so long in conservatorship, MBA states, solely because Treasury hasrnprovided the funds to allow their operations. rnWith that support continuing, there is no clear mention of what willrneventually cause FHFA to put them into receivership.  It is, the letter says, “not unlike arnbrain dead patient who is being kept alive indefinitely by artificial lifernsupport.”  Absent some objective andrntransparent criteria, the timing of any move to put the Enterprises intornreceivership will appear to be arbitrary. rnFHFA should discuss the criteria particularly because the ultimate costsrnwill increase as long as the decision is postponed and there is still a debaternover whether those costs will be borne by taxpayers or future homebuyers.</p

Competing Goals in Receivership    </p

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

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of is prohibited.

About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

See all blogs


Leave a Comment

Leave a Reply

Latest Articles

Real Estate Investors Skip Paying Loans While Raising Billions

By John Gittelsohn August 24, 2020, 4:00 AM PDT Some of the largest real estate investors are walking away from Read More...

Late-Stage Delinquencies are Surging

Aug 21 2020, 11:59AM Like the report from Black Knight earlier today, the second quarter National Delinquency Survey from the Read More...

Published by the Federal Reserve Bank of San Francisco

It was recently published by the Federal Reserve Bank of San Francisco, which is about as official as you can Read More...