Fannie and Freddie Told to Write Their

fAnnIE And fREddIE AskEd tO wRItE tHEIR wILLs

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been directed to create so-called living wills. Such wills are comprehensive resolution plans that detail how either GSE could be resolved quickly or orderly if the Federal Housing Finance Agency (FHFA) is named receiver in case of another financial meltdown. The order is in the form of a final rule provided by the Federal Housing Finance Agency. The law is similar to those provided by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, requiring several large financial institutions to apply such wills. The Treasury Department and the Financial Stability Oversight Council have also approved living rules for the GSEs.

The final rule requires the GSEs to explain how core or essential business lines can be sustained to ensure continued support for mortgage finance and to stabilize the housing finance system without exceptional government support, to prevent a GSE from being put in receivership, litigate investors for losses, or fund the resolution of either company.

HOUSING AND ECONOMIC RECOvERY ACT (HERA)

The ultimate goal of the Housing and Economic Recovery Act was to restore public confidence in government-sponsored enterprises (GSEs) that offered home loans, namely Fannie Mae and Freddie Mac. It established the Federal Housing Finance Agency (FHFA) and authorized states to repay subprime loans with mortgage revenue bonds. As a new agency in 2008, the FHFA used its newly acquired authority to place Fannie Mae and Freddie Mac in conservatorship.

Under the main act of HERA, there were several sub-title acts, including:

• Housing Assistance tax

Act of 2008 • fHA modernization Act of 2008 • sAfE mortgage Licensing

Act of 2008 • Housing Assistance tax

Act of 2008

This HERA subtitle act included a refundable tax credit for eligible first-time homebuyers (purchases made on or after April 9, 2008, and before July 1, 2009) up to 10% of a principal home’s market value to $7,500. It also abolished the credit for taxpayers earning more than $75,000 ($150,000 for collective returns).

Those who received the tax credit were required to repay it over 15 years in equal installments via a surcharge on their annual income taxes. It also provided emergency aid for the redevelopment of foreclosed and abandoned properties.

FHA MODERNIzATION ACT OF 2008

The FHA loan limit was raised from 95 percent to 110 percent of the region’s median home price, up to 150 percent of the GSE conforming loan limit (i.e., $625,000) under this subtitle act. It also required a 3.5 percent down payment on all FHA loans. It imposed a 12-month moratorium on implementing risk-based premiums by the US Department of Housing and Urban Development. It also banned seller-funded down payments while allowing the FHA to guarantee up to $300 billion in 30-year fixed-rate refinance loans for distressed borrowers up to 90% appraised. The act applied to mortgage commitments made on or before January 1, 2008. Furthermore, the act allowed current mortgage holders to accept the profits of the insured loan as full payment on any preexisting debt. Participation in this initiative by lenders was entirely voluntary.

SAFE MORTGAGE LICENSING ACT

By August 1, 2009, all states were forced to enact a mortgage loan originator (MLO) registration and licensing system (or August 1, 2010, for legislatures that assemble every two years). States were permitted to run their systems while adhering to strict federal guidelines or enroll in the Nationwide Mortgage Licensing System and Registry (NLMS).

CONCLUSION

For the very first time in history, the GSEs must explain how, in the event of insolvency, key business lines and charters would continue to sustain the housing finance system without the need for unprecedented government assistance. These living wills provide future investors with the information they need to price risk suitably by establishing the ground rules in the event of insolvency. This is a condition for the GSEs to gather private capital, which is vital to the housing market’s long-term stability.

Simultaneously, the FHFA will continue to advocate for solutions to systemic issues in the housing sector that GSEs cannot overcome independently. Only local governments have the authority to reverse zoning restrictions and land-use rules that raise the cost of new housing or halt construction. Only Congress has the power to break up the Fannie and Freddie duopoly, which capitalizes risk and prevents new entrants from providing better prices, efficiency, innovation, and stability. Nonetheless, ensuring that the GSEs are well-capitalized and ready to survive the next downturn is critical to avoiding exacerbating these issues as housing prices fall is unavoidable.

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References

http://www.mortgagenewsdaily. com/05042021_gse_conservatorship.asp https://www.americanbanker.com/news/ fhfa-proposes-living-wills-for-fannie-andfreddie https://www.investopedia.com/terms/h/ housing-and-economic-recovery-acthera.asp