The Federal Housing Finance Agency (FHFA) has published a final rule that requires Fannie Mae and Freddie Mac (the government-sponsored enterprises) to develop credible resolution plans, also known as “living wills." These resolution plans would facilitate an orderly resolution of the GSEs should the FHFA be appointed their receiver per the Housing and Economic Recovery Act of 2008 (HERA).
“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 HERA,” said 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. This rule helps create a stronger, more resilient housing finance system by protecting taxpayers and the mortgage market from harm if either Enterprise fails."
The final rule mirrors a rule issued by both the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) under the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires many large financial institutions to submit living wills. The Department of Treasury's 2019 Housing Reform Plan highlighted the need for a credible resolution framework for the Enterprises, and the Financial Stability Oversight Council endorsed GSE living wills in the fall of 2020.
The final rule states that the GSEs must demonstrate how core or important business lines would be maintained to ensure continued support for mortgage finance and stabilize the housing finance system, without extraordinary government support, to prevent a GSE from being placed in receivership, indemnify investors against losses, or fund the resolution of a GSE.
“FHFA is developing a more robust prudential regulatory framework for the Enterprises, including capital, liquidity, and stress testing requirements, and enhanced supervision,” the final rule stated. “FHFA believes a resolution planning rule is also an important part of developing such a framework and is a key step toward the robust regulatory post-conservatorship framework FHFA is developing.”
In terms of Fannie and Freddie’s government-conservatorship status and the future of the GSEs, Calabria recently commented at an industry event that the FHFA is open to input from the industry as it continues to make decisions.
“FHFA is continuing to put in place key regulations that support the enterprise's safety and soundness and ability to fulfill their mission, across the economic cycle,” Calabria said. “I encourage [mortgage bankers] to continue to engage with FHFA, provide your market insights to help us inform our work. Through all the changes and continuing challenges of 2021, I remain optimistic about what we can accomplish working together.”