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The way the Federal Housing Finance Agency (FHFA) Director Mark Calabria sees it, after the capital rule, the finalization of the living will rule is one of the last major regulatory pieces needed to put the Housing and Economic Recovery Act of 2008 (HERA) into effect. He spoke about the implementation and impact of living wills last Tuesday at the Brookings Institution's Center on Regulations and Markets.
When FHFA earlier this month published a final rule requiring Fannie Mae and Freddie Mac (the government-sponsored enterprises which FHFA regulates) to develop credible resolution plans, also known as “living wills," Calabria explained that the rule will provide the GSEs with a "roadmap for preserving business continuity should they fail again," and could "help create a stronger, more resilient housing finance system by protecting taxpayers and the mortgage market from harm" if either Fannie or Freddie fails.
He expounded on those ideas during his Brookings address, whose transcript can be read in full here on FHFA's website.
The living will rule is built on the foundation of resolution planning established by the 2010 Dodd-Frank Act, which requires big banks to create resolution plans, or living wills, in the event a bank experiences severe financial stress. Each bank’s plan clarifies how it could be placed into a receivership overseen by the FDIC or into bankruptcy and resolved without disrupting markets or relying on extraordinary government support, Calabria explained.
"We recognize the GSEs are not banks," he said. "But an orderly system for settling claims is just as critical to any financial institution as appropriate capital standards. And as we learned in 2008, inconsistencies in financial regulation across institutions can mask risk and fuel financial instability."
He points out that Fannie Mae and Freddie Mac own or guarantee more than $6 trillion in single-family and multifamily mortgages, which is about half the market. Together the GSEs are about equivalent in size to the top three largest banks in America combined, he said.
Ensuring the GSEs have credible living wills comparable to the other largest financial institutions also brings "important clarity to housing finance about how FHFA’s receivership powers would work in a time of significant financial stress, as remote as such times can seem when home prices are rising."
He pointed out Fannie and Freddie's strong support of the market in 2020, acquiring more than 60% of the single-family mortgages originated throughout the year of the pandemic and supporting families in need.
"When COVID hit, the enterprises used their recently authorized retained earnings to help millions stay safe in their homes. And most recently, FHFA announced a new refinancing option that will help low-income families save thousands of dollars on their mortgage," Calabria said. "In a crisis, capital at the enterprises offers borrowers protection from foreclosure, destroyed credit, and displacement. This is especially important for lower-income and minority families who are often first to lose their jobs and savings. That is why FHFA is making sure that enterprise risk is matched to their capital. And it is why I have spent the last two years making every effort to build capital at Fannie Mae and Freddie Mac."
Credible living wills at Fannie and Freddie, Calabria said, will ensure that, "in a great public dilemma involving housing finance, FHFA will be able to act quickly without exposing the financial system or taxpayers to additional risk."
