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Fannie, Freddie to Create ‘Living Wills’ in Case They Fail

The lending giants keep mortgage originations humming but failed during the Great Recession and the feds took over. They must now create a Plan B in case it happens again.

WASHINGTON – The Federal Housing Finance Agency (FHFA) published a final rule that requires Fannie Mae and Freddie Mac (the Enterprises) to develop credible resolution plans – also known as “living wills.”

During the Great Recession, Fannie Mae and Freddie Mac – the giant secondary banks that keep the mortgage market humming by buying mortgages and empowering lenders to make more – essentially failed. Considered “too big to fail,” however, the government bailed them out and took over operations.

While they’re still too big to fail, FHFA’s demand for resolution plans would provide a Plan B if that happens again by facilitating a rapid and orderly resolution should 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. Just like other large financial institutions, these plans will provide Fannie Mae, Freddie Mac and FHFA a roadmap for preserving business continuity should they fail again,” says Director Mark Calabria. It protects “taxpayers and the mortgage market from harm if either Enterprise fails.”

The final rule is similar to a rule issued by both the Federal Reserve Board and the Federal Deposit Insurance Corporation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring many large financial institutions to submit living wills.

Under the final rule, the Enterprises must demonstrate how core business lines would be maintained to ensure continued support for mortgage financing and stability within the housing finance system – without extraordinary government support. The goal of their living will is to prevent Fannie or Freddie from being placed in receivership, indemnify investors against losses, or fund the resolution of an Enterprise.

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