On September 27, 2017, the Federal Housing Finance Agency requested comment on its proposed strategic plan, which “…reflects the Agency’s priorities as regulator of the Federal Home Loan Bank System and as regulator and conservator of Fannie Mae and Freddie Mac[.]” Release.
On November 23, 2016, the Federal Housing Finance Agency (FHFA) announced an increase in the maximum conforming loan limits for mortgages acquired by Freddie Mac and Fannie Mae. The maximum loan limit for one-unit properties in 2017 will increase from $417,000 to $424,100 for most of the United States. In certain higher-cost areas, there will be a higher loan limit. Release. A list of the 2017 maximum conforming loan limits for all counties and county‑equivalent areas in the country can be found here.
On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) issued a final rule establishing new requirements for membership in the Federal Home Loan Banks (“FHLBanks”). The FHLBanks are 11 U.S. government-sponsored banks that provide liquidity to their members to support housing finance and community investment. Membership is governed by the Federal Home Loan Bank Act (the “Act”), which states that insurance companies, among others, are eligible for membership. 12 U.S.C. § 1424(a)(1). The new rule, issued under that Act, establishes new requirements for becoming a member and maintaining membership of an FHLBank. Most notably, the final rule excludes captive insurance companies from membership.
In its 2014 proposed rule, FHFA first proposed excluding captive insurance companies from the scope of the definition of “insurance company” in the Act. Captive insurance companies are insurance companies established by a parent specifically to cover risks to which the parent is exposed; they do not insure non-affiliated third parties. Despite receiving 400 comments on this aspect of the rule, almost all of which expressed opposition to the proposal, FHFA’s final rules retains the proposal essentially as it was proposed.
Under the rule, FHLBanks may not accept any captive insurance companies as new members. For captive insurance companies that became members since the rule was proposed in 2014, membership must be terminated within one year, and no additional advances may be made. Captive insurance companies that were members of a FHLBank prior to the issuance of the proposed rule may remain members of their current FHLBanks for five years, but the amount of advances they can receive are capped, and the FHLBanks may not make new advances or renew existing advances with a maturity date beyond the five-year period.
The rule’s exclusion of captive insurance companies is vulnerable to challenge in court. Chiefly, it is unclear that FHFA has authority to exclude captive insurance companies from the purview of the Act. Congress directed that “any” insurance company shall be eligible for membership, potentially ousting FHFA’s discretion to pick and choose among insurance companies, especially where the definition of “insurance company” has traditionally been left to the States. In the same vein, it is unclear that FHFA may add additional statutory criteria (here, that an insurance company must primarily underwrite insurance for nonaffiliated persons or entities) not included by Congress. In addition, FHFA’s evaluation of its purported reason for excluding captive insurance companies—that such companies may be passing advances through to their parents, who are not eligible for FHLBank membership—is not thoroughly analyzed. It appears that rather than investigating whether captive insurance companies are actually being used as conduits to ineligible entities, FHFA relies primarily on industry publications encouraging companies to set up captives in order to do so. Moreover, it is unclear that FHFA’s proffered solution would solve any purported problem given that other entities that remain eligible under FHFA’s new rule can also pass through advances to their ineligible parent companies.
Under the 2014 proposal, FHFA also proposed imposing ongoing minimum investment requirements on FHLBank members in order to maintain membership. Specifically, FHFA proposed that institutions would have had to maintain a certain percentage of residential mortgage assets. The threshold for small banks and credit unions with assets less than $1 billion was at least 1%. In its final rule, FHFA removed these requirements from the final regulations, concluding that the burdens of imposing such standards would outweigh the benefits.
The new regulation will go into effect 30 days after publication in the Federal Register. The rule has been strongly opposed by industry participants, who view it as a detriment to the liquidity of the residential housing market, and is expected to garner further discussion and likely a court challenge. Press Release. Final Rule.
Please feel free to contact any of the authors of this Client Alert or other Orrick attorneys with whom you work to discuss any questions you may have with regard to the foregoing.
On December 16, 2015, the U.S. Commodity Futures Trading Commission approved a new regulation for uncleared swaps not regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency. The new rule requires parties to collect margin in order to address concerns of entities taking on excessive risk. Press release.
On December 15, 2015, the Federal Housing Finance Agency issued a proposed rule that would require Fannie Mae and Freddie Mac to provide specific services relating to manufactured housing, affordable housing preservation and rural markets. The proposed rule would also require Fannie Mae and Freddie Mac to address financing concerns in very low- to moderate-income families in those areas. Press release.
On November 16. 2015, the Federal Housing Finance Agency released a report that analyzes its duties as regulator of the Federal Home Loan Bank System and as regulator and conservator of Fannie Mae and Freddie Mac for the fiscal year 2015. Release.
On October 19, 2015, the Federal Housing Finance Agency issued a Final Notice indicating that it will continue to use “expanded-data” House Price Index when establishing Freddie Mac and Fannie Mae’s maximum conforming loan limits. Release.
In a recent speech, Federal Housing Finance Agency (FHFA) director Melvin Watt discussed key FHFA initiatives for 2016. Watt stated that the common Securitization Platform (CSP) and Single Security efforts will be launched in two stages. Watt stated, “In the first stage, which we are calling Release 1, the CSP will begin issuing and administering only Freddie Mac’s securities. In the second phase, Release 2, the CSP will begin issuing and administering securities for both Enterprises and will do so using the new Single Security for the first time.”
Regarding credit risk transfers, Watt stated that Fannie Mae and Freddie Mac are on pace to exceed the 2015 Conservatorship Scorecard objectives. In terms of next steps, Watt stated, “we want to refine and further standardize the Enterprises’ debt, reinsurance and upfront offerings. This will help broaden liquidity. We will continue to work with the Enterprises on other innovative transaction types, such as credit-linked notes. We will also aggressively continue our work to analyze, assess, and define upfront credit risk transfers. We are committed to engaging stakeholders as part of this process.” Speech.
On May 11, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York found Nomura Holdings Inc. liable for inaccurately characterizing the mortgage loan collateral backing seven RMBS certificates it sold to Fannie Mae and Freddie Mac between 2005 and 2007. The suit against Nomura is the last that remains of sixteen lawsuits originally filed against by FHFA against RMBS issuers and sellers alleging violations of Sections 12(a)(2) and 15 of the 1933 Securities Act and state securities laws. Judge Cote’s decision followed a nearly 4-week bench trial that concluded on April 9, 2015.
In a 361-page decision, Judge Cote found, among other things, that 45% to 59% of the sample loans were materially defective insofar as they deviated from relevant underwriting guidelines, and that 27% of the sample loans were subject to inflated appraisals. Judge Cote treated this as strong circumstantial evidence that the appraisers did not believe in the credibility of their appraisals at the time that they were made. Additionally, Judge Cote found that inadequacies in credit ratings of the offered certificates were due to inaccurate loan tapes Nomura provided to the rating agencies. Finally, Judge Cote found that Nomura’s due diligence practices were insufficient, and rejected Nomura’s argument that market conditions, and not the misrepresentations, caused the losses alleged. Judge Cote did not specify the amount of damages and asked the parties to submit a proposed judgment by May 15, 2015. Opinion and Order.
On April 30, the Federal Housing Finance Agency (FHFA) released a report providing the results of annual stress tests Fannie Mae and Freddie Mac are required to undergo under the Dodd-Frank Act. The report provide updated information on possible ranges of future financial results for Fannie Mae and Freddie Mac under severely adverse economic conditions. Press Release. Report.
