The Federal Housing Finance Agency (FHFA) has recently proposed a new conservatorship and receivership operations framework for the government-sponsored enterprises, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Now, after a weighing in the proposal, the Mortgage Bankers Association (MBA) has raised some concerns.

MBA President and CEO John A. Courson and Chairman-Elect Michael D. Berman wrote a letter to FHFA General Counsel Alfred M. Pollard, Esq., stating MBA’s threefold concern about the framework: being overly theoretic, vagueness on the receivership triggers, and unclear receivership goals.

The Housing and Economic Recovery Act of 2008 (HERA) established FHFA in place of the three other agencies that were already regulating the Enterprises and 12 other Federal Home Loan Banks. When FHFA was established, the Enterprises were in a conservatorship with one of the abolished agencies.

The Federal Register published FHFA’s proposed framework on July 9. It included the following issues:

1) FHFA’s powers as conservator or receiver

2) Authority and time limits in reviewing and enforcing contracts

3) Alternative procedures and time period in determining of claims

4) Expenses and unsecured claims priority

5) How to set-up a limited-life regulated entity (LLRE) to assume or succeed to the assets and liabilities of a regulated entity in default or danger of default

6) An LLRE’s authority to obtain credit

7) Capital distribution while in conservatorship

Payment of securities litigation claims

In the letter sent by MBA, it was stated that since the FHFA is already aware of what it is dealing with, it should also be clear as to how various claimants are to be treated once Enterprises are in receivership. The framework may have been clear about wiping out common and preferred stockholders but it did not say anything about subordinated debt holders and the treatment of senior debt holders claims over MBS holders. The letter further states that FDIC guidelines on repudiating contracts should be followed.

Another thing that was discussed in the letter was the trigger that can make FHFA put the Enterprises into receivership. With Treasury providing funds for operations, the Enterprises have managed to survive in conservatorship. With FHFA postponing the decision on the criteria for moving the Enterprises into receivership, ultimate costs are increasing – and these costs will be shouldered by either taxpayers or future homebuyers.

Goal-setting is also important. MBA adds that FHFA should look at the degree to which Enterprises assets are utilized for new secondary market structure.

The MBA letter reiterates that it is not meant to promote any specific course of action but instead to point out the issues that need to be addressed to make market participants see the potential changes in the near future. This, the letter reads, is important since every FHFA and Enterprises action affects the counterparties and different creditors financially.