Big News $$$$$$ FNMA
The Establishment of Holding Companies and Affiliates. Immediately after the enactment of the act, Fannie and Freddie will be permitted to establish holding companies—ordinary corporations chartered under the law of a state. These companies will be authorized to engage in any activity permissible for corporations chartered in that state and will be the parent companies of both Fannie and Freddie and their non-GSE affiliates that, among other things, will be permitted to engage in acquiring and securitizing mortgages.
However, although the various corporate steps can be taken to create these holding companies and their non-GSE subsidiaries, neither the holding companies nor any non-GSE subsidiaries will be able to engage in any business activity (other than acting as the parent companies of Fannie and Freddie) until their respective GSE subsidiaries have taken two steps: (1) achieved a level of capitalization that the then regulator of Fannie and Freddie considers equivalent to the level of capitalization a company would have to maintain for its debt to be rated AA by a recognized debt rating agency; and (2) spun off, to separate companies owned, respectively, by the shareholders of Fannie and Freddie, copies of their automated underwriting systems and copies of all information in their databases that pertain to the business of underwriting, acquiring, or securitizing mortgages. The regulator of Fannie and Freddie is required by the plan to certify that all relevant information has been spun off and Fannie and Freddie continue to maintain what would be the equivalent of an AA rating on their debt.
INTRODUCTION AND SUMMARY
The purpose of requiring an AA-equivalent rating is to prevent Fannie and Freddie from using their continuing GSE status to attract capital and support their operations, while transferring most of their assets to the holding company. The purpose of requiring that they spin off copies of their automated underwriting systems is to assure that, even as privatized companies, Fannie and Freddie are unable to dominate the mortgage market through their superior data on conventional/conforming mortgages or the fact that many originators have become accustomed to working within the parameters of their automated underwriting systems. By requiring that these assets be spun off to independent companies owned by their shareholders, the plan intends to give the shareholders of Fannie and Freddie an opportunity to realize the value of these assets. The spun-off companies, which will be required to maintain their independence from the GSEs, the GSEs’ holding companies, or any other participants in the mortgage market, can engage in any activity, but they will be required to license the automated underwriting systems and the databases to all comers, on essentially comparable terms.
Thus, at the conclusion of this process, Fannie and Freddie will have been liquidated and their charters revoked. However, they will be succeeded by fully private companies that can engage in any activity, including the same businesses in which Fannie and Freddie engaged as GSEs. The residential finance market, in addition, will have become considerably more competitive. Instead of two companies dominating the market and earning oligopolistic profits, many companies will compete, seeking to make what are now classified as conventional/conforming loans, to hold them as investments or securitize them. It is likely that this competition and the innovations it will spawn relatively quickly will drive mortgage costs down to a level equivalent to the level that prevailed when Fannie and Freddie dominated the market. However, in this case, the shareholders of the competing companies, and not U.S. taxpayers, will bear the risks associated with this business.
This privatization program bears a strong resemblance to that of Sallie Mae, which was implemented in the mid-1990s. Sallie Mae was also privatized through the creation of a non-GSE holding company and the gradual runoff of its GSE portfolio. As the GSE portfolio declined, the business of the holding company grew, so that, after a period of years, the holding company was operating without the restrictions applicable to a GSE.
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