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FHFA Announces Multiple New Policy Initiatives
On June 15, the FHFA published a Notice of Proposed Rulemaking regarding state and local Property Assessed Clean Energy (PACE) programs, as required by a preliminary injunction issued by the Northern District of California in a lawsuit challenging the FHFA’s direction to Fannie Mae and Freddie Mac not to purchase mortgages subject to first-lien PACE obligations, and to the Federal Home Loan Banks to limit exposure to first-lien PACE programs. Under the PACE programs, local governments provide property-secured financing to property owners for the purchase of energy-related home improvement projects. The FHFA believes such financing arrangements present safety and soundness concerns. Several states challenged the FHFA actions in court. While most of the cases were dismissed, California succeeded in forcing the FHFA to conduct a formal rulemaking on the issue. Comments on the proposed rule are due by July 30, 2012.
On June 18, the FHFA announced an initiative to supplement fraud reporting by the entities it supervises. Under the Suspended Counterparty Program, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are required to notify the FHFA whenever an individual or company with whom they do business is adjudicated to have engaged in fraud or other financial misconduct. The FHFA also will consider information it receives from other government sources. Based on the reported information, the FHFA will make a determination as to whether the individual or business will be suspended from doing business with the supervised entities. The new program takes effect August 15, 2012.
On June 19, the FHFA published a Notice and Request for Comment regarding a proposed new rating system to be used in conducting safety and soundness examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The proposal seeks to implement a single risk-focused examination system for all three entities that would be similar to the “CAMELS” rating system used by federal prudential regulators for depository institutions. The FHFA is accepting comments on the proposed system through July 19, 2012.
Federal District Court Allows Interlocutory Appeal of Challenge to FHFA MBS Suit
On June 19, the U.S. District Court for the Southern District of New York granted defendants motion to certify an interlocutory appeal from a portion of the courts earlier denial of their motion to dismiss as untimely the FHFAs claims under the 1933 Securities Act. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 11-5201, 2012 WL 2324486 (S.D.N.Y. June 19, 2012). On May 4, 2012, the court denied, in large part, the defendants motion to dismiss the FHFAs claims alleging that billions of dollars of MBS purchased by Fannie Mae and Freddie Mac were based on offering documents that contained materially false statements and omissions. The suit was selected to proceed first among the 18 such suits brought by the FHFA. In this most recent decision, the court reasoned that resolution of issues relating to the timeliness of the claims will remove a cloud of legal uncertainty that hangs over the other 17 actions in this suite of cases by clarifying the impact of the Housing and Economic Recovery Act of 2008 on the statute of limitations in the Securities Act of 1933 and, as a consequence, defining the scope of discovery.
FHFA Submits Annual Report to Congress
On June 13, the FHFA submitted to Congress its annual report on its 2011 examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The report rates Fannie Mae and Freddie Mac as “critical supervisory concerns” and states that their continuing credit losses stem primarily from loans originated during 2005-2007. The report cites certain key challenges of Fannie Mae and Freddie Mac, which include (i) the ongoing stress in the national housing market, (ii) the broader economic environment, and (iii) the lack of certainty about the future of Fannie Mae and Freddie Mac. Among other things, the report provides updated information about the Fannie Mae and Freddie Mac portfolios and foreclosure prevention efforts. The report also notes that the financial condition of the Federal Home Loan Banks remained stable, though exposure to private-label mortgage-backed securities continues to impact certain of the Banks.