Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Rules and Regulations 5609 

to consider in determining whether to 

finalize the proposed action. The 

Director may, in his or her sole 

discretion, convene an informal hearing 

with representatives of the Bank to 

receive or discuss any such information. 

The Director, in his or her sole 

discretion, also may extend the period 

in which the Bank may respond to a 

notice for an additional 30 calendar 

days for good cause, or shorten such 

comment period if the Director 

determines the condition of the Bank 

requires faster action or a shorter 

comment period or if the Bank consents 

to a shorter comment period. The 

Director shall inform the Bank in 

writing, which may be provided as part 

of the notice required under paragraphs 

(a) or (b) of this section, of any decision 

to extend or shorten the comment 

period. The failure of a Bank to provide 

information during the allotted 

comment period will waive any right of 

the Bank to comment on the proposed 

action. 

(d) Final action. At the earlier of the 

completion of the comment period 

established under paragraph (c) or the 

receipt of information provided by the 

Bank during such period, the Director 

shall determine whether to take the 

proposed action or actions that were the 

subject of the notice under paragraphs 

(a) or (b) of this section, after taking into 

consideration any information provided 

by the Bank. Such notice shall respond 

to any information submitted by the 

Bank. Any final order that the Bank take 

action, refrain from action or comply 

with any other requirement that was the 

subject of a notice under paragraph (b) 

of this section shall take effect upon the 

Bank’s receipt of the notice required 

under this paragraph, unless a different 

effective date is set forth in this notice, 

and shall remain in effect and binding 

on the Bank until terminated in writing 

by the Director or until any terms and 

conditions for termination, as set forth 

in the notice, have been met. 

(e) Final actions under this section. 

Any final decision that the Bank take 

action, refrain from action or comply 

with any other requirement that was the 

subject of a notice under paragraph (b) 

of this section shall constitute an order 

under the Safety and Soundness Act. 

The Director in his or her discretion 

may apply to the United States District 

Court for the District of Columbia or to 

the United States district court for the 

judicial district in which the Bank in 

question is established pursuant to 

section 3 of the Bank Act (12 U.S.C. 

1423) for the enforcement of such order, 

as allowed under § 1375 of the Safety 

and Soundness Act (12 U.S.C. 4635) . In 

addition, a Bank or any executive officer 

or director of a Bank can be subject to 

enforcement action, including the 

imposition of civil monetary penalties, 

under § 1371, § 1372 or § 1376 of the 

Safety and Soundness Act (12 U.S.C. 

4631, 4632, or 4636) for failure to 

comply with such an order. 

(f) Judicial review. A Bank that is not 

classified as critically undercapitalized 

may obtain judicial review of any final 

capital classification decision or of any 

final decision to take supervisory action 

made by the Director under § 1229.2, 

§ 1229.4, § 1229.7 or § 1229.9 in 

accordance with the requirements and 

procedures set forth in § 1369D of the 

Safety and Soundness Act (12 U.S.C. 

4623). 

Dated: January 26, 2009. 

James B. Lockhart III, 

Director, Federal Housing Finance Agency. 

[FR Doc. E9–2083 Filed 1–29–09; 8:45 am] 

BILLING CODE 8070–01–P 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1252 

RIN 2590–AA22 

Portfolio Holdings 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Interim final rule; request for 

comments. 

SUMMARY: The Federal Housing Finance 

Agency is issuing an interim final 

regulation to govern the portfolio 

holdings of the Federal National 

Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac). Comments 

on the issues and questions set forth in 

the preamble are requested, and the 

agency will amend the rule as 

appropriate after considering comments. 

DATES: Effective Date: January 30, 2009. 

Comment Date: Written comments 

must be submitted on or before June 1, 

2009. 

ADDRESSES: You may submit your 

comments, identified by ‘‘Portfolio 

Holdings IFR/RFC, [RIN 2590–AA22],’’ 

by any of the following methods: 

• U.S. Mail, United Parcel Post, 

Federal Express, or Other Mail Service: 

The mailing address for submitting 

comments is: Alfred M. Pollard, General 

Counsel, Attention: Comments 

‘‘Portfolio Holdings IFR/RFC, [RIN 

2590–AA22],’’ Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552. 

• Hand Delivery/Courier: The hand 

delivery address for submitting 

comments is: Alfred M. Pollard, General 

Counsel, Attention: Comments 

‘‘Portfolio Holdings IFR/RFC, [RIN 

2590–AA22],’’ Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552. The 

package should be logged at the Guard 

Desk, First Floor, on business days 

between 9 a.m. and 5 p.m. 

• E-mail: Comments may be 

submitted via electronic mail at 

RegComments@FHFA.gov addressed to 

Alfred M. Pollard, General Counsel. 

Please include ‘‘Portfolio Holdings IFR/ 

RFC, [RIN 2590–AA22]’’ in the subject 

line of the message. 

• Federal eRulemaking: Instructions 

on comment submission are also 

available on the eRulemaking portal at 

http://www.regulations.gov. 

The Federal Housing Finance Agency 

(FHFA) requests that comments 

submitted in hard copy also be 

accompanied by the electronic version 

in Microsoft Word or in a portable 

document format (PDF) on 3.5’’ disk or 

CD–ROM, and identify the comments as 

pertaining to the Portfolio Holdings 

Interim Final Rule. 

FOR FURTHER INFORMATION CONTACT: 

Ming-Yuen Meyer-Fong, Office of the 

General Counsel, (202) 414–3798, or 

Valerie Smith, Office of Policy Analysis 

and Research, (202) 414–3770, Federal 

Housing Finance Agency, 1700 G Street, 

NW., Washington, DC 20552. The 

telephone number for the 

Telecommunications Device for the Deaf 

is (800) 877–8339. For more information 

on this Interim Final Regulation, see the 

SUPPLEMENTARY INFORMATION section of 

this document. 

SUPPLEMENTARY INFORMATION: 

I. Comments and Access 

Instructions: FHFA requests that 

comments submitted in hard copy also 

be accompanied by the electronic 

version in Microsoft® Word or in a 

portable document format (PDF) on 3.5’’ 

disk or CD–ROM, and identify that 

comments pertain to ‘‘Portfolio 

Holdings IFR/RFC, [RIN 2590–AA22].’’ 

Statement of Availability: This 

Interim Final Regulation as well as any 

comments posted may be accessed via 

the internet. Users can access the FHFA 

web page at http://www.fhfa.gov; select 

Supervision and Regulations Tab; select 

Regulations, Notices and Public 

Comments; then, select the link titled 

‘‘Portfolio Holdings’’ or via the 

worldwide eRulemaking portal at 

http://www.regulations.gov. User can 

also access Exhibits A to F referenced in 

this interim rule document. Specifically, 

Exhibit A (Amended and Restated 

Senior Preferred Stock Purchase 


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5610 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Rules and Regulations 

Agreement for Fannie Mae) may be 

accessed at http://www.treas.gov/press/

releases/reports/seniorpreferredstock

purchaseagreementfnm1.pdf, and 

Exhibit B (Amended and Restated 

Senior Preferred Stock Purchase 

Agreement for Freddie Mac) at http:// 

www.treas.gov/press/releases/reports/

seniorpreferredstockpurchaseagreement

frea.pdf. Also, Exhibit C (Certificate of 

Designation of Terms of Variable 

Liquidation Preference Senior Preferred 

Stock, Series 2008–2 for Fannie Mae) 

may be accessed at http://www.treas.

gov/press/releases/reports/certificate

fnm2.pdf, and Exhibit D (Certificate of 

Terms and Conditions of Variable 

Liquidation Preference Senior Preferred 

Stock for Freddie Mac) may be accessed 

at http://www.treas.gov/press/releases/

reports/certificatefreb.pdf. Finally, 

Exhibit E (Warrant to Purchase Common 

Stock of Fannie Mae) may be accessed 

at http://www.treas.gov/press/releases/

reports/warrantfnm3.pdf, and Exhibit F 

(Warrant to Purchase Common Stock of 

Freddie Mac) may be accessed at 

http://www.treas.gov/press/releases/

reports/warrantfrec.pdf. In addition, 

copies of all comments received will be 

available for examination by the public 

on business days between the hours of 

10 a.m. and 3 p.m., at the Federal 

Housing Finance Agency, Fourth Floor, 

1700 G Street, NW., Washington, DC 

20552. To make an appointment to 

inspect comments, please call the Office 

of General Counsel (FHFA) at (202) 414– 

6924. 

II. Background 

A. Establishment of the Federal Housing 

Finance Agency 

On July 30, 2008, the President signed 

the Housing and Economic Recovery 

Act (Act) (Pub. L. 110–289, 122 Stat. 

2564). Among other things, the Act 

established a new independent 

executive branch agency known as the 

Federal Housing Finance Agency and 

transferred the supervisory and 

oversight responsibilities for Fannie 

Mae and Freddie Mac (the Enterprises) 

from the Office of Federal Housing 

Enterprise Oversight (OFHEO). The 

Enterprises are government-sponsored 

enterprises (GSEs) chartered by 

Congress for the purposes of 

establishing secondary market facilities 

for residential mortgages. 12 U.S.C. 1716 

et seq. (Fannie Mae Charter Act) and 12 

U.S.C. 1451, et seq. (Freddie Mac 

Corporation Act). Specifically, Congress 

established the Enterprises to provide 

stability in the secondary market for 

residential mortgages, respond 

appropriately to the private capital 

market, provide ongoing assistance to 

the secondary market for residential 

mortgages, and promote access to 

mortgage credit throughout the country. 

Id. 

The Act amended the Federal 

Housing Enterprises Financial Safety 

and Soundness Act of 1992 (Safety and 

Soundness Act) (Pub. L. 102–550, 

(codified at 12 U.S.C. 4501 et seq.). 

Among other things, the Act required 

FHFA to establish criteria by regulation 

governing the portfolio holdings of the 

Enterprises. 12 U.S.C. 4624. The 

purpose of such regulation is to ensure 

that the portfolio holdings are backed by 

sufficient capital and consistent with 

the mission and the safe and sound 

operations of the Enterprises. 12 U.S.C. 

4624(a). Further, the Act directed that 

FHFA consider the ability of the 

Enterprises to provide a liquid 

secondary market through securitization 

activities, the portfolio holdings in 

relation to the overall mortgage market, 

and adherence to standards of 

prudential management and operations 

established by FHFA in accordance with 

section 1313B of the Act. 12 U.S.C. 

4624. The Act also required that any 

criteria governing Enterprise portfolio 

holdings ensure that such holdings are 

consistent with the Enterprises’ mission, 

which includes facilitating the financing 

of affordable housing for low- and 

moderate-income families in a manner 

consistent with their overall public 

purposes. 12 U.S.C. 4624(a); 12 U.S.C. 

4501(7). 

B. Discussion and Analysis of Interim 

Rule 

The FHFA is issuing this regulation as 

an interim final rule, with an effective 

date of January 30, 2009. The name of 

the newly established part 1252 will 

read ‘‘Portfolio Holdings,’’ which will 

contain the rules governing Enterprise 

portfolio holdings. The provisions of 

this regulation are adopted on an 

interim final basis and will remain in 

effect until amended. A 120-day 

comment period is provided on the 

interim final rule and on the topics and 

questions raised in the Request for 

Comments section. 

In accordance with section 1109(b) of 

the Act, FHFA is required to issue 

regulations establishing criteria 

governing Enterprise portfolio holdings. 

The criteria should ensure that 

Enterprise portfolio holdings are backed 

by sufficient capital and consistent with 

the mission as well as the safe and 

sound operations of the Enterprises. 12 

U.S.C. 4624(a). 

The Act authorizes the Director to 

order temporary adjustments to the 

established criteria for an Enterprise or 

both Enterprises, including during times 

of economic distress or market 

disruption. 12 U.S.C. 4624(b). In 

addition, the Act provides that the 

Director monitor the portfolio of each 

Enterprise and authorizes the Director to 

order an Enterprise to dispose of or 

acquire any asset under terms and 

conditions to be determined by the 

Director, if the Director determines that 

such action is consistent with the 

purposes of the Safety and Soundness 

Act or the authorizing statute of the 

Enterprise. 12 U.S.C. 4624(c). 

C. Enterprise Conservatorships and 

Senior Preferred Stock Agreements With 

the Department of the Treasury 

On September 6, 2008, FHFA, with 

the concurrence of the Secretary of the 

Treasury and the Chairman of the Board 

of Governors of the Federal Reserve, 

placed Fannie Mae and Freddie Mac 

into conservatorship. By board 

approval, both Enterprises consented to 

the appointment of a conservator. 

FHFA’s goals in placing the Enterprises 

into conservatorship included 

enhancing their capacity to fulfill their 

mission of providing liquidity and 

stability to the mortgage markets and 

mitigating the systemic risk posed by 

the Enterprises, which had contributed 

to instability in mortgage and broader 

financial markets. Upon a determination 

by the Director of FHFA that either 

Enterprise has returned to a safe and 

solvent condition and the systemic risks 

contributing to the conservatorship 

decision have been addressed 

adequately, the Director will issue an 

order terminating the conservatorship of 

that Enterprise. There is no exact time 

frame as to when the conservatorship of 

either Enterprise may end. 

In order to prevent Enterprise capital 

from being exhausted, FHFA, upon 

appointing itself conservator for the 

Enterprises and on behalf of each 

Enterprise, entered into separate Senior 

Preferred Stock Purchase Agreements 

(Stock Purchase Agreements) with the 

Department of the Treasury. See 

Exhibits A & B (Stock Purchase 

Agreements for Fannie Mae and Freddie 

Mac). Under the Stock Purchase 

Agreements, each Enterprise’s capacity 

to issue new guarantees of mortgagebacked securities (MBS) and to maintain 

and grow its mortgage portfolio holdings 

was fortified through a commitment by 

the Department of the Treasury to 

acquire up to $100 billion of senior 

preferred stock in that Enterprise as 

necessary to ensure that the Enterprise 

avoid a negative net worth. In exchange 

for that commitment, each of the 

Enterprises granted to the Department of 

the Treasury shares of Senior Preferred 

Stock with an initial liquidation 


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preference of $1 billion (and which 

value would increase with each 

investment by the Department of the 

Treasury up to Treasury’s commitment 

of $100 billion for each Enterprise, as 

well as with any unpaid commitment 

fees or dividends owed). Id.; see also 

Exhibits C & D (Certificates of 

Designation of Terms of Variable 

Liquidation Preference Senior Preferred 

Stock, Series 2008–2 for Fannie Mae 

and Freddie Mac). The Enterprises also 

granted to the Department of the 

Treasury warrants for shares of common 

stock. See Exhibits E & F (Warrants to 

Purchase Common Stock of Fannie Mae 

and Freddie Mac). In conjunction with 

enhancing the Enterprises’ capacity to 

engage in new business and to maintain 

and grow their mortgage portfolio 

holdings, the Stock Purchase 

Agreements also established criteria 

governing those holdings. 

Under the portfolio holdings criteria 

set forth in the Stock Purchase 

Agreements, each Enterprise may, 

through December 31, 2009, increase its 

mortgage assets to a level not to exceed 

$850 billion, thereby allowing each 

Enterprise to provide additional 

liquidity during this period of mortgage 

market stress. After December 31, 2009, 

the portfolio holdings criteria set forth 

in the Stock Purchase Agreements 

require the reduction of each 

Enterprise’s mortgage assets at the rate 

of 10 percent per year until they reach 

a size of $250 billion, which would be 

around the year 2020. That reduction is 

expected to be achieved largely through 

natural run-off. The portfolio holdings 

criteria set forth in the Stock Purchase 

Agreements do not address Enterprise 

holdings of non-mortgage assets. 

III. Section-by-Section Analysis 

Section 1252.1 

Section 1252.1 adopts the portfolio 

holdings criteria established by the 

Stock Purchase Agreements, as they 

may be amended from time to time, as 

the standards for this rule. Under the 

current Stock Purchase Agreements, 

which currently have the same portfolio 

holdings criteria for both Enterprises, an 

Enterprise may grow its mortgage assets 

up to $850 billion on December 31, 

2009. Starting on December 31, 2010, 

the Enterprise must hold 10 percent less 

mortgage assets in its portfolio than at 

the end of the preceding year until those 

assets reach a level of $250 billion, at 

which point, no further decrease is 

currently required. Adjustments could 

be made to those criteria by amendment 

of the Stock Purchase Agreements. 

FHFA’s establishment of criteria 

governing Enterprise portfolio holdings 

in the Stock Purchase Agreements 

represents an exercise of authority 

consistent with the authority granted by 

Congress under section 1369E of the 

Safety and Soundness Act. FHFA’s goals 

for the conservatorship include 

fortifying Enterprise capacity to support 

the secondary mortgage market. The 

criteria for Enterprise portfolio holdings 

established in the Stock Purchase 

Agreements allow the Enterprises 

immediate capacity to provide stability 

and liquidity to the secondary mortgage 

market, while mitigating systemic risk, 

and facilitating Enterprise efforts to 

achieve a balance between their mission 

and safe and sound operations in the 

intermediate term. Given the severe 

deterioration in mortgage market 

conditions and findings by FHFA that 

the Enterprises were unable to raise 

capital, immediate, coordinated 

government action was required to 

reinforce Enterprise capacity to provide 

liquidity to the secondary mortgage 

market. Establishing criteria governing 

Enterprise portfolio holdings was an 

essential part of that action. 

Section 1252.2 

Section 1252.2 addresses the effective 

duration of the interim rule. FHFA 

expects these regulations to be effective 

until any amendment or until the 

Enterprises are no longer subject to the 

terms and obligations of the Stock 

Purchase Agreements. 

IV. Regulatory Requirements 

A. Paperwork Reduction Act 

The interim rule does not contain any 

information collection requirement to 

require the approval of OMB under the 

Paperwork Reduction Act (44 U.S.C. 

3501 et seq.). Therefore, the 

requirements of the Paperwork 

Reduction Act do not apply. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) requires that a 

regulation that has a significant 

economic impact on a substantial 

number of small entities, small 

businesses, or small organizations must 

include an initial regulatory flexibility 

analysis describing the regulation’s 

impact on small entities. Such an 

analysis need not be undertaken if the 

agency has certified that the regulation 

does not have a significant economic 

impact on a substantial number of small 

entities. 5 U.S.C. 605(b). FHFA has 

considered the impact of the interim 

final rule under the Regulatory 

Flexibility Act. The General Counsel of 

FHFA certifies that the interim final rule 

is not likely to have a significant 

economic impact on a substantial 

number of small business entities 

because the regulation is applicable 

only to the Enterprises, which are not 

small entities for purposes of the 

Regulatory Flexibility Act. 

C. Good Cause for Issuance of Interim 

Final Rule 

An agency may issue an interim final 

rule when the agency for good cause 

finds that notice and public procedure 

thereon are ‘‘impracticable, 

unnecessary, or contrary to the public 

interest.’’ 5 U.S.C. 553(b). The interim 

final rule issued herein meets the Act’s 

requirement for issuance of regulations 

establishing portfolio holdings pursuant 

to section 1369E of the Safety and 

Soundness Act, 12 U.S.C. 4501 et seq., 

as amended, as well as the requirements 

for good cause pursuant to 5 U.S.C. 

553(b). 

HERA requires the Director to issue 

regulations establishing the portfolio 

holding standards for the Enterprises 

within 180 days of enactment. In 

addition, this interim final rule adopts 

criteria governing the portfolio holdings 

of the Enterprises that have been in 

place and currently govern the actions 

of the Enterprises. Given these facts, the 

Director has determined that prior 

notice and comment procedures are 

impractical and contrary to public 

interest. 

Further, given that the Enterprises 

received notice of the portfolio holdings 

criteria set forth in the Stock Purchase 

Agreements, and consented to the 

portfolio holdings criteria through their 

conservator, opportunity for further 

comment by the Enterprises is 

unnecessary. The issuance of this 

interim final rule and publication in the 

Federal Register serve to comply with 

the formal requirement in the Act that 

FHFA issue regulations within 180 days 

of enactment. See section 1109(b) of the 

Act. 

V. Request for Comments 

A. Interim Final Rule (§§ 1252.1 and 

1252.2) 

FHFA is interested in receiving 

comments on all aspects of the Interim 

Final Rule, and all relevant comments 

will be considered. FHFA will amend 

the interim final rule as appropriate 

after reviewing comments received. 

FHFA also requests comments on the 

issues and questions set forth herein to 

give the public an opportunity to 

comment on criteria governing 

Enterprise portfolio holdings that will 

apply when the Enterprises are no 

longer subject to Stock Purchase 

Agreements that establish holdings 


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1Remarks by Treasury Secretary Henry M. 

Paulson, Jr., ‘‘The Role of the GSEs in Supporting 

the Housing Recovery,’’ before the Economic Club 

of Washington (January 7, 2009). 

criteria. When addressing a specific 

question contained in this interim final 

rule, FHFA asks that commenters 

specifically note, by number, which 

question is being addressed. In 

particular, the FHFA is seeking 

comments in the areas and on the issues 

discussed below. Comments should be 

identified as pertaining to the Portfolio 

Holdings IFR and should be submitted 

as indicated in the ADDRESSES section of 

this preamble. 

B. Request for Comments 

FHFA as conservator is working to 

restore each Enterprise to a safe and 

sound condition. FHFA anticipates that, 

once housing and mortgage markets 

stabilize, the Enterprises may return to 

profitability. While many—including, 

for example, then-Secretary of the 

Treasury Henry M. Paulson 1—have 

suggested major changes in the structure 

or roles of the Enterprises, until 

Congress acts to make changes to their 

charters, FHFA must implement current 

law in the best way possible. 

Accordingly, FHFA plans to develop a 

regulation establishing criteria that will 

govern their portfolio holdings at such 

time as the Enterprises are no longer 

subject to Stock Purchase Agreements 

that establish portfolio holdings criteria. 

1. Public Policy Objectives of the 

Regulation 

Section 1369E of the Safety and 

Soundness Act specifies two public 

policy objectives that guide FHFA’s 

development of a regulation establishing 

criteria governing Enterprise portfolio 

holdings. The first objective is ensuring 

that portfolio holdings are backed by 

sufficient capital. 12 U.S.C. 4624(a). The 

Enterprises are subject to capital 

regulations as set forth in 12 CFR part 

1750. As initially enacted, in 1992, the 

Safety and Soundness Act established 

fixed minimum capital requirements in 

statute, directed OFHEO to establish 

risk-based capital requirements for the 

Enterprises as prescribed in statute, and 

greatly limited the agency’s flexibility 

with respect to adjusting those riskbased capital requirements. Capital 

regulations issued in accordance with 

those authorities allowed the 

Enterprises to operate with considerable 

leverage relative to their risks and 

relative to other regulated financial 

institutions, regardless of economic 

conditions or the phase of the mortgage 

credit cycle. Each Enterprise’s core 

capital—comparable to Tier 1 capital for 

banks—consistently represented less 

than 2 percent of the sum of its 

mortgage assets and guaranteed MBS. 

High leverage relative to their risks 

contributed significantly to the systemic 

risk posed by the Enterprises and their 

inability to continue to perform their 

mission and operate in a safe and sound 

manner as they incurred losses in 2007 

and 2008. 

Under the Act, OFHEO’s capital 

regulations remain in effect for the 

Enterprises until modified or replaced. 

The Act amended the Safety and 

Soundness Act to provide FHFA with 

broad authorities with respect to capital 

regulation comparable to those 

possessed by the federal bank regulatory 

agencies. Accordingly, FHFA has begun 

to develop a new and more rigorous 

capital regime that will be applicable to 

the Enterprises after the 

conservatorships are terminated. FHFA 

intends that any new risk-based capital 

regulation and any amendment to an 

existing minimum capital regulation 

ensure that the Enterprises’ portfolio 

holdings are backed by sufficient 

capital, consistent with the 

requirements of section 1369E of the 

Safety and Soundness Act. 

FHFA has determined that it is 

prudent and in the best interests of the 

secondary mortgage market to suspend 

capital classifications of the Enterprises, 

during the conservatorships, in light of 

the Senior Preferred Stock Purchase 

Agreements. FHFA continues to closely 

monitor Enterprise capital levels, but 

the existing statutory and FHFAdirected regulatory capital requirements 

are not binding during the 

conservatorships. 

The second public policy objective 

that guides FHFA’s development of a 

regulation is ensuring that the 

Enterprises’ portfolio holdings are 

consistent with their mission and safe 

and sound operations. The statutory 

mission of the Enterprises is to provide 

stability in the secondary market for 

residential mortgages, respond 

appropriately to the private capital 

market, provide ongoing assistance to 

the secondary market for residential 

mortgages by increasing the liquidity of 

mortgage investments and improving 

the distribution of capital available for 

residential mortgage lending, promote 

access to mortgage credit throughout the 

country, and support financing for 

housing affordable by low- and 

moderate-income households and in 

underserved areas. The mission is most 

challenging and most important during 

the part of the mortgage credit cycle 

when market conditions are weakest. 

Thus, the Enterprises, as a matter of 

public policy, must maintain sufficient 

financial strength to make business 

decisions throughout that cycle that are 

relatively unconstrained by solvency or 

liquidity problems. To do so, the 

Enterprises must limit their risk 

exposures and build sufficient capital, 

relative to their risks, in periods of 

housing and mortgage market 

expansion, to be able to absorb losses 

and maintain sufficient capital to 

comply with regulatory capital 

requirements and perform their mission 

during contractions in the housing 

sector or the broader economy. In 

addition, to fulfill their mission to 

provide stability and ongoing assistance 

to the secondary mortgage market, the 

Enterprises should not themselves 

present unnecessary systemic risk to the 

secondary market or the broader 

mortgage finance or financial markets. 

FHFA intends that a regulation 

establishing criteria governing 

Enterprise portfolio holdings, in 

combination with a revised capital 

regime for the Enterprises, will give 

them incentives that will promote their 

ability to perform their mission at all 

points in the mortgage credit cycle. 

2. Questions Requesting Public 

Comment Regarding Standards 

Governing Portfolio Holdings of 

Mortgage Assets 

The Enterprises’ mortgage portfolio 

holdings have long been a source of 

debate by lawmakers, policy makers, 

researchers, and others, principally 

because of the size of those holdings. 

Recent events that eventually caused 

FHFA to place the Enterprises in 

conservatorship highlight the risks 

posed by their large mortgage portfolio 

holdings and the failure of the 

Enterprises to hold capital 

commensurate with the risks posed by 

those holdings. In mid-2006, the 

Enterprises agreed to cap the growth of 

their mortgage portfolio holdings due to 

their accounting, internal control, and 

risk management weaknesses. Recent 

events also underscore the need to 

establish criteria governing the holdings 

that will allow the Enterprises to carry 

out their mission in a safe and sound 

manner. 

Section 1369E of the Safety and 

Soundness Act makes clear that 

Congress considered the Enterprises’ 

mortgage portfolio holdings necessary 

for them to carry out their mission, at 

least in some circumstances. 

Accordingly, Congress granted FHFA 

authority to complete determine the 

appropriate size and composition of the 

mortgage portfolio holdings going 

forward, and whether the Enterprises 

should and how they can be encouraged 


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2Financial institutions and markets experience 

periodic lending booms and busts that amplify the 

business cycle, making economic activity more 

volatile than it would otherwise be. Countercyclical behavior by the Enterprises—building up 

capital relative to their risks in periods of housing 

and mortgage market expansion and using that 

capital to absorb losses and increase their activity 

during contractions—might reduce the volatility of 

mortgage lending, housing activity, and overall 

economic activity. 

3Andrea Lehnert, S. Wayne Passmore, and Shane 

Sherland, ‘‘GSEs, Mortgage Rates, and Secondary 

Market Activities.’’ (April 2008) Journal of Real 

Estate Finance and Economics 36(3), 343–363. 

4See the studies cited in James C. Miller, III, and 

James E. Pearce, Revisiting the Net Benefits of 

Freddie Mac and Fannie Mae (a study prepared for 

Freddie Mac, November 2006). 

5Bernanke, Ben S., ‘‘GSE Portfolios, Systemic 

Risk, and Affordable Housing,’’ Speech before the 

Independent Community Bankers of America’s 

Annual Convention and Techworld, Honolulu, 

Hawaii (March 6, 2007). 

to operate in a more counter-cyclical 2

fashion so that they can respond 

appropriately when the secondary 

mortgage market is under stress. FHFA 

invites public comments on those and 

related issues. Separate questions are 

posed about Enterprise purchases of 

mortgage assets for portfolio and about 

portfolio holdings of those assets, since 

those activities raise distinct issues. 

i. Benefits of Enterprise Purchases of 

Mortgage Assets for Portfolio. 

The Enterprises provide liquidity— 

ready access to funds on reasonable 

terms—to the thousands of banks, 

thrifts, and mortgage companies that 

make loans to housing in the U.S. The 

Enterprises do so primarily by 

transforming individual mortgages into 

MBS backed by Enterprise guarantees of 

timely payment of principal and 

interest. Lenders provide the Enterprises 

with the individual mortgages used to 

create Enterprise MBS and use the cash 

raised to engage in further lending. 

Securitization helps provide a 

continuous, stable supply of funds to 

finance purchases of homes by 

individuals and families and apartment 

buildings and other multifamily 

dwellings by investors. 

In some circumstances, the 

Enterprises provide additional liquidity 

and stability to the secondary mortgage 

market by buying whole loans from 

lenders, and by purchasing MBS that 

they or the Government National 

Mortgage Association (Ginnie Mae) have 

guaranteed, or private-label MBS issued 

by large lenders or Wall Street firms. 

The Enterprises hold those mortgage 

assets in portfolio and finance them 

with debt. By standing ready to 

purchase MBS they have guaranteed 

when the market yields of those 

securities are high relative to the yields 

of alternative investments, the 

Enterprises enhance the liquidity of the 

MBS. Enterprise purchases of selected 

tranches of private-label MBS may also 

enhance the liquidity and reduce the 

yields of those securities. 

The economic benefits provided by 

Enterprise purchases of mortgage assets 

for their portfolios during periods when 

the secondary mortgage market is 

generally liquid and stable are 

uncertain. Research at the Federal 

Reserve Board, using data from a period 

of relative market stability, found that 

purchases for the Enterprises’ portfolios 

appear to have no material effect on the 

cost or availability of mortgage credit.3

Studies conducted by other researchers 

have found that the Enterprises’ 

purchases of whole loans and MBS for 

their portfolios reduce mortgage interest 

rates and mortgage rate volatility, 

increase the volume of mortgage lending 

and refinancing, and increase liquidity 

in the secondary mortgage market.4

A large portion of the mortgage assets 

purchased for portfolio by the 

Enterprises finance dwelling units that 

are affordable to low- and moderateincome households, or are located in 

geographic areas designated as 

underserved. Those and other loans may 

have characteristics that make them 

difficult or uneconomical to securitize. 

Enterprise purchases of such loans may 

enhance the liquidity and lower the 

interest rates that lenders require on 

those assets. The Enterprises’ 

acquisition of those assets for portfolio 

may increase the availability and reduce 

the cost of such financing more than 

securitization alone.5

Further, the Enterprises can support 

mortgage markets and the housing 

sector and reduce market yields of MBS 

by purchasing those securities during 

periods of severe stress or turmoil in 

mortgage markets or the broader 

financial system. In the recent period of 

mortgage market stress, Enterprise 

purchases of MBS appear to have had 

some impact on the secondary market 

pricing and liquidity of mortgage 

securities of those securities. When such 

conditions ease, the Enterprises may be 

able to sell such mortgage assets in an 

orderly manner, rather than holding 

them indefinitely in portfolio. 

Question 1: What additional benefits 

are provided to the secondary mortgage 

market and the housing sector by 

Enterprise purchases for portfolio of 

mortgage loans and MBS, beyond the 

benefits provided by their securitization 

activities? What is the magnitude of 

those additional benefits? 

Question 2: Is it possible for the 

Enterprises to fulfill their mission of 

providing stability and liquidity to the 

secondary mortgage market without 

purchasing mortgage assets for 

portfolio? If so, how? If not, what types 

of mortgage assets should they be 

allowed to purchase for portfolio, and in 

what amounts? 

Question 3: Could the U.S. 

government better ensure the liquidity 

and stability of the secondary mortgage 

market other than through Enterprise 

purchases of mortgage assets for 

portfolio—for example, through the 

activities of the Federal Reserve System, 

mortgage asset purchases by the 

Department of the Treasury, or the 

provision of an explicit government 

guarantee of MBS securitized by the 

Enterprises? 

Question 4: Should the Enterprises’ 

purchases of mortgage assets vary over 

the mortgage credit cycle or with 

conditions in the secondary mortgage 

market? If so, how? 

Question 5: If the Enterprises 

purchase large volumes of mortgage 

assets during periods of stress or turmoil 

in the secondary mortgage market, 

should they be required to sell those 

assets once that market stabilizes? If so, 

when and how should the Enterprises 

conduct such sales? 

ii. Benefits of Enterprise Mortgage 

Portfolio Holdings. 

The Enterprises’ portfolio holdings of 

mortgage assets grew rapidly beginning 

in the 1990s and extending through the 

early part of the current decade. The 

pace of that growth greatly exceeded the 

growth of the mortgage market as a 

whole, as measured by residential 

mortgage debt outstanding (RMDO). The 

Enterprises’ combined holdings of 

mortgage assets increased from $135 

billion, or 4.7 percent of RMDO, at the 

end of 1990, to $1,410 billion, or 20.4 

percent of RMDO, at the end of 2002. In 

the years that ensued, the Enterprises 

were plagued by accounting scandals 

related to the hedging of their mortgage 

portfolios, internal control problems, 

and other issues that led to the 

imposition of supervisory restrictions 

on the growth of their mortgage assets 

and capital surcharges. Between 2004 

and 2007, the mortgage portfolios of the 

Enterprises shrunk or grew significantly 

more slowly than RMDO. At the end of 

June 2008, their combined holdings of 

mortgage assets totaled $1,541 billion, 

or 12.7 percent of RMDO. 

Historically, key beneficiaries of the 

Enterprises’ large mortgage portfolio 

holdings were their shareholders, who 

profited from the Enterprises’ low 

funding costs. Some types of mortgage 

assets acquired for the portfolio may 

have contributed to the Enterprises’ 

mission objectives. Such assets may 

have included whole loans that finance 

affordable housing that are not easily 


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6See, among many other studies, Bernanke, Ben 

S., ‘‘GSE Portfolios, Systemic Risk, and Affordable 

Housing,’’ Speech before the Independent 

Community Bankers of America’s Annual 

Convention and Techworld, Honolulu, Hawaii 

(March 6, 2007); Eisenbeis, Robert A, W. Scott 

Frame, and Larry D. Wall, ‘‘An Analysis of the 

Systemic Risks Posed by Fannie Mae and Freddie 

Mac and an Evaluation of the Policy Options for 

Reducing Those Risks,’’ Journal of Financial 

Services Research (Vol. 31, Nos. 2–3, June 2007), 

75–99; Greenspan, Alan, ‘‘Government-Sponsored 

Enterprises,’’ Remarks Delivered at the Conference 

on Housing, Mortgage Finance, and the 

Macroeconomy, Federal Reserve Bank of Atlanta 

(May 19, 2005); Mankiw, N. Gregory, Remarks at the 

Conference of State Bank Supervisors, State 

Banking Summit and Leadership Conference 

(November 6, 2003); Office of Federal Housing 

Enterprise Oversight, Systemic Risk: Fannie Mae, 

Freddie Mac, and the Role of OFHEO (Washington, 

DC: February 2003); and Poole, William. ‘‘Housing 

in the Macroeconomy,’’ Review, Federal Reserve 

Bank of St. Louis (May/June 2003), 1–8. 

7 Department of the Treasury, Responses to 

Questions of the First Report of the Congressional 

Oversight Panel for Economic Stabilization 

(December 31, 2008), 10. 

securitized because of non-standard 

features and small volumes, as well as 

mortgage securities that are backed by 

affordable housing loans and that are 

not traded in markets with the broad 

appeal and liquidity of Enterprise MBS. 

The mortgage portfolios have also been 

used to support the Enterprises’ 

securitization activities, to provide 

liquidity and stability to the secondary 

mortgage market, and to support the 

liquidity of the Enterprises’ own MBS. 

Question 6: Could the benefits of the 

Enterprises’ mortgage portfolio holdings 

be achieved if the levels of those 

holdings were substantially lower than 

current levels? Could the Enterprises 

carry out their mission of providing 

stability and liquidity to the secondary 

mortgage market and of supporting 

affordable housing without maintaining 

portfolios of mortgage assets? If so, 

explain how. 

iii. Additional Risks to the Enterprises 

Posed by Their Mortgage Portfolio 

Holdings. 

The Enterprises’ securitization 

activities and portfolio holdings of 

whole loans expose them to mortgage 

credit risk—the risk of losses if 

borrowers do not make their payments 

due or default on their loans. The recent 

credit crisis demonstrates that broadbased and sizable losses from exposure 

to mortgage credit risk can occur. 

Securitization and portfolio investment 

in whole loans also expose the 

Enterprises to the risk that lenders, 

mortgage servicers, and mortgage 

insurers may not fulfill their contractual 

obligations, with significant 

consequences during a systemic event. 

The mortgage portfolios of the 

Enterprises expose them to risks beyond 

those posed by their securitization 

activities. The principal additional risks 

are interest rate risk, derivatives 

counterparty credit risk, the risk of 

declines in the fair values of MBS 

holdings due to increased credit and 

market liquidity risks, funding and basis 

risks, and operational risks. Their 

exposure to interest rate risk arises 

primarily from the long-term, fixed-rate 

mortgages that they hold, directly or 

through MBS. Because borrowers can 

prepay their mortgages at any time, a 

mismatch of the durations of Enterprise 

mortgage assets and liabilities can 

result. The Enterprises use various 

techniques, including hedging with 

derivatives, to manage the risk resulting 

from this mismatch. Using derivatives to 

hedge that risk exposes the Enterprises 

to derivatives counterparty credit risk. 

The Enterprises’ holdings of privatelabel MBS pose additional credit risk 

and significant risk of asset price 

declines due to declines in market 

liquidity. Funding risk is the risk that a 

firm will be unable to obtain funds at a 

reasonable cost or at all when its 

existing debt matures or its payments 

are due. Basis risk is the risk that the 

interest rates in different financial 

markets will not move in the same 

direction or amount at the same time. 

Operational risk can manifest itself in 

a number of ways, most commonly 

through the breakdown of internal 

controls, ineffective corporate 

governance, inadequate policies and 

procedures, employee behavior, and 

external events. The Enterprises face 

operational risks due to technology 

failures, business disruptions, internal 

or external fraud, processing errors, and 

weaknesses in internal policies and 

procedures. For example, the 

accounting scandals at both Enterprises 

in the early part of the decade were 

partially due to irregularities in the 

implementation of complex derivatives 

accounting principles. 

Section 1369E of the Safety and 

Soundness Act requires that in 

establishing criteria governing the 

Enterprises’ portfolio holdings, the 

Director shall consider the Enterprises’ 

adherence to prudent management and 

operations standards established under 

section 1313B of the Act. 12 U.S.C. 

4624(a). Those standards must address 

many issues related to managing risks 

posed by the Enterprises’ mortgage 

portfolio holdings, including 

management of interest rate risk 

exposure, management of market risk, 

adequacy and maintenance of liquidity 

and reserves, management of asset and 

investment portfolio growth, overall risk 

management processes, management of 

credit and counterparty risk, and 

management of operational risks. 

Question 7: Aside from reducing the 

volume or altering the composition of 

mortgage assets held by the Enterprises, 

are there other ways in which FHFA can 

use criteria governing their mortgage 

portfolio holdings to reduce their 

exposure to or improve their 

management of interest rate, credit, 

operational, and other risks? If so, what 

approaches should FHFA take? 

Question 8: How can FHFA best use 

criteria governing mortgage portfolio 

holdings, in conjunction with capital 

regulations and other supervisory tools, 

such as prudent management and 

operations standards established in 

accordance with section 1313B of the 

Safety and Soundness Act, to address 

the Enterprises’ exposure to the 

additional risks posed by such 

holdings? 

iv. Systemic Risk Posed by Enterprise 

Mortgage Portfolio Holdings. 

There is broad agreement among 

policymakers and economists that the 

Enterprises pose substantial systemic 

risk to mortgage markets and the 

broader financial system.6 As the 

Treasury Department recently stated, 

‘‘[t]he systemic importance of these two 

enterprises, and the systemic impact of 

a collapse of either, cannot be 

overstated.’’ 7 The Enterprises’ systemic 

risk arises from four sources: 

• High leverage increases the risk of 

Enterprise failure and of the adverse 

consequences for mortgage lending and 

housing activity attendant on such 

failure. 

• The Enterprises’ combined 

mortgage assets totaled nearly $1.6 

trillion as of November 30, 2008. If 

either Enterprise had to shrink its 

portfolio holdings rapidly, the market 

values of the mortgage assets held by 

many other financial institutions would 

be adversely affected, exacerbating 

solvency and liquidity problems. 

• Mortgage lender dependence on the 

Enterprises, already high since the mid1980s, has increased substantially since 

the collapse of the secondary market for 

private-label MBS in the third quarter of 

2007. If either Enterprise greatly 

reduced or sharply curtailed its 

mortgage purchases, mortgage rates 

would increase, which would reduce 

new mortgage lending, depress the 

market values of mortgage assets held 

throughout the industry, and tend to 

weaken housing and the broader 

economy. 

• Outstanding Enterprise debt—over 

$1.6 trillion at the end of November 

2008—is widely held by commercial 

banks in the U.S., institutional 

investors, foreign central banks, and 

other foreign investors. If Enterprise 


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solvency or liquidity problems led to 

large declines in the market value of 

that debt, there could be serious adverse 

effects on banks and other investors. 

The Enterprises are also among the 

largest end-users of over-the-counter 

(OTC) interest rate derivatives. 

Uncertainty about how counterparties 

would replace their OTC derivatives 

with one or both Enterprises, if either 

failed, could adversely affect those 

institutions and the OTC derivatives 

markets. 

As noted above, a key objective of 

placing the Enterprises in 

conservatorship and executing the Stock 

Purchase Agreements was to limit the 

systemic risk they posed, which had 

risen sharply in 2007 and the first half 

of 2008, as they reported financial losses 

and their leverage and borrowing costs 

increased, and to avoid adverse 

consequences for the housing sector and 

economy. If the mortgage portfolio 

holdings of the Enterprises were 

reduced in order to limit the systemic 

risk they pose, the overall effect on 

financial stability would depend on 

what other entities acquired the assets, 

how they funded the assets and 

managed the associated risks, and how 

much capital they held against those 

risks. 

Question 9: Should FHFA use criteria 

governing the Enterprises’ mortgage 

portfolio holdings to mitigate the 

systemic risk posed by the Enterprises? 

If so, how? If the mortgage portfolio 

holdings of the Enterprises were 

reduced in an effort to mitigate the 

systemic risk posed by the Enterprises, 

how would the stability of the mortgage 

markets and the broader financial 

system be affected? What steps could 

the federal government take to 

maximize any improvement in stability? 

v. Criteria Governing Enterprise 

Mortgage Portfolio Holdings. 

a. Size of Mortgage Portfolio Holdings. 

Under the portfolio holdings criteria 

established in the Stock Purchase 

Agreements, the mortgage assets of each 

Enterprise will decline by 10 percent 

each year starting in 2010 and each year 

thereafter until the holdings of each 

Enterprise reached $250 billion. FHFA 

projects that would occur in 2020, at the 

end of which each Enterprise’s mortgage 

portfolio holdings would represent 

about 2.0 percent of projected RMDO. 

(Chart 1). 

Another approach could establish 

criteria that, rather than specifying 

dollar amounts, specified maximum 

ratios between each Enterprise’s 

mortgage assets and some indicator of 

the size of the mortgage market such as 

RMDO. For example, the criteria could 

require each Enterprise’s mortgage 

assets to decline as required by the 

Stock Purchase Agreements until each 

Enterprise’s mortgage portfolio 

represented no more than, say, 2.1 

percent of RMDO—the share that $250 

billion represented as of mid-2008—and 

limit each portfolio’s future growth so as 

to maintain its ratio to RMDO at 2.1 

percent thereafter. FHFA projects that 

would occur in 2016, at the end of 

which each Enterprise’s mortgage assets 

would be about $400 billion (Chart 2). 

Under any such approach, increases in 

the mortgage assets of an Enterprise or 

both Enterprises could be permitted on 

a temporary basis in times of economic 

distress or market disruption, consistent 

with 12 U.S.C. 4624(b). 


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Other criteria could be devised to 

internalize at the Enterprises some of 

the potential costs of large portfolio 

holdings, in order to create an incentive 

for the Enterprises to restrain those 

holdings below a desired level. Thus, 

the criteria could impose a firm limit on 

the mortgage assets of each Enterprise, 

but create a range below that limit 

within which holdings would be 

increasingly discouraged. For example, 

that range could begin at their combined 

share of RMDO at the end of 1991 (5 

percent—2.5 percent per Enterprise) and 

go as high as their combined market 

share at the end of 1994, the mid-point 

of the seven-year period 1991 through 

1997 (or 8.3 percent—4.1 percent per 

Enterprise). A sliding scale minimum 

capital surcharge could apply if an 

Enterprise chose to hold more than the 

lower amount of the range. The 

surcharge would increase as the 

holdings moved toward the limit, with 

a maximum surcharge of, perhaps, an 

additional two percent of mortgage 

assets. 

Yet another approach could establish 

criteria that would allow the mortgage 

portfolio holdings of each Enterprise to 

expand and contract with its mortgage 

credit book of business—the sum of 

those holdings plus its guaranteed MBS 

held by other investors. 

Question 10: Should the size of the 

Enterprises’ mortgage portfolio holdings 

be limited to a fixed dollar amount, be 

linked to a market indicator, or be 

linked to the size of their MBS 

outstanding? 

Question 11: Should the permissible 

size of the Enterprises’ holdings of 

mortgage assets vary in a manner related 

to the phase of the mortgage credit cycle 

or conditions in the secondary mortgage 

market? If so, how should FHFA 

monitor that cycle or secondary 

mortgage market conditions, and how 

should the permissible size of those 

holdings vary? 

Question 12: How could decreases in 

the Enterprises’ mortgage portfolio 

holdings affect their operational 

infrastructures? How would changes in 

their operational infrastructures affect 

their ability to expand their purchases 

of mortgage assets for portfolio during 

times of stress in the secondary 

mortgage market? Does each Enterprise 

need a minimum level of mortgage 

portfolio holdings to maintain the 

infrastructure needed to expand its 

purchases under such conditions? 

Question 13: Should each Enterprise’s 

minimum capital requirement increase 

with the size or composition of its 

mortgage portfolio holdings? If so, how 

should such increase be imposed? 

Should a capital surcharge be imposed 

on each Enterprise if its mortgage 

portfolio holdings exceed some level? If 

so, how should such surcharge be 

imposed? 

b. Composition of Mortgage Portfolio 

Holdings. 

Criteria regarding the Enterprises’ 

mortgage portfolios could limit their 

holdings of certain types of assets, while 

encouraging them to hold more of 

mortgage products that make a greater 

contribution to specific elements of 

their mission. 

Question 14: Should FHFA restrict 

the types of mortgage assets the 

Enterprises are allowed to hold to those 

that are strictly related to specific 

elements of their mission? If so, how 

should those assets be defined? For 

example, should FHFA prohibit or place 

a limit on each Enterprise’s holdings of 

mortgage-related securities guaranteed 

by the other Enterprise or Ginnie Mae or 

its holdings of private-label MBS? 

Question 15: Should FHFA require 

that assets purchased for the portfolio 

each year comply with affordable 

housing goals and sub-goals established 

for that year? 

Question 16: Should FHFA allow the 

Enterprises to hold, without limit, either 

whole loans (or securities backed by 

them) that finance affordable housing 

not easily securitized because of nonstandard features and small volumes or 

mortgage securities backed by loans that 

finance affordable housing, where 

markets for those securities are small or 

thin? Please provide examples of such 

loans or securities. Alternatively, should 

FHFA place a limit on the amount of 

such loans or securities that an 

Enterprise can hold? If so, what is an 

appropriate level? 


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c. Funding of Mortgage Portfolio 

Holdings. 

The Enterprises fund their portfolios 

of mortgage assets largely by issuing 

debt. The Enterprises are also highly 

leveraged—historically, each 

Enterprise’s core capital represented 

less than 2 percent of the sum of its 

mortgage assets and guaranteed MBS. 

The Enterprises have relied heavily on 

short-term debt to fund their mortgage 

portfolio holdings, used financial 

derivatives to alter synthetically the 

maturity of that debt, and depended on 

their ability to roll over debt and enter 

into new derivatives contracts in all 

market conditions. Because of the 

favorable funding costs enjoyed by the 

Enterprises, they benefitted from 

attractive spreads between the yields on 

the assets comprising their mortgage 

portfolio holdings and their cost of 

funds. FHFA will address issues related 

to the funding of Enterprise mortgage 

assets through promulgation of risk 

management standards, the agency’s 

examination process, and by a new riskbased capital standard. 

Question 17: Should FHFA establish 

criteria governing the Enterprises’ 

mortgage portfolio holdings that specify 

that the Enterprises adhere to a specific 

maximum ratio of short-term debt to 

mortgage assets or minimum ratio of 

callable debt to long-term, fixed-rate 

mortgage assets or to total long-term 

debt? 

Question 18: Should FHFA specify 

criteria that condition Enterprise 

mortgage portfolio holdings above a 

certain amount on maintaining 

measures of the risks—e.g., duration and 

convexity—associated with those 

portfolios within specified levels? 

Should adherence to appropriate limits 

on such risks be addressed through of 

prudential management and operations 

standards in accordance with section 

1313B of the Act and FHFA’s 

examination process? 

d. Counter-Cyclical Changes in 

Enterprise Mortgage Portfolio Holdings. 

FHFA could establish criteria that 

limit the rate of growth of each 

Enterprise’s mortgage assets once the 

Enterprise complied with criteria 

related to the size of those holdings. The 

growth limit could be tied to the average 

growth rate of the mortgage market over 

a long period, which would allow each 

Enterprise’s portfolio holdings to grow 

more slowly (or rapidly) than the overall 

market during periods in which the 

market was expanding more rapidly (or 

slowly) than on average. That type of 

growth limit would require the 

Enterprises to vary the rate of growth of 

their mortgage portfolio holdings in a 

counter-cyclical manner. One way of 

achieving this could be to require that 

growth in each Enterprise’s portfolio 

holdings be limited to the preceding 10- 

year rolling annual average growth rate 

of RMDO (Chart 3). 

Question 19: Should FHFA create 

incentives for the Enterprises to behave 

in a counter-cyclical manner through 

criteria governing their portfolio 

holdings of mortgage and non-mortgage 

assets, regulatory capital requirements, 

or both? If so, how? What are the 

implications of specifying such criteria 

for the Enterprises’ mission? 

3. Questions Requesting Public 

Comment Regarding Standards 

Governing Enterprise Holdings of NonMortgage Assets 

i. Benefits and Risks of Enterprises 

Holdings of Non-Mortgage Assets. 

The Enterprises need to maintain 

adequate levels of liquidity so that they 

can carry out their day-to-day operating 

activities. Maintaining adequate levels 

of liquidity can help strengthen the 

Enterprises’ ability to meet their 

statutory mission of providing stability 

and liquidity to the secondary mortgage 

market, during good times and during 

periods of market stress, without 

incurring extraordinary financing costs. 

The risk of not maintaining a portfolio 

of highly liquid non-mortgage assets 

was illustrated in the recent market 

disruption. The quick reversal in market 

conditions illustrates how fast liquidity 

can disappear and how a prolonged 

period of market illiquidity can affect 

firms such as the Enterprises and their 

counterparties. Indeed, during that 

period, spreads between the yields of 

Enterprise debt and U.S. Treasury 

securities reached all time highs. In 

addition, the Enterprises’ large holdings 

of mortgage assets were not useful 

sources of cash as the MBS repurchase 

agreement market shriveled, and sales of 

MBS would have only exacerbated 

problems in the market. 

There is an opportunity cost 

associated with holding a sizable 

volume of generally low-yielding assets 


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in an effort to ensure adequate liquidity 

in a financial crisis. However, up to a 

point that cost is offset by the potential 

benefit of the Enterprises being prepared 

to maintain funding for their long-term 

assets and to respond in an appropriate 

and meaningful way to a market 

disruption. 

Question 20: What risks and costs are 

associated with requiring the 

Enterprises to maintain a portfolio of 

liquid, non-mortgage assets? 

Question 21: Is it appropriate to 

require the Enterprises to hold a large 

portfolio of highly liquid assets even 

during periods of market tranquility? If 

so, why? Should the Enterprises be 

compensated for holding ‘‘excess’’ 

levels of non-mortgage assets during 

periods of market tranquility? If so, 

what are appropriate incentives? 

ii. Standards Governing Enterprise 

Non-Mortgage Assets. 

The rationale for establishing 

standards governing the size and 

composition of the Enterprises’ nonmortgage assets is to ensure that they 

maintain sufficient liquidity to meet 

their obligations and engage in new 

business during market distress and to 

ensure that the Enterprises do not hold 

amounts of those assets beyond those 

needed to achieve their mission. That 

can be best achieved by requiring that 

the Enterprises maintain portfolios of 

marketable, highly liquid non-mortgage 

assets at prescribed levels. Those assets 

would be easily converted into cash, 

without loss of value and disruption to 

financial markets. Indeed, during a 

market crisis such as that experienced 

in the recent past, a portfolio of highly 

liquid non-mortgage assets would better 

enable the Enterprises to perform their 

mission of providing liquidity and 

stability to the secondary mortgage 

market. 

a. Size of the Non-Mortgage Portfolios. 

FHFA could establish criteria 

governing the size of the Enterprises’ 

holding of non-mortgage assets. For 

example, the criteria could require that 

each Enterprise maintain a minimum 

balance of marketable, highly liquid 

non-mortgage assets equal to 30 days of 

expected net cash needs and totaling at 

least $30 billion at all times. 

Question 22: Should the Enterprises 

be required to maintain a specific 

minimum dollar amount of highly 

liquid non-mortgage assets at all times? 

If so, what is an appropriate dollar 

amount? Alternatively, should the level 

of non-mortgage assets be set at a 

percentage of an Enterprise’s total assets 

or a specified number of days of 

liquidity? If so, what is an appropriate 

percentage factor or number of days? 

Question 23: Should the Enterprises’ 

non-mortgage portfolios grow with the 

phases of the mortgage credit cycle or 

counter to that cycle? Should the 

Enterprises be given incentives for 

holding large volumes of liquid nonmortgage assets during periods of ample 

market liquidity? If so, how should such 

incentives be provided? For instance, 

after criteria governing holdings of nonmortgage assets are established, FHFA 

could reduce each Enterprise’s 

minimum capital requirement by, for 

example, 75 percent of the amount of 

non-mortgage assets held to comply 

with those criteria. 

b. Composition of the Non-Mortgage 

Portfolios. 

In establishing criteria governing the 

composition of the Enterprises’ nonmortgage portfolios, FHFA could require 

that U.S. Treasury securities with 

maturities of 30 days or less represent 

a specified percentage of each 

Enterprise’s total non-mortgage assets 

(for example, 50 percent). The balance 

of each Enterprise’s portfolio could 

include other marketable, liquid, highlyrated securities, with maturities of one 

year or less, such as the following— 

• Commercial paper (rated A1/P1); 

• Short-term Eurodollar time 

deposits; 

• Short-term money market accounts; 

and 

• Short-term municipal securities. 

Question 24: Should the criteria 

enumerate the specific types of 

investments the Enterprises should hold 

in the non-mortgage portfolios. If so, 

what type assets should be included? 

Should U.S. Treasury securities 

represent a specific share of the nonmortgage portfolios? If so, what is an 

appropriate percentage or dollar 

amount? 

Question 25: What is an appropriate 

maturity range for securities comprising 

the non-mortgage portfolios? How 

should holdings be distributed 

according to that range? 

4. Questions Requesting Public 

Comment Regarding Temporary 

Adjustment of Criteria Governing 

Portfolio Holdings 

The Act authorizes the Director to 

order temporary adjustments to the 

established criteria governing the 

portfolio holdings of an Enterprise or 

both Enterprises, including during times 

of economic distress or market 

dislocation. 12 U.S.C. 4624(b). 

Question 26: Should FHFA attempt 

to specify in advance how it might 

adjust criteria governing Enterprise 

mortgage or non-mortgage portfolio 

holdings in specific circumstances? 

List of Subjects 

12 CFR Part 1252 

Government-sponsored enterprises, 

Portfolio holdings, Mortgages. 

Authority and Issuance 

■ Accordingly, for the reasons stated in 

the preamble, under the authority of 12 

U.S.C. 4624, the Federal Housing 

Finance Agency hereby amends Title 

12, Chapter XII, Code of Federal 

Regulations as follows: 

CHAPTER XII—FEDERAL HOUSING 

FINANCE AGENCY 

Subchapter C—Enterprises 

■ 1. Add Subchapter C consisting of 

part 1252 to read as follows: 

PART 1252—PORTFOLIO HOLDINGS 

Sec. 

1252.1 Enterprise portfolio holdings 

criteria. 

1252.2 Effective duration. 

Authority: 12 U.S.C. 4624. 

§ 1252.1 Enterprise portfolio holding 

criteria. 

The Enterprises are required to 

comply with the portfolio holdings 

criteria set forth in their respective 

Senior Preferred Stock Purchase 

Agreements with the Department of the 

Treasury, as they may be amended from 

time to time. 

§ 1252.2 Effective duration. 

This part shall be in effect for each 

Enterprise so long as— 

(a) This part has not been superseded 

through amendment, and 

(b) The Enterprise remains subject to 

the terms and obligations of the 

respective Senior Preferred Stock 

Purchase Agreement. 

Dated: January 16, 2009. 

James B. Lockhart III, 

Director, Federal Housing Finance Agency. 

[FR Doc. E9–2047 Filed 1–29–09; 8:45 am] 

BILLING CODE 8070–01–P 

NATIONAL LABOR RELATIONS 

BOARD 

29 CFR Part 102 

Revisions of Regulations Concerning 

Procedures for Electronic Filing 

AGENCY: National Labor Relations 

Board. 

ACTION: Final rule. 

SUMMARY: The Board is amending 

regulations concerning the procedures 

for filing documents with the Agency 


erowe on PROD1PC63 with RULES