Freddie Mac And Fannie Mae Announce Enhancements To Risk Management, Capital And Disclosure Practices And Standards
October 19, 2000
Washington, DC and McLean, VA ? Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) today announced that they are voluntarily adopting a series of measures that will put them at the vanguard of evolving global capital, risk management and disclosure practices. The two companies will augment their capital bases and also will expand their periodic public disclosures to achieve an unprecedented level, timeliness and quality of financial information available to the public. Taken together, these steps are intended to ensure that Freddie Mac and Fannie Mae remain among the world's best-managed financial institutions.
Commenting on the announcement, Freddie Mac Chairman and CEO Leland C. Brendsel said: "It is essential that Congress, regulators and the public have confidence that Freddie Mac meets our vital mission while maintaining world-class capital and risk management standards. We developed these commitments to ensure Freddie Mac remains in the vanguard of financial risk management and to put to rest any questions regarding our future safety and soundness. Freddie Mac is committed to serving millions of America's families for generations to come."
"Financial regulators are looking for enhanced capital, more transparency and more market discipline for all financial institutions. Fannie Mae and Freddie Mac are two of the largest and best-run financial institutions in the world. Because of our size, and the importance of the role we play in the U.S. housing system, it is crucial that our activities pose no risks to the financial system," said Franklin D. Raines, Chairman and CEO of Fannie Mae. "To this end, we have been working diligently for the past several months to develop these voluntary commitments. Taken together, these steps will reassure policy-makers and the financial markets about our safety and soundness, and will serve as a model for other large financial institutions to follow."
The companies have voluntarily committed to:
- Issue publicly traded, externally rated subordinated debt on a semi-annual basis such that the sum of core capital and outstanding subordinated debt for each company will equal or exceed 4 percent of on-balance-sheet assets following a three-year phase-in period. This will promote market discipline and provide a supplement to capital that will further strengthen the companies' financial position.
- Maintain more than three months' worth of liquidity assuming no access to debt markets, to reduce the possibility that the companies' operations could be disrupted during a significant financial crisis. This measure is consistent with the principles of sound liquidity management set forth by the Basel Committee on Banking Supervision.
- Implement an interim risk-based capital stress test, using parameters contained in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, until permanent risk-based capital regulations are finalized by the Office of Federal Housing Enterprise Oversight (OFHEO), Freddie Mac's and Fannie Mae's safety and soundness regulator. The parameters and outcome of the stress test will be publicly disclosed on a quarterly basis.
- Publicly disclose results of interest rate risk sensitivity analyses, conducted on a monthly basis, to provide the public with greater information on a more frequent basis - a commitment to frequency of disclosure that no other financial institution has made.
- Publicly disclose result of credit risk sensitivity analyses, conducted on a quarterly basis, to provide the public better information on credit risk on a basis that exceeds recommended best practices - a commitment to forward-looking credit risk disclosure that no other financial institution has made.
- Obtain and publicly disclose a rating from a nationally recognized statistical rating organization, to provide an independent signal to the public and Congress regarding each company's financial condition.
Each component will be self-executing through implementation and disclosure. Congress, the public and investors will be able to independently evaluate Fannie Mae's and Freddie Mac's performance against the commitments. These components also will be subject to continuous supervisory examination by OFHEO, under its existing examination program.
More details on the enhancements announced by Freddie Mac and Fannie Mae are attached.
Freddie Mac is a stockholder-owned corporation established by Congress in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. Over the years, Freddie Mac has opened doors for one in six homebuyers and more than two million renters across America.
Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Over the past 31 years, Fannie Mae has provided nearly $2.9 trillion of mortgage financing for over 35 million families. More information about Fannie Mae can be found on the Internet at www.fanniemae.com.
Summary of Committments (MSWord)
Source: Freddie Mac