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Regulators Will Oversee Subordinated Debt Deals.
Washington -- The next time Fannie Mae and Freddie Mac issue subordinated debt, it will be with the approval of their federal supervisor - the Office of Federal Housing Enterprise Oversight.
In 2000, the two government-sponsored enterprises made "voluntary" commitments to Congress to issue subordinated debt in an effort to increase market discipline and fend off GSE reform legislation.
They issued $18 billion in subordinated debt before running into accounting problems and suspended issuance.
Now they have entered in regulatory agreements with OFHEO that renew their commitments to issue subordinated debt. But this time around, the regulator will review their issuance plans before any offerings are made to investors.
"These agreements represent an evolution of voluntary actions to a set of enforceable commitments that will be overseen by OFHEO and will operate within a predictable supervisory framework," said OFHEO acting director Stephen Blumenthal.
Under the agreements, the two GSEs pledge to "take reasonable steps to maintain outstanding subordinated debt of sufficient size to promote liquidity and reliable market quotes."
The agreements also call for Fannie and Freddie to maintain a 4% capital ratio consisting of core capital (plus general allowance for losses) and subordinated debt.
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