Responses that have arrived in time to meet an extended deadline for comments related to a proposed SEC rule on conflicts of interest show at least one influential industry commentator is concerned that it could interfere with routine secondary mortgage market functioning unless adjusted.
At least 20 commentators have responded in time to meet the Feb. 13 deadline, including Stephen H. McElhennon, Fannie Mae vice president and deputy general counsel. He said in a comment letter submitted after the original December deadline for responses was extended that he is concerned the proposal “may call into question many legitimate transactions entered into in good faith in the secondary market for residential mortgages.”
For example, McElhennon notes that he is concerned that “the normal process by which Fannie Mae issues REMIC securities” could fall within the definition of one of the proposed tests for determining a “material conflict of interest” if the rule is not changed.
“Investment bankers aggregate Fannie Mae MBS or mortgage loans and deliver them to Fannie Mae in a swap transaction for Fannie Mae REMIC Securities, for which transaction Fannie Mae charges a fee. The investment bankers will determine the structure, or ‘waterfall,' by which principal and interest will be distributed to investors. Fannie Mae reverse-engineers the waterfall and then incorporates it into the related REMIC trust and securities offering documents,” he explained.
“We are concerned that…the proposed rule will require Fannie Mae to monitor the waterfall requested by the investment banker to determine if it might create a conflict of interest between the investment banker and the investor,” said McElhennon. “This duty will be impossible for Fannie Mae to meet and may ultimately result in fewer REMICs being issued, thus diminishing our ability to provide liquidity in the secondary market for residential mortgage loans.
“Therefore, Fannie Mae believes that the Commission should revise this material conflict of interest test to exclude third-party issuers who did not actually develop the related REMIC waterfall from [a test for material conflict of interest] under the proposed rule,” he said.
