The Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation and Office of Thrift Supervision (the “Agencies”) have issued a joint notice of proposed rulemaking that would reduce the risk-weighting of certain obligations of Fannie Mae and Freddie Mac to 10%. The Agencies issued the proposal in view of the U.S. Treasury Department’s actions to support Fannie Mae and Freddie Mac in conjunction with the conservatorship of the two Government Sponsored Enterprises (“GSEs”) announced on September 7, 2008.

The Agencies view the credit facility and the senior preferred stock purchase agreement (“Treasury Agreement”) established by Treasury (which ensures that Fannie Mae and Freddie Mac maintain a positive net worth) as providing additional support to holders of debt and mortgaged-backed securities issued or guaranteed by Fannie Mae and Freddie Mac. In particular, the Agencies indicated that the Treasury Agreement enhances market stability by providing additional security to debt holders – senior and subordinated – and improves mortgage affordability by providing additional confidence to investors in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. As a result, the Agencies are proposing to amend their respective risk-based capital regulations to reduce the risk-weighting from 20% to 10% for certain claims on, or guaranteed by, Fannie Mae and Freddie Mac. Such claims include all credit exposures, such as senior and subordinated debt and counter party credit risk exposures, but do not include preferred or common stock. The reduced risk-weighting would apply for as long as the Treasury Agreement is in effect.

The proposed rulemaking will be subject to a comment period for thirty (30) days after publication in the Federal Register. In particular, the Agencies have requested comment on the potential effects of their proposal on other banking organization claims on GSEs such as Federal Home Loan Bank debt.