FHFA Targets 2021 for GSE Public Offerings
Written By: Joel Palmer, Op-Ed Writer
Public offerings for Fannie Mae and Freddie Mac are likely to occur in 2021, once the Federal Housing Finance Agency’s (FHFA) capital rule is in place.
This is the timetable provided by FHFA Director Mark A. Calabria at the Credit Union National Association (CUNA) Government Affairs Conference.
Calabria spoke at the conference on the topic of strengthening the housing finance system.
“It all starts with capital, the foundation of financial safety and soundness,” said Calabria during his remarks. “Fannie and Freddie own or guarantee a combined $5.5 trillion in single and multifamily mortgages. That is nearly half of America's residential mortgage market. But when I walked in the door at FHFA, they were limited to just $6 billion in allowable capital reserves. This put their combined leverage ratio at nearly 1,000 to one. The danger this poses to taxpayers and our entire housing system cannot be overstated.”
Last September, Treasury and FHFA agreed to allow Fannie and Freddie to retain more of their excess earnings. Fannie Mae can retain up to $25 billion in capital, while Freddie Mac is permitted to maintain capital reserves of $20 billion.
At the end of 2019, Fannie’s net worth was $14.6 billion, while Freddie’s reached just over $9 billion.
Calabria noted that while this is a major improvement in capital, the combined leverage ratio still stands at 240 to one.
“This is far less capital than Fannie and Freddie need to survive even a modest downturn,” Calabria said. “But we are moving in the right direction. And we will continue building on this foundation this year.”
In November 2019, FHFA announced it would re-propose the entire regulation on capital requirements sometime this year. Calabria reiterated that timeline during his speech to CUNA.
The new capital rule will replace one proposed in 2018, which was proposed by Calabria’s predecessor and before FHFA began the process of allowing Fannie and Freddie to retain capital.
“FHFA's capital rule will be a critical mile marker in our effort,” said Calabria. “It must be in place before Fannie and Freddie can go to the market to raise capital.”
Though he cited 2021 as the target date for public offerings, he said the move will be dependent on completing the capital process, not by the date on the calendar.
In addition to building capital, Calabria said FHFA is reducing the risk profiles of Fannie and Freddie by reducing the number of loans that contain multiple risk factors without reducing the availability of mortgage credit.
“Historically, the proportion of layered-risk loans purchased by Fannie and Freddie has been in the single digits. But as we saw in the last crisis, without adequate capital, even this ‘tail risk’ can imperil our housing finance system,” said Calabria.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
