FHFA Releases Updated Capital Rule for GSEs
Written By: Joel Palmer, Op-Ed Writer
Despite a global pandemic that has shut down much of the country’s economy, the process of removing the two government sponsored enterprises (GSEs) took a step forward last week.
The Federal Housing Finance Agency (FHFA) last week released a re-proposal for a new regulatory capital framework for Fannie Mae and Freddie Mac.
FHFA said this latest proposal is an enhancement of the proposed rulemaking published in July 2018.
“The 2018 proposal remains the foundation of the re-proposal,” the agency said in a statement. “The enhancements in the new proposal preserve the mortgage risk-sensitive framework of the 2018 proposal, while increasing the quantity and quality of the Enterprises' regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements.”
In addition to the reasons above, FHFA said it is re-proposing the capital framework because there is a more concerted effort to end GSE conservatorship.
At the time of the 2018 framework, FHFA had stated it was not taking a position on housing finance reform. The 2018 proposal was not connected to efforts or plans to recapitalize the enterprises or release them from conservatorship.
But in September 2019, the Treasury Department released its long-awaited plan to reform the housing finance system. A month later, the Treasury Department and FHFA increased the amount of capital reserves the GSEs were able to retain.
According to FHFA, these are the main enhancements of the new proposal:
It strengthens the quality of regulatory capital by including a set of supplemental capital requirements based on the U.S. banking framework’s definitions of capital.
It would ensure that the levels of risk-based capital for single-family and multifamily mortgage exposures are subject to a 15 percent risk weight floor.
It includes additional refinements that ensure post-CRT capital requirements are prudent and reflect the credit risk of the exposures retained.
It would determine operational risk capital using the U.S. banking framework’s advanced measurement approach, subject to a floor equal to 0.15 percent of the enterprise’s adjusted total assets.
It would establish a minimum leverage requirement of 2.5 percent of an enterprise’s adjusted total assets, with an additional leverage buffer amount of 1.5 percent of adjusted total assets, intended to serve as a risk-insensitive credible backstop to risk-based measures that are subject to significant model and other risks.
Its risk-based and leverage capital buffer amounts can be drawn down in a period of financial stress and then rebuilt over time as economic conditions improve.
It includes a new, countercyclical adjustment to mark-to-market loan-to-value ratio (MTMLTV) that the agency says will provide significantly more stability and predictability in enterprise capital requirements through the economic cycle, while promoting safety and soundness
"This national health crisis has affirmed the importance of the Enterprises' mission to serve the American housing market during good times and bad. When credit dries up, low- and moderate-income households are hurt most. We must chart a course for the enterprises toward a sound capital footing so they can help all Americans in times of stress," said FHFA Director Mark Calabria. "More capital means a stronger foundation on which to weather crises. The time to act is now."
In addition to the new proposal, both Fannie and Freddie issued requests for proposals (RFPs) to hire underwriting financial advisors to assist in developing and implementing recapitalization plans and ending their conservatorships.
FHFA invites interested parties to submit comments on the notice of proposed rulemaking within 60 days of its publication in the Federal Register via FHFA.gov
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.
