FHFA Proposes Rules to Require Annual Enterprise Capital Plans
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has issued a proposed rule that would require Fannie Mae and Freddie Mac to develop, maintain, and submit annual capital plans to FHFA.
The proposed rule would mandate the following inclusions in the enterprises' capital plans:
An assessment of the expected sources and uses of capital over the planning horizon.
Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the enterprise's internal scenarios, as well as under FHFA's scenarios.
A description of all planned capital actions over the planning horizon.
A discussion of how the enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market:
A discussion of any expected changes to the enterprise's business plan that are likely to have a material impact on the enterprise's capital adequacy or liquidity.
The enterprise’s capital policy, which are written principles and guidelines used for capital planning, capital issuance, capital usage and distributions.
Results of required stress tests, and an explanation of how the capital plan takes these results into account.
FHFA said the proposed rule is designed to ensure the enterprises properly assess their risks and maintain the appropriate level of capital.
"Today's action is part of FHFA's commitment to safety and soundness and protecting the housing finance system throughout the economic cycle," said Acting Director Sandra Thompson. "The proposed rule will help ensure that the Enterprises have robust systems and processes in place to monitor and maintain proper levels of capital. Adhering to a framework similar to other regulatory capital planning frameworks will better position the Enterprises, and the mortgage market, to withstand stressful economic environments.”
The rule document states that the enterprises should have robust systems and processes in place that incorporate forward-looking projections of revenue and losses to monitor and maintain their internal capital adequacy.
“In FHFA’s opinion, the enterprises generally should operate with capital positions well above the minimum regulatory capital ratios, with the amount of capital held commensurate with each enterprise’s risk profile. The Enterprises should have internal processes for assessing their capital adequacy that reflect a full understanding of their risks and ensure that they hold capital corresponding to those risks to maintain overall capital adequacy.”
The proposal incorporates the stress capital buffer from the regulatory capital framework that was finalized in November 2020 under FHFA’s previous leadership and amended in September 2021.
The buffer is determined by FHFA, and the calculation is based on the results of a supervisory stress test, subject to a floor of 0.75 percent of the enterprise’s adjusted total assets as of the last day of the previous calendar quarter.
The proposal has changed the calculation method slightly by considering an enterprise’s planned common stock dividends for the fourth through seventh quarters of the planning horizon rather than the ERCF direction to use each of the nine quarters of the planning horizon. This change is consistent with the Board’s recent amendments to the banking rule, which uses four quarters of planned common stock dividends.
FHFA invites comments on all aspects of the proposed rule. Comments can be submitted at the agency’s website and by email at RegComments@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.
