FHFA Proposes Capital Framework Changes and Suspends PSPA Provisions
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has proposed amending the Enterprise Regulatory Capital Framework (ERCF) for Fannie Mae and Freddie Mac.
The proposed amendments, released last week, would refine the prescribed leverage buffer amount (PLBA) and the capital treatment of credit risk transfers (CRT).
The latest proposals would amend the current ERCF that was published as a final rule in December 2020, which was a re-proposal of the regulatory capital framework proposed in 2018.
The proposed rule would:
Replace the fixed PLBA equal to 1.5 percent of an enterprise's adjusted total assets with a dynamic PLBA equal to 50 percent of the enterprise's stability capital buffer.
Replace the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure.
Remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCF's securitization framework.
FHFA said the new rule is intended to “facilitate an environment where leverage is not the binding capital constraint for the enterprises and where the enterprises have incentives to distribute acquired credit risk to private investors through CRT rather than to buy and hold that risk.”
FHFA’s leadership laid out a number of reasons it wants to encourage Fannie and Freddie to engage in CRT. Most notable was how CRT was effective in distributing credit risk following the onset of the COVID-19 pandemic.
As the agency pointed out, CRT markets experienced a liquidity shock in the immediate onset of the pandemic. Fannie and Freddie halted CRT issuances in response. But as housing markets rebounded in the second half of 2020, Freddie Mac resumed securities and reinsurance CRT issuance at an accelerated pace.
Due in part to the observed resiliency of the CRT market, FHFA said that CRT could facilitate regulatory capital planning in furtherance of the safety and soundness of the enterprises and that CRT programs can help facilitate the continued acquisition of higher risk loans throughout the economic cycle due to capital relief afforded to risk transfer.
“The amendments proposed today will allow the enterprises to support the housing market throughout the economic cycle in a safe and sound manner," said FHFA Acting Director Sandra L. Thompson. “The proposed requirements provide the Enterprises with the necessary incentives to support sustainable lending initiatives by transferring a significant amount of credit risk away from the taxpayers to private investors that are better positioned to take this risk.”
FHFA will accept comments on the proposed rules for 60 days. You can submit comments online at www.fhfa.gov/open-for-comment-or-input, or via email at RegComments@fhfa.gov.
In a separate action last week, FHFA and the Treasury Department suspended certain provisions that were added to the Preferred Stock Purchase Agreements (PSPAs) with Fannie Mae and Freddie Mac (the Enterprises) in January.
The suspended provisions include limits on the enterprises' cash windows (loans acquired for cash consideration), multifamily lending, loans with higher risk characteristics, and second homes and investment properties.
“This suspension will provide FHFA time to review the extent to which these requirements are redundant or inconsistent with existing FHFA standards, policies, and directives that mandate sustainable lending standards," said Thompson.
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.
