FHFA Amends ERCF and Proposes New Servicer Financial Requirements
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) made a pair of announcements last week, including a final amended rule to the Enterprise Regulatory Capital Framework (ERCF) and new proposed financial eligibility requirements for enterprise servicers and sellers.
The final rule published last week amends the ERCF rule published in the final days of the Trump Administration in December 2020. The amended rule refines the prescribed leverage buffer amount and risk-based capital treatment of retained credit risk transfer (CRT) exposures for Fannie Mae and Freddie Mac.
Specifically, the final rule:
Replaces the fixed leverage buffer equal to 1.5 percent of an enterprise's adjusted total assets with a dynamic leverage buffer equal to 50 percent of the enterprise's stability capital buffer. FHFA stated that a leverage framework that serves as the binding capital constraint in most economic scenarios could lead to undesirable outcomes at the enterprises, including promoting risk-taking and creating disincentives for CRT and other forms of risk transfer.
Replaces the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent. The agency said the change addresses concerns that the current floor unduly decreases the capital relief afforded to CRT and reduces the enterprises’ incentives to engage in CRT.
Removes the requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures.
Implements technical corrections to the December 2020 ERCF.
FHFA said with the final rule, the enterprises together would be required to hold approximately $319 billion in adjusted total capital, of which at least $270 billion would need to be tier 1 capital and $234 billion would need to be common equity tier 1 capital (CET1). This is based on their financial condition as of September 30, 2021.
“For both enterprises, estimated tier 1 risk-based capital requirements plus buffers would exceed estimated leverage capital requirements plus buffers as of this date, providing the enterprises with incentives to manage their capital and potentially reduce risk to taxpayers using CRT,” the agency said in a fact sheet about the new rule.
Also last week, FHFA proposed new minimum financial eligibility requirements for Fannie and Freddie sellers and servicers. The proposed requirements would replace ones put in place in 2015.
Most of the amended requirements are aimed at non-depository sellers and servicers. The changes include:
Modifying the definition of tangible net worth on all servicers/sellers by subtracting deferred tax assets.
Raising the minimum capital ratio on all non-depository seller/servicers from 6 percent to 9 percent.
Establishing an incremental liquidity requirement for non-depository mortgage originators that use the to-be-announced (TBA) market to hedge interest rate risk.
Requiring all large non-depositories to submit annual capital and liquidity plans as well as third-party assessments of their performance and creditworthiness.
The agency said the re-proposed financial requirements differentiate between the servicing of Ginnie Mae mortgages and the servicing of enterprise mortgages. Additionally, FHFA has incorporated feedback from the agency's 2020 proposal, as well as lessons learned from market events in reaction to the global COVID-19 pandemic. The proposal also reflects coordination with other federal agencies.
Interested parties can submit input on the new proposed requirements at ServicerEligibility@fhfa.gov. The agency anticipates finalizing them in the second quarter of 2022.
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.
