On July 17, 2018, FHFA published a proposed regulation on capital requirements for Fannie Mae and Freddie Mac (the Enterprises). FHFA is seeking comments on all aspects of the proposed rule.
The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement for the Enterprises.
When FHFA released the proposed rule on June 12, 2018, FHFA Director Mel Watt said, “We think it is important for FHFA, as prudential regulator for Fannie Mae and Freddie Mac, to articulate our views on capital requirements and to start a healthy discussion about the amount of capital the Enterprises should have to appropriately shield taxpayers from assistance."
The Enterprises have operated under suspended regulatory capital requirements since being placed into conservatorships by FHFA in September 2008. Although the capital requirements in the rule would also be suspended while the Enterprises remain in conservatorship, FHFA believes the proposed rule achieves several objectives outlined below:
- The proposed rule transparently communicates FHFA's views as a financial regulator about capital adequacy as Congress and the Administration work to determine the future of housing finance reform;
- It updates the existing capital rule by drawing on regulatory developments implemented in response to the recent financial crisis;
- It allows market participants to comment on the proposed capital requirements for the Enterprises; and,
- Comments will help inform FHFA's views as conservator about refinements that may be appropriate to the Conservatorship Capital Framework (CCF), which is discussed in more detail below.
The proposed rule builds on FHFA's work with the Enterprises to develop the CCF. Despite the Enterprises' limited ability to hold capital under the Senior Preferred Stock Purchase Agreements, FHFA developed this aligned risk management framework to better inform each Enterprise's business decisions while in conservatorship and to guard against the Enterprises making competitive decisions that could adversely impact safety and soundness. The CCF, which is currently in use by both Enterprises, includes aligned capital guidelines that incorporate capital relief for charter-required, loan-level credit enhancements like mortgage insurance, and capital relief for credit risk transfer (CRT) transactions. FHFA will continue to apply the CCF to the Enterprises during conservatorship.
FHFA is requesting comments on all aspects of the proposed rule. In addition to requesting comment on all aspects of the proposed rule, FHFA has also raised a number of specific questions in the preamble discussion of the proposed rule. The topics of the questions include:
- The pro-cyclicality of risk-based capital requirements when using current, or updated risk characteristics, such as mark-to-market loan-to-value ratios;
- The role of a leverage ratio requirement as a backstop to the risk-based capital requirements, and the pros and cons of a leverage ratio that periodically exceeds risk-based capital requirements;
- The proposed rule's treatment of charter-required credit enhancements and CRTs, and the capital relief provided to the Enterprises for these transfers of credit risk for both single-family and multifamily loans; and
- Alternative approaches to calculating market risk, including using the global market shock component of the Dodd-Frank Act Stress Tests.
FHFA would appreciate comments on these topics, or any topic or question covered by the proposed rule, and encourages comments that are supplemented with quantitative analyses.
In order to provide the public with more time to evaluate the proposed rule, FHFA announced on July 31, 2018 that it was extending the comment period by an additional 60 days to November 16, 2018, giving stakeholders a total of 120 days to review and comment on the proposed rule.
For more information, see the following Fact Sheet on FHFA's Proposed Rule on Enterprise Capital Requirements, or listen to this webinar held by FHFA June 19, 2018, which explains the proposed rule and includes questions and answers.
FHFA invites interested parties to submit comments via FHFA.gov, following instructions provided in the Federal Register notice, on the proposed rule by November 16, 2018.
Tagged: Rulemaking; Rules; FHFA; capital requirements; risk; credit enhancements; Credit Risk Transfer; Dodd-Frank Act Stress Tests; Conservatorship; safety and soundness
By: Naa Awaa Tagoe
Senior Associate Director
Division of Housing Mission and Goals
Office of Financial Analysis, Modeling and Simulations