(revised 12/18 to include actual language as printed in Federal Register)
Washington, D.C. – Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator of Fannie Mae and Freddie Mac (the Enterprises), today announced proposed improvements to OFHEO's final risk-based capital rule published September 13, 2001 in the Federal Register.
"These modifications will improve upon the ability of the rule to closely tie capital to risk. A dynamic, state-of-the-art rule such as this will necessarily undergo periodic revision to reflect changing risk profiles and better information about the nature of risks," said Falcon. "We continuously research and analyze risk characteristics of the Enterprises. That ongoing work has now resulted in the identification of several areas where we can improve upon treatments currently in the rule. I assured Congress in September that we would move expeditiously to implement such improvements."
Interested parties will have 30 days to comment from the date of publication in the Federal Register. Comments will be published on the OFHEO web site at www.ofheo.gov. The proposed rule was submitted to the Office of Management and Budget (OMB) Friday, Nov. 16 and cleared today, Tuesday, Dec. 11. OFHEO sent the proposed regulation to the Federal Register today (attached).
The proposed rule includes the following improvements:
Modification to Counterparty Haircuts
The proposed rule would modify the calculation of counterparty haircuts to take loss severities into account explicitly and would extend the phase-in period for investment grade counterparties from five years to 10 years. These changes would tie haircuts more closely to the historical experience of bond issuers during stressful periods and phase them in evenly during the 10-year stress period.
The proposed rule would reduce the differential in haircuts between AAA- and AA-rated counterparties to more closely reflect historical experience.
Multifamily Loans
The proposal would make a number of changes to the multifamily default model, loss severity parameters, and prepayment speeds that refine the measurement of risk in multifamily loans. The proposed changes would reflect more accurately the differential risks between fixed rate and adjustable rate mortgages as well as the costs and recoveries associated with foreclosures. The proposal on prepayment speeds would more accurately reflect prepayment penalties.
Funding
The proposed rule would refine funding rules to provide a more realistic picture of funding costs in a stressful period by altering the target mix of long- and short-term debt to be maintained during the stress period from 50/50 to the Enterprise's actual mix of long- and short-term debt at the start of the stress period. The proposal would also add a 10-basis point premium to the cost of an Enterprise's newly issued debt during the last nine years of the stress period, reflecting the impact of the stress on an Enterprise's cost of funds.
Technical and Clarifying Changes
The proposal makes a number of other technical and clarifying changes that refine the measurement of risk in complex instruments, such as derivative contracts, foreign currency swaps, and instruments with call options, and eliminates double counting and distortion in calculations.
In light of the proposed changes, OFHEO will now be using the First Quarter 2002 numbers to calculate how the Enterprises will fare under the risk-based capital rule. OFHEO will publish this information in June 2002.
Stefanie Johnson (202) 649-3030