(amended 3/18/02 to include Federal Register text)
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), announced that an amendment to OFHEO’s risk-based capital rule has been finalized and will be sent to the Federal Register today. The amendment will be published in the Federal Register in early March.
The risk-based capital rule became effective when it was published in the Federal Register September 13, 2001. The rule and the amendment to the rule will be enforceable later this year, beginning September 13, 2002, as mandated by Congress in OFHEO’s authorizing statute which called for a one-year implementation period for the Enterprises.
The proposed amendment was published in the Federal Register December 18, 2001.
The amendment to the risk-based capital rule has remained essentially the same as the original proposal.
Highlights of the final amendment to the risk-based capital rule include:
Modification to Counterparty Haircuts
The amendment modifies the calculation of counterparty haircuts—reductions made in risk calculations to cash flows from a security or agreement—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 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 amendment reduces the differential in haircuts between AAA- and AA-rated counterparties to more closely reflect historical experience.
Multifamily Loans
The amendment makes 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 changes reflect more accurately the differential risks between fixed rate and adjustable rate mortgages as well as the costs and recoveries associated with foreclosures. The amendment on prepayment speeds more accurately reflects prepayment penalties.
Funding
The amendment refines 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 amendment also adds 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 amendment 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.
Stefanie Johnson (202) 649-3030