On July 30, 2008, President George W. Bush signed Public Law 110-289, the Housing and Economic Recovery Act of 2008 (HERA), which established FHFA, giving the Agency authority to place its regulated entities into conservatorship or receivership. On September 6, 2008, in order to restore the balance between safety and soundness and mission, FHFA placed Fannie Mae and Freddie Mac (the Enterprises) into conservatorships. That is a statutory process designed to stabilize a troubled institution with the objective of returning them to normal business operations. FHFA will act as the conservator of each Enterprise until they are stabilized.
Disclosure of Capital Positions During Conservatorship
The Director has determined that it is prudent and in the best interests of the market to suspend capital classifications of the Enterprises during the conservatorships, in light of the Senior Preferred Stock Purchase Agreements with the U.S. Department of the Treasury. FHFA will continue to closely monitor capital levels, but the existing statutory and regulatory capital requirements will not be binding during the conservatorships and FHFA will not issue quarterly capital classifications. The Enterprises will continue to submit capital reports to FHFA during the conservatorships. Relevant capital figures will be available in the Enterprises' quarterly 10-Q filings.
Enterprise Regulatory Capital Framework (ERCF)
HERA also gave the Agency authority to establish risk-based capital standards and the authority to establish regulatory leverage requirements that exceed the statutory minimum leverage requirements. FHFA has adopted the ERCF as a going-concern regulatory capital framework intended to ensure that the Enterprises operate in a safe and sound manner and are positioned to fulfill their statutory mission to provide stability and liquidity to the secondary mortgage market across the economic cycle, particularly during periods of financial stress. Like the U.S. Banking Framework, the ERCF includes risk-based and leverage capital requirements, capital buffers, and definitions for available capital. The ERCF also makes conforming amendments to definitions in FHFA’s regulations governing assessments and minimum capital and removes the Office of Federal Housing Enterprise Oversight’s (OFHEO) regulation on capital for the Enterprises. The ERCF was adopted in a final rule in December 2020 after notice and comment rulemaking and has since been amended several times.
Key features of the ERCF include:
- Supplemental capital requirements based on the Basel framework’s definitions of common equity tier 1 (CET1), tier 1, and adjusted total capital;
- Granular credit risk capital requirements based on the risk characteristics of single-family and multifamily mortgage loans;
- 20% risk-weight floor on single‐family and multifamily mortgage exposures;
- Countercyclical adjustment on loan‐to‐value (LTV) ratios for single‐family mortgage exposures to address cyclicality in house prices;
- Credit risk, market risk, and operational risk capital requirements;
- A set of capital buffers comprised of the stress capital buffer, stability capital buffer, and countercyclical capital buffer; and
- Leverage capital requirements and leverage buffer.
The transition to the ERCF’s requirements has important implications for the Enterprises’ capital accumulation process and their pricing and profitability. The ERCF is a granular, mortgage risk-sensitive framework, the adoption of which resulted in updated capital requirements across credit characteristics, as well as an increase in overall capital requirements stemming predominately from: 1) the risk-weight floor for mortgage exposures, 2) the single-family countercyclical adjustment, and 3) risk-insensitive capital buffers. Importantly, the ERCF includes reductions to risk-based capital requirements for most mortgage exposures included in credit risk transfer (CRT) transactions and for loans with LTV ratios above 80 percent with private mortgage insurance, where the private mortgage insurance provider meets the Enterprise mortgage insurer eligibility requirements.
Proposed Rule | Final Rule Press Release | Final Rule
Prescribed Leverage Buffer Amount and Credit Risk Transfer
FHFA amended the ERCF on March 16, 2022, by refining the prescribed leverage buffer amount (PLBA or leverage buffer) and CRT securitization framework for the Enterprises. The final rule also made technical corrections to various provisions of the ERCF.
The amendments help to ensure that the ERCF appropriately reflects the risks assumed by the Enterprises and contain proper incentives for the Enterprises to distribute acquired credit risk to private investors, rather than to buy and hold that risk. In doing so, the amendments help restore FHFA’s intended paradigm of having the Enterprises’ leverage capital requirements and leverage buffer provide a credible backstop to their risk-based capital requirements and buffers, enhancing the safety and soundness of the Enterprises.
Specifically, the amendments:
- Replaced 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;
- Replaced 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; and
- Removed the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT exposures.
Proposed Rule | Final Rule Press Release | Final Rule
Public Disclosures for the Standardized Approach
FHFA amended the ERCF on June 2, 2022, by introducing new public disclosure requirements for the Enterprises. The requirements include quarterly quantitative and annual qualitative disclosures related to risk management, corporate governance, capital structure, and capital requirements and buffers under the standardized approach.
The disclosure amendments are intended to improve market discipline and encourage sound risk-management practices at the Enterprises by ensuring that market participants have access to sufficient information to assess an Enterprise’s material risks and capital adequacy so they can make informed investment decisions. Public disclosures that are clear, comprehensive, useful, consistent over time, and comparable across Enterprises helps to facilitate such analyses and therefore contributes to the safety and soundness of the Enterprises. The capital disclosure documents are available on the Enterprises’ websites.
Proposed Rule | Final Rule Press Release | Final Rule
Capital Planning and Stress Capital Buffer Determination Proposed Rule
FHFA amended the ERCF on June 3, 2022, after notice and comment rulemaking, by requiring the Enterprises to submit annual capital plans to the Agency and provide prior notice for certain capital actions. The rule amendment also incorporates the determination of the stress capital buffer into the capital planning process. The capital planning requirements adopted by FHFA are consistent with the capital planning regulatory framework for large bank holding companies.
The capital planning requirements are meant to help ensure that the Enterprises have robust capital planning systems and processes in place to properly assess their risks, monitor capital adequacy, and identify the amount and type of capital they need to raise to meet the ERCF’s requirements. In doing so, the capital planning requirements contribute to the long-term stability of the regulatory framework for the Enterprises, including after they achieve adequate capitalization under the ERCF.
Specifically, the capital planning final rule mandates that the Enterprises' capital plans include:
- An assessment of the expected sources and uses of capital over the planning horizon;
- Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the Enterprise's internal scenarios, as well as under FHFA's scenarios;
- A description of all planned capital actions over the planning horizon;
- A discussion of how the Enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market; and
- A discussion of any expected changes to the Enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity.
Proposed Rule | Final Rule Press Release | Final Rule
Commingled Securities, Multifamily Government Subsidy, Derivatives, and Other Enhancements
FHFA amended the ERCF on November 30, 2023 to modify provisions related to guarantees on commingled securities, multifamily mortgage exposures secured by properties with a government subsidy, derivatives and cleared transactions, credit scores for single-family mortgage exposures, guarantee assets, mortgage servicing assets (MSAs), time-based calls for CRT exposures, interest-only (IO) mortgage-backed securities (MBS), single-family countercyclical adjustment, stability capital buffer, and compliance date for the advanced approaches.
Together, the various amendments implement some lessons learned through the continued application of the ERCF and better reflect the risks faced by the Enterprises in operating their businesses. Regulatory capital requirements that properly account for risk allow the Enterprises to build capital to enhance their safety and soundness and fulfill their statutory mission throughout the economic cycle.
Specifically, the amendments:
- Reduced the risk weight and credit conversion factor for guarantees on commingled securities to 5 percent and 50 percent, respectively;
- Introduced a risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies;
- Replaced the current exposure methodology (CEM) with the standardized approach for counterparty credit risk (SA-CCR) as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions (this change is effective January 1, 2026);
- Updated the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score;
- Introduced a risk weight of 20 percent for guarantee assets;
- Aligned the timing of the first application of the single-family countercyclical adjustment with the first property value adjustment;
- Delayed the compliance date for the advanced approaches to January 1, 2028;
- Expanded the definition of MSAs to include servicing rights on mortgage loans owned by an Enterprise;
- Explicitly permitted eligible time-based call options in the CRT operational criteria, subject to certain restrictions;
- Amended the risk weights for IO MBS to 0 percent, 20 percent, and 100 percent, conditional on whether the security was issued by the Enterprise, the other Enterprise, or a non-Enterprise entity, respectively; and
- Clarified the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.