FHFA Announces Final Capital Rule for Fannie and Freddie
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) released a final rule establishing a regulatory capital framework for Fannie Mae and Freddie Mac.
The finalization of a regulatory capital framework is a key step in preparing Fannie and Freddie to exit conservatorship.
“Fannie Mae and Freddie Mac have a mission to serve the American housing market during good times and bad. After considering all the comments on the proposed rule…FHFA is confident that the final rule puts Fannie Mae and Freddie Mac on a path toward a sound capital footing,” said FHFA Director Mark Calabria.
“Increased capital means that they can serve all Americans, especially low- and moderate-income families, throughout the economic cycle.”
As required by the proposed rule, an Enterprise must maintain tier 1 capital in excess of 4 percent to avoid restrictions on capital distributions and discretionary bonuses.
While similar to the proposed rule published on June 30, the final rule includes some changes, which include:
An increase in the dollar amount of capital relief afforded to the enterprises’ credit risk transfer (CRT).
Making the floor on the adjusted risk weight assigned to mortgage exposures 20 percent instead of 15 percent.
Capital relief for COVID-19 forbearance loans.
Refinements to risk-based capital requirements.
Capping the combined risk multiplier for a single-family mortgage exposure at 3.0, based on the 2018 proposal.
Use of a new House Price Index for single-family countercyclical adjustment.
FHFA said the changes from the proposed rule will help ensure that Fannie and Freddie operate in a safe and sound manner and are positioned to fulfill their statutory mission, especially during periods of financial stress.
In a fact sheet, FHFA said that if the 2018 proposal was in effect in 2007, Fannie’s and Freddie’s peak cumulative capital exhaustion would have left, respectively, capital equal to only 0.1 percent and 0.5 percent of their total assets and off-balance sheet guarantees. These amounts would not have sustained the market confidence necessary for the enterprises to continue as going concerns.
FHFA also noted that the enterprises will now face market discipline and strong incentives to base decisions more on its own understanding of the costs and benefits and less on that of its regulator.
The final framework ends a process that began in 2017, when FHFA implemented the Conservatorship Capital Framework. A year later, FHFA submitted a proposed rule based on that framework. The proposed rule released in June of this year was a re-proposal of the 2018 framework. FHFA said it received and reviewed 128 comments regarding the proposed rule.
The final rule fulfills Congress's Housing and Economic Recovery Act of 2008 mandate that FHFA establish risk-based capital requirements for the enterprises.
About the Author
As an NAMP® 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.
