FHFA Proposes Liquidity Rule for GSEs
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) released a proposed liquidity rule for the government sponsored enterprises designed to complement to the final capital rule announced last month.
According to FHFA, the proposed rule seeks to implement minimum liquidity and funding requirements for Fannie Mae and Freddie Mac. In addition, the rule includes daily management reporting of the enterprises' liquidity positions, monthly public disclosure reporting requirements, and other liquidity-related requirements.
“Requiring the enterprises to have enough liquid assets to continue supporting the mortgage market during times of severe stress protects taxpayers and the housing market,” said FHFA Director Mark Calabria.
The proposed rule includes two cash-flow requirements and two long-term liquidity and funding requirements. They include:
A 30-day liquidity requirement. This short-term requirement is designed to promote the short-term resilience of the liquidity risk profile of the enterprises, thereby improving their ability to absorb shocks arising from financial market and economic stresses. This requirement is based on a cumulative net cash outflow analysis, plus an additional $10 billion cushion requirement that must be met by highly liquid assets, such as Treasury securities.
A one-year liquidity requirement. FHFA included this requirement to ensure the enterprises manage their liquidity beyond the short-term, and to provide additional incentives to fund their activities in a more stable fashion. Over this intermediate term, the enterprises may count borrowings against certain fixed income instruments that the Fixed Income Clearing Corporation deems eligible collateral (subject to a haircut), which they cannot count under the 30-day requirement. There is no separate excess cushion required under this metric.
A requirement that the ratio of long-term unsecured debt to less-liquid assets must be greater than 120 percent
A requirement that the ratio of the spread duration of unsecured debt to the spread duration of retained portfolio assets must be greater than 60 percent.
The rule document states the two longer-term liquidity and funding requirements are designed to encourage the issuance of an appropriate mix of longer-term debt to reduce rollover risk. FHFA expects this will also reduce the risk that Fannie and Freddie would have to sell less-liquid assets in distressed markets.
FHFA said the GSEs’ current liquidity levels would meet or exceed the requirements of the proposed rule.
The proposed liquidity rule was released a month after FHFA released a final rule establishing a regulatory capital framework for Fannie Mae and Freddie Mac. The capital rule requires the GSEs to must maintain tier 1 capital in excess of 4 percent to avoid restrictions on capital distributions and discretionary bonuses.
FHFA is seeking comments regarding the proposed rule prior to issuing the final liquidity rule. You can submit to FHFA’s website (www.fhfa.gov/open-for-comment-or-input) or the Federal eRulemaking Portal (www.regulations.gov). If you submit your comment to the Federal eRulemaking Portal, please also send it by e-mail to FHFA at RegComments@fhfa.gov to ensure timely receipt by FHFA.
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.
