FHFA Publishes Final Rule for Amended Capital Framework
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has published its final rule amending several provisions in the Enterprise Regulatory Capital Framework (ERCF) for Fannie Mae and Freddie Mac.
The final rule is effective on April 1, 2024, except for several amendments that won’t take effect until January 1, 2026. The new rule amends the ERCF that was published in December 2020.
FHFA said the final rule takes into account the comments from 23 industry stakeholders following publication of the proposed rule changes in March of this year. The proposed rule included modifications related to the following items:
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 credit risk transfer (CRT) exposures
Interest-only (IO) mortgage-backed securities (MBS),
The single-family countercyclical adjustment
The stability capital buffer
“FHFA proposed these amendments to implement lessons learned through the continued application of the ERCF and to better reflect the risks faced by the enterprises in operating their businesses,” the agency stated in the final rule document. “Regulatory capital requirements that properly account for risk will allow the enterprises to build capital to enhance their safety and soundness and protect U.S. taxpayers against financial losses. The amendments in the final rule will bolster the ERCF as it aims to ensure that each enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market throughout the economic cycle, in particular during periods of financial stress.”
In the overview of the final rule, FHFA said it will:
Reduce the risk weight for guarantees on commingled securities from 20 percent to 5 percent and the credit conversion factor from 100 percent to 50 percent. A commingled security is a security issued by one enterprise that is backed, in whole or in part, by collateral issued by the other enterprise, subject to certain restrictions. FHFA said the previous percentages “may not accurately reflect the counterparty risks posed by commingling activities and in certain circumstances may impair the liquidity of the enterprises' securities, which may adversely affect the nation's housing finance market.”
Introduce a risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies.
Replace 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.
Update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score.
Introduce a risk weight of 20 percent for guarantee assets. A guaranteed asset is an on- balance sheet asset that represents the present value of a future consideration for providing a financial guarantee on a portfolio of mortgage exposures not recognized on the balance sheet. Examples include Freddie Mac’s multifamily K-deals, Fannie Mae’s multifamily bond credit enhancements, and certain single-family guarantee arrangements without securitization. The current ERCF does not include an explicit risk weight for guarantee assets.
Align the timing of the first application of the single-family countercyclical adjustment with the first property value adjustment.
Delay the compliance date for the advanced approaches to January 1, 2028.
Expand the definition of MSAs to include servicing rights on mortgage loans owned by the enterprises
Explicitly permit eligible time-based call options in the CRT operational criteria, subject to certain restrictions.
Amend 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.
Clarify the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.
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.
