The Federal Housing Finance Agency (FHFA) has reached another milestone as it tries to resolve the 12-year conservatorship of the GSEs. On Wednesday it released a new regulatory capital framework for Fannie Mae and Freddie Mac. The final rule, a revision of a proposal made in 2018, reflects the 128 comments made on the 2018 proposal and well as other outreach to stakeholders.
FHFA says the final rule fulfills Congress's mandate in Housing and Economic Recovery Act of 2008 that FHFA establish risk-based capital requirements for the GSEs. It is intended to ensure their safety and soundness by increasing the quantity and quality of their regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements.
The final rule is substantively like the proposed rule in terms of overall structure and approach which required each GSE to must maintain tier 1 capital in excess of 4.0 percent to avoid restrictions on capital distributions and discretionary bonuses. FHFA said it made three notable changes to the risk-based capital requirements in the final rule, as well as several other refinements. The notable changes include:
- Increased capital relief for credit risk transfers (CRT);
- Reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance; and
- Increased the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20 percent.
These enhancements will ensure the GSEs safety and soundness and their ability to fulfill its statutory mission across the economic cycle, particularly during periods of financial stress.
FHFA Director Mark Calabria said, "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, and the Financial Stability Oversight Council's (FSOC's) review of the secondary mortgage market, FHFA is confident that the final rule puts Fannie Mae and Freddie Mac on a path toward a sound capital footing. Increased capital means that they can serve all Americans, especially low- and moderate-income families, throughout the economic cycle."
To support the rule, FHFA is also releasing supplementary data for its House Price Index (HPI), expanding it back to the first quarter of 1975. It is currently benchmarked to January 1991. The augmented data series will include a countercyclical adjustment to single-family mortgage exposures based on the deviation between the inflation adjusted level of the index and an estimated long-run trend. The final rule utilizes the updated expanded-data FHFA HPI as the basis for the countercyclical adjustment.