Maybe all of the talk about ending the GSE’s long term incarceration in conservatorship is more than talk this time. Earlier this week both
Freddie Mac and Fannie Mae announced they would be issuing Requests for
Proposals (RFPs) seeking to hire financial advisors to that end. Then, late Wednesday, the Federal Housing Finance Agency
(FHFA), the GSE conservator, said it was seeking comments on proposed revisions
to its own 2018 proposal to establish a new regulator capital framework for the
two companies. FHFA said the changes to its proposal “ensure each [GSE’s]
safety and soundness and its ability to fulfill its statutory mission across
the economic cycle, in particular during periods of financial stress. The
re-proposal is also a critical step toward responsibly ending the
conservatorships.”
FHFA Director Mark Calabria, referencing the current COVID-19
pandemic, said “This national health crisis has affirmed the importance of
the [GSE’s] mission to serve the American housing market during good times and
bad. When credit dries up, low- and moderate-income households are hurt most.
We must chart a course for the [GSEs] toward a sound capital footing so they
can help all Americans in times of stress. More capital means a stronger
foundation on which to weather crises. The time to act is now.”
A 1992 Act regarding the GSEs’ safety and soundness
prescribed both minimum leverage capital and a highly prescriptive risk-based
capital requirement. The
Housing and Economic Recovery Act of 2008 (HERA), which amended the 1992 act,
gave FHFA greater authority to determine the capital standards for the
Enterprises.
FHFA said it is asking for comments as it has begun the process to end the
conservatorships. This is a policy change since the 2018 proposal was drafted
and there was an assumption that the conservatorship could endure indefinitely.
This may have informed the comments and perhaps even the decision to comment at
all. FHFA proposes to increase the quantity and quality of regulatory capital
to ensure each GSE can provide stability and assistance of the secondary
market, especially during periods of financial stress. It is also proposing
changes to mitigate the pro-cyclicality
The
proposed rule maintains at its core the mortgage-risk sensitive capital
framework of the 2018 proposal, backstopped by a leverage ratio requirement,
with enhancements in four key components:
1.
Quality of Capital – The quality of regulator capital
includes supplemental requirements based on the U.S. banking framework’s
definitions of capital. These should help mitigate the weaknesses in the GSEs’ requirements
that became evident in the 2008 financial crisis.
2.
Quantity of Capital – Enhancements to strengthens the
quantity of regulatory capital include:
- Ensuring that levels of risk-based
capital for single-family and multifamily mortgage exposures are subject to a
prudent 15 percent risk weight floor. - Additional refinements that ensure
post-capital risk transfer (CRT) capital requirements are prudent and reflect
the credit risk of the exposures retained, while still providing meaningful
capital relief for CRT. - A set of capital buffers that help
ensure the GSE’s remain viable going concerns and promote stability in the
secondary market during a period of financial stress. - Determination of operational risk
capital using the U.S. banking framework’s advanced measurement approach,
subject to a floor equal to 0.15 percent of the GSEs’ adjusted total assets. This
is an increase from the 0.08 percent requirement in the 2018 proposal. By
comparison, of the U.S. bank holding companies with at least $500 billion in
total assets at the end of 2019, the smallest operational risk capital
requirement was 0.69 percent of that organization’s total leverage exposure. - A minimum leverage requirement of
2.5 percent of a GSE’s adjusted total assets, with an additional leverage
buffer amount of 1.5 percent of adjusted total assets, intended to serve as a
risk-insensitive credible backstop to risk-based measures that are subject to
significant model and other risks.
3.
Addressing Pro-cyclicality – The proposed rule includes the
following key changes to address concerns with the significant pro-cyclicality
of the aggregate capital requirements of the 2018 proposal:
- The proposed rule’s risk-based and
leverage capital buffer amounts can be drawn down in a period of financial
stress and then rebuilt over time as economic conditions improve. These buffers
include requirements such as restricting capital distributions such as
dividends when capital falls below prescribed limits. - The proposed rule retains the 2018
proposal’s approach to using updated home values to establish the
mark-to-market loan-to-value ratio (MTMLTV) of single-family mortgage exposures
and their associated risk-weighted asset requirement. However, the use of
MTMLTV through the house price cycle had the potential to cause significant
variability and uncertainty in capital requirements, resulting in potentially
too little capital at the peak of the cycle while likely necessitating a
substantial capital cushion in anticipation of substantially higher capital
requirements at the trough. The proposed rule includes a new, countercyclical
adjustment to MTMLTV to provide significantly more stability and predictability
throughout the cycle while promoting safety and soundness. - There are additional refinements, such
as changes to the base risk weight grids and risk multipliers, that result in
more stable and manageable capital requirements and buffers.
4.
Advanced Approaches – The proposed rule includes
requirements for the GSEs to assess their own credit, market, and operational
risks. They must take responsibility for measuring and managing the risks they
take and hold sufficient capital to stand behind those risks. Accordingly,
FHFA’s standardized capital requirements, set largely through various grids, multipliers,
and other formulas, should serve as a safety and soundness backstop to the
advanced approaches.
The comment period will extend for 60 days after the
proposal is published in the Federal Register. A link to the proposal is
available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Releases-Re-Proposed-Capital-Rule-for-the-Enterprises.aspx
By Jann Swanson , dated 2020-05-21 09:13:26
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Courtesy of Mortgage News Daily