FHFA Seeks Feedback on Proposed Capital Reserve Structure For Fannie, Freddie

0

How much capital should government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have in their reserves in order to adequately protect taxpayers from a bailout?

That’s what the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), wants feedback on.

The FHFA is seeking comment on a proposed regulation on capital requirements for the companies, which have been in conservatorship since 2008.

The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement for each company, the agency says in a release.

Fannie Mae and Freddie Mac are currently not permitted to retain capital on their own under the terms of their (revised) Senior Preferred Stock Purchase Agreements (PSPAs) with the U.S. government.

However, under the terms of their original bailout agreements, each company had $3 billion in capital “buffer” set aside for it in the Treasury coffers, to protect taxpayers should it go into the red. That “buffer” amount was to be tapered down to zero as of Jan. 1, 2018 (because in 2008 nobody thought the companies would be in conservatorship for over nine years), but in December, foreseeing that the new corporate tax code could send the companies into the red, the FHFA took administrative action and reinstated each company’s capital reserve “buffer” at $3 billion.

But it was not enough: In February, following implementation of the new Republican tax plan, Fannie Mae announced that it would need a Treasury draw of about $3.7 billion, following a reported net loss of $6.5 billion in the fourth quarter of 2017.

Now, the FHFA is grappling to come up with a capital reserve structure that will adequately protect U.S. taxpayers. The final rule will outline the capital reserve structure the FHFA thinks will work best after the companies are released back the private sector – if and when that should ever happen – and will also inform it of how to best set the capital reserve buffer that is in place while the companies remain in conservatorship.

The FHFA is careful to state that its proposed rule is really just a guideline to be followed “as Congress and the Administration work to determine the future of housing finance reform.”

At the same time, however, the proposed rule builds on the FHFA’s work with the GSEs to develop a conservatorship capital framework (CCF) that is now being used to align capital guidelines for both companies.

“We think it is important for FHFA, as the prudential regulator for Fannie Mae and Freddie Mac, to articulate our views on capital requirements and to start a healthy discussion about the amount of capital the enterprises should have to appropriately shield taxpayers from assistance,” says Melvin L. Watt, director of the FHFA, in a statement. “In addition, feedback on this proposed rule will inform FHFA’s views as conservator in making possible refinements to our assumptions about capital as we evaluate the enterprises’ business decisions during conservatorship.”

The FHFA explains that the CCF helps it assess the overall financial health of the companies, including their guarantee fees, activities and operations, as well as to guard against the enterprises making competitive decisions that could adversely impact safety and soundness.

In the proposed rule, the FHFA is careful to state that it is not in any way supporting a “recap and release” of the GSEs back to the private sector.

“By proposing this rule, FHFA is not attempting to take a position on housing finance reform and the proposed rule is not connected to efforts or ideas about recapitalizing the enterprises or administratively releasing them from conservatorship,” the agency states. “FHFA continues to believe that it is the role of Congress to determine the future of housing finance reform and what role, if any, the enterprises should play in that reform.”

The FHFA will be holding a webinar to explain the proposed rule at 1:30 p.m. EDT June 19.

Leave a Comment

avatar
  Subscribe  
Notify of