FHFA to Re-Propose Capital Rule for Fannie Mae and Freddie Mac


The Federal Housing Finance Agency (FHFA) says it plans to re-propose the entire regulation on capital requirements for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac sometime in 2020.

The rule, adopted in June 2018 when Mel Watt was still director at the agency, set a new capital retention framework for Fannie Mae and Freddie Mac, in order to protect taxpayers from potential bailouts.

However, those capital requirements would have only gone into effect when the companies exited conservatorship.

Now, the FHFA says it plans to scrap the entire rule and re-introduce a new one at an unspecified date next year.

In September, the Treasury and the FHFA announced that they had agreed on how much capital the GSEs should retain as they prepare to be transitioned out of conservatorship and back to the private sector.

As per the “capital agreements” signed with the Treasury and FHFA, Fannie Mae was to retain $25 billion and Freddie Mac was to retain $20 billion – at least initially.

The agreements in effect modify the existing Preferred Stock Purchase Agreements (PSPAs) that the GSEs have had in place with the federal government since their takeover in 2008.

In essence, PSPAs have been modified to permit Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion per company in capital reserves currently permitted.

“The 2018 Capital Rule was proposed before FHFA began the process of retaining capital at the [GSEs] as a first step toward ending the conservatorships,” says Mark Calabria, director of the FHFA, regulator of Fannie Mae and Freddie Mac, in a statement. “In fairness to all interested parties, the comments submitted during the previous rulemaking were submitted under a different set of assumptions about the future of the [GSEs]. During the process of the rulemaking, important issues were identified that will be addressed in the re-proposal.

“The Capital Rule is one of the most important rules I will issue as director,” Calabria adds. “This rule will be re-proposed and finalized within a timeline fully consistent with ending the conservatorships. Requiring the [GSEs] to build capital that can properly support their risk ensures that taxpayers will never be on the hook again during an economic downturn.”

In October the FHFA instructed the GSEs – by way of its 2020 Scorecard and Strategic Plan – to “prepare for a transition out of conservatorship.”

This includes “the development and implementation of a responsible transition plan to exit conservatorship, with appropriate readiness by the [GSEs],” the Scorecard states.

In addition the GSEs are to “provide support to FHFA as needed to develop a roadmap with milestones for exiting conservatorship,” and to “conduct such activities as directed by FHFA arising from recommendations in the Treasury and HUD Reform Plans.”

FHFA directed the companies to “develop and implement FHFA-approved strategies that ensure the efficient utilization of capital targeted to support the core guaranty business with adequate returns to attract the private capital necessary to enable an exit from the conservatorships.”

The GSEs have also been directed to “develop a post-conservatorship strategy and governance framework for CSS/CSP, including an assessment of any additional capabilities beneficial for the CSS/CSP to perform, to support a competitive mortgage market.”

In addition the companies are to “maintain an effective process to ensure that internal audit and supervisory findings are remediated by management in a timely fashion with appropriate board oversight” and “maintain a sustainable, effective process for fair lending risk assessment, monitoring, and mitigation, and work with the FHFA’s Office of Fair Lending Oversight to prepare for transition to post-conservatorship fair lending supervision and oversight.”

In a statement, Ed DeMarco, president of the Housing Policy Council (HPC) and former acting director of the FHFA, says the council “strongly supports the FHFA’s decision to re-propose a new capital framework for Fannie Mae and Freddie Mac.”

“Last year, HPC recommended that FHFA re-propose the framework because it was based upon a set of assumptions and models that were not fully disclosed to the public,” DeMarco says. “That proposal also failed to address systemic risk issues, lacked any reasonable comparability to other federal capital regimes, and was pro-cyclical.  HPC believes it entirely appropriate for FHFA to take this step, and we look forward to reviewing and commenting on the new proposal.”

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