The Federal Housing Finance Agency (FHFA) has issued a proposed rule that would require Fannie Mae and Freddie Mac to develop, maintain and submit annual capital plans to the FHFA. This requirement helps protect taxpayers by ensuring that the enterprises properly assess their risks and maintain the appropriate level of capital.
“This action is part of FHFA’s commitment to safety and soundness, and protecting the housing finance system throughout the economic cycle,” says Acting Director Sandra Thompson. “The proposed rule will help ensure that the enterprises have robust systems and processes in place to monitor and maintain proper levels of capital. Adhering to a framework similar to other regulatory capital planning frameworks will better position the enterprises, and the mortgage market, to withstand stressful economic environments.”
The proposed rule mandates that the enterprise’s capital plans include an assessment of the expected sources and uses of capital over the planning horizon. It would have estimates of projected revenues, expenses, losses, reserves and pro forma capital levels under a range of the enterprises’ internal scenarios, as well as under the FHFA’s scenarios.
The plans must include a description of all planned capital actions over the planning horizon and a discussion of how the enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market. In addition, there will be discussion of any expected changes to the enterprises’ business plan that are likely to have a material impact on capital adequacy or liquidity.
The proposed rule also incorporates the determination of the stress capital buffer into the capital planning process and builds upon the existing supervisory expectation that the enterprises incorporate forward-looking projections of revenue and losses to monitor and maintain their internal capital adequacy.