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FHFA issues Final Capital Rule for Fannie Mae, Freddie Mac

GSEs to maintain tier 1 capital in excess of 4%

The Federal Housing Finance Agency (FHFA) released its Final Capital Rule Wednesday for mortgage giants Fannie Mae and Freddie Mac as it continues to work toward ending conservatorship.

The final rule mandates that the GSEs maintain tier 1 capital in excess of 4% to avoid restrictions on capital distributions and discretionary bonuses.

For example, as of June 30, 2020, the enterprises together would have been required to maintain $207 billion in common equity tier 1 capital, $265 billion in tier 1 capital, and $283 billion in adjusted total capital. For each enterprise, as of June 30, 2020, the adjusted total capital required under the buffer-adjusted risk-based capital requirement would exceed the tier 1 capital required under the buffer-adjusted leverage ratio requirement.

The FHFA explained that the increase in required amounts of regulatory capital, relative to the proposed rule, is due in part to the increase in the enterprises’ adjusted total assets to $6.6 trillion, a 9% increase from the enterprises’ $6.1 trillion in adjusted total assets as of September 30, 2019.

“Fannie Mae and Freddie Mac have a mission to serve the American housing market during good times and bad,” FHFA Director Mark Calabria said. “After considering all the comments on the proposed rule, and the Financial Stability Oversight Council’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,” Calabria said. “The final rule is another milestone necessary for responsibly ending the conservatorships.”

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The FHFA issued the final rule after reviewing all 128 comments on its proposed rule, along with hosting two webinars and listening sessions, which it says fulfills Congress’ Housing Economic Recovery Act of 2008 mandate to establish risk-based capital requirements for the government-sponsored enterprises.

Other key changes from the proposed rule include:

—Increased capital relief for credit risk transfers

—Reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance

—Increased the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20%

Previously, Fannie Mae and Freddie Mac said the proposed capital rule would mean they might have to raise the guarantee fees they charge to package home loans into securities that are sold to bond investors.

“Higher capital requirements would require the enterprises to have more equity capital, and as equity capital increases, the enterprises must earn more to maintain the same return on equity,” Fannie Mae said in a comment letter. “For Fannie Mae’s business model, the most viable source of higher earnings would be increases to guaranty fees.”

Earlier this month, the FHFA doubled down on its mission to end the GSE conservatorship, saying that mission has not changed, even as it became clear that President-elect Joe Biden had won the election.

“FHFA’s capital rule for the housing GSEs is an important step in ensuring the housing finance system can serve the needs of homeowners, renters, and the broader mortgage market for generations to come,” Fannie Mae CEO Hugh Frater said. “The new capital standards set the stage for a responsible end to the conservatorship and a future recapitalization of Fannie Mae.

“We applaud Director Calabria for his leadership in finalizing the rule,” Frater continued. “Fannie Mae is a very different company than at the beginning of conservatorship. We are better managed, better regulated and better able to serve homeowners and renters. Adequate capital will allow us build on these advances by operating safely and soundly, protecting taxpayers from loss, and serving our affordable housing mission.”

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