FHFA wraps up enterprise regulatory capital framework tweaks

Final rule makes credit risk transfers more economical for the GSEs

The Federal Housing Finance Agency (FHFA) on Friday finalized proposed changes to the enterprise regulatory capital framework.

The amendments replace the fixed prescribed leverage buffer amount — currently 1.5% of an enterprise’s adjusted total assets — with a dynamic buffer equal to 50% of its stability capital buffer. Instead of a prudential floor of 10% on the risk weight assigned to any retained CRT exposure, the prudential floor would be 5%. The final rule also removes the requirement that an enterprise apply an overall effectiveness adjustment to its retained CRT exposures.

“FHFA continues to believe that the amendments in this final rule will lessen the potential deterrents to Enterprise risk transfer by properly aligning incentives in the ERCF and will position the Enterprises to operate in a safe and sound manner to fulfill their statutory mission throughout the economic cycle, both during and after conservatorships,” the FHFA wrote in the federal register.

The final rule also makes some technical corrections to the December 2020 enterprise regulatory capital framework, including a “significant” typo in the definition of the long-term house price index.

The changes will take effect in 60 days.

The rule affirms changes the FHFA proposed in September 2021. It also puts to rest concerns that a provision of the Preferred Stock Purchase Agreement would keep the FHFA from making changes to the regulatory capital framework without approval from the U.S. Treasury.

The final rule makes credit risk transfers more economical for the government sponsored enterprises. Fannie Mae had paused its CRT transactions in the early days of the COVID-19 pandemic, and only recently restarted them. According to one analyst, some investors were earning returns on equity leveraged against CRT assets in the high teens.

The FHFA said it got mostly supportive feedback from stakeholders during the comment period after it floated the proposal. 

In comments, some stakeholders raised concerns that tying the leverage buffer to the stability capital buffer could hinder the GSEs’ countercyclical role. The GSEs’ market share tends to grow during a stressful period as other market participants grow more slowly or shrink. Commenters argued the change could limit the GSEs’ ability to supply market liquidity when it is needed the most.

But FHFA disagreed. The conservator of Fannie Mae and Freddie Mac said that it anticipates tying the leverage buffer to the stability capital buffer will reduce the pro-cyclicality of the leverage framework, because increases to a GSE’s adjusted total assets are immediately reflected in the fixed 1.5% leverage buffer, while increases to its share of the mortgage market take up to two years to show up in the stability capital buffer.

Several commenters suggested the FHFA do away with the leverage buffer altogether, but the agency sharply disagreed with that recommendation.

“The leverage buffer represents a cushion above an enterprise’s 2.5% leverage ratio requirement that can be drawn down in a stress scenario without violating prompt corrective action, providing an Enterprise with flexibility to continue its normal operations without risk of breaching a requirement,” the FHFA wrote.

At least half the comments the FHFA received veered away from the proposed amendments to the capital framework, the FHFA wrote.

Instead of opining on the fixed prescribed leverage buffer, commenters wrote to the FHFA about a number of other “important topics,” like loan-level pricing adjustments, guarantee fees and housing finance reform. At least some commenters took issue with the “overall complexity” of the enterprise regulatory capital framework.

“FHFA acknowledges the importance of these topics and will thoroughly consider the public’s feedback on these issues when relevant rulemakings and policy decisions are under consideration,” the agency wrote.

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