On September 16, the Federal Housing Finance Agency (FHFA) issued a notice of proposed rulemaking (NPR) to amend the Enterprise (Fannie Mae and Freddie Mac) capital rules that were issued in December 2020. Specifically, the proposed rule would:
- replace the fixed PLBA equal to 1.5 percent of an Enterprise's adjusted total assets with a dynamic PLBA equal to 50 percent of the Enterprise's stability capital buffer;
- replace the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure; and
- remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT (credit risk transfer) exposures in accordance with the ERCF's securitization framework.
The new proposal would reduce the total retained capital held by the Enterprises to approximately three percent from four percent that is in the current rule. The result would reduce the combined capital held by the Enterprises from $294 billion to $220 billion. Importantly, the proposal also recognizes the value and importance in credit risk transfer and provides greater capital relief by removing the effectiveness adjustment to CRT exposures.
“The amendments proposed today will allow the Enterprises to support the housing market throughout the economic cycle in a safe and sound manner," said Acting Director Sandra L. Thompson in a recently issued press release. “The proposed requirements provide the Enterprises with the necessary incentives to support sustainable lending initiatives by transferring a significant amount of credit risk away from the taxpayers to private investors that are better positioned to take this risk. I look forward to receiving robust feedback on the proposed amendments."
The NPR specifically addresses concerns raised by NMHC in its September 2020 comment letter to FHFA identifying that:
- the leverage ratio would be a binding constraint on determining total capital rather than the risk based calculation;
- the 10% prudential floor was too high given the risk; and
- the rule undervalued credit risk transfer and would result in the Enterprises retaining the credit risk on riskier loans.
The NPR has a 60-day comment period once entered in the Federal Register.
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