On November 26, NMHC and NAA submitted a comment letter to FHFA in response to proposed amendments to the Enterprise (Fannie Mae and Freddie Mac) Risk-Based Capital framework. As previously reported, FHFA issued a Notice of Proposed Rulemaking (NPR) on September 16 that would amend portions of the capital framework for the Enterprises. Specifically, the NPR proposed to:
- replace the fixed PLBA equal to 1.5 percent of an Enterprise's adjusted total assets with a dynamic Prescribed Leverage Buffer Amount (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 credit risk transfer (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 exposures in accordance with the Enterprise Risk Capital Framework (ERCF) securitization framework.
Our response to the proposed amendments were supportive of the modification to the PLBA and welcomed the change to recognize the importance of CRT in managing risk for the Enterprises. We suggested that further analysis may be warranted to evaluate the efficacy of the five-percent floor for the well-established multifamily CRT framework utilized by the Enterprises.
Our comment letter also took the opportunity to point out unaddressed issues raised in our August 31, 2020 comment letter on the FHFA proposed risk-based capital framework:
- Pro-cyclicality of the capital framework: The pro-cyclicality of the capital framework for the multifamily housing businesses of the Enterprises is not adequately reflected in the ERCF;
- The ERCF provides insufficient information regarding the derivation of the lookup grids and risk multipliers applicable to multifamily mortgage exposures and could undermine the affordable and workforce housing markets and the Enterprises’ related initiatives;
- Incongruent Treatment of multifamily and single-family housing: FHFA should take care to ensure that the ERCF reflects the unique risk management characteristics and demonstrated credit performances of the multifamily business as compared to the single-family business.
We will continue to work with FHFA in order to address the issues identified.