The proposal by Fannie Mae and Freddie Mac’s regulator to impose bank-like capital requirements would be relevant only if the companies leave conservatorship.
GSE capital rule is hypothetical, but FHFA gets earful anyway
A risk-based capital plan for Fannie Mae and Freddie Mac is only theoretical as long as the two mortgage giants remain under government control. But the Federal Housing Finance Agency proposal requiring the government-sponsored enterprises to prepare for future crises still elicits strong opinions.
The FHFA has mostly won praise for developing the plan, meant to smooth the transition if Fannie and Freddie are released from their conservatorships. But lenders and other stakeholders are still poking holes in the proposal, calling for a higher level of required capital, changes to risk factors to protect the GSEs in a downturn, and a revamp to the FHFA’s rulemaking process.
Among the more than 70 comment letters received by the agency, several stakeholders also called for greater transparency about how the proposal was formulated.
The Housing Policy Council “urges FHFA to reconsider and rework several features of the proposed capital framework and to republish the proposal with the full set of models, data, and assumptions, embedded in the proposed capital framework,” wrote Edward DeMarco, president of the group representing some of the largest lenders and a former acting FHFA director.
The proposal, issued in June, would assess the GSEs’ credit risk for different mortgage categories and include market and operational risk components in measuring the firms’ capital strength. The FHFA also asked for comment on two different options for establishing a minimum leverage ratio for the companies: one where capital is equal to 2.5% of assets and off-balancesheet guarantees, or an option requiring capital equal to 1.5% of trust assets and 4% of non-trust assets.
But both big and smaller lenders saw room for improvement in the plan. Smaller financial institutions encouraged the FHFA to require a bigger capital cushion than the agency originally proposed. Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America, said a more conservative approach would be to set minimum GSE capital levels at least equal to those for the Federal Home Loan banks.
“ICBA strongly believes that the GSEs’ capital requirements, at a minimum, should be similar to the capital requirements of the FHLBs. That would put the GSEs’ total capital at 4% with a 5% leverage ratio,” Haynie wrote in a comment letter. “We, therefore, suggest that the FHFA implement the proposed framework but with a higher capital requirement that reflects consideration for both protecting the taxpayer and the optics surrounding the GSEs.”
The Community Home Lenders Association, which represents smaller nonbank lenders, agreed that “a larger cushion is needed, even in the absence of full recapitalization, and therefore CHLA continues to urge FHFA to suspend dividends to reach a more reasonable cushion.”
Others argued that the FHFA’s proposed capital plan is too procyclical, which could leave the mortgage giants severely weakened in a crisis.
“[ The proposed rule’s] minimum leverage ratios would not be consistent with requirements for global systemically important banks, given the de facto status of the GSEs as systematically important financial institutions,” wrote Edward Pinto and Lynn Fisher, co-directors of the American Enterprise Institute’s Center on Housing Markets and Finance, and AEI adjunct fellow Patrick Lawler. “The result would be underpricing of risks and exacerbation of house price cycles.”
In its letter, the Mortgage Bankers Association noted that the proposal’s use of mark-to-market loan-to-value ratios contributes to the plan’s procyclical nature. Those ratios immediately go down in a housing boom when home values increase.
The effect would allow guarantors to “release capital during stronger markets, only to then require larger capital buffers in the midst of a downturn,” wrote MBA President and CEO Bob Broeksmit in the organization’s comment letter.
The Housing Policy Council agreed, and suggested that the procyclicality of the