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.

National Mortgage News - - Contents - By Han­nah Lang

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

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