May 21, 2020

FHFA releases updated capital rule proposal

moneyThe Federal Housing Finance Agency (FHFA) Wednesday re-proposed its rule to set capital requirements for the government-sponsored enterprises (GSEs). The agency indicated it would reissue the proposal last year; NAFCU was generally supportive of the proposal but continues to advocate that certain safeguards are codified by Congress before removing the GSEs from conservatorship.

"As our nation grapples with the economic impact of the coronavirus pandemic, strong capital requirements at the GSEs are as important as ever," said NAFCU Director of Regulatory Affairs Ann Kossachev. "The FHFA’s commitment to building a robust regulatory capital framework for the GSEs is an essential first step before releasing them from conservatorship.

"As housing finance reform efforts continue, we encourage the FHFA to work with Congress to ensure credit unions have guaranteed and equal access to the secondary market and receive fair pricing based upon loan quality, not volume. Additionally, we strongly support credit risk transfers and are evaluating the role of such transactions in our review of this rule. NAFCU will continue to engage on this issue, as the housing finance system is of great importance to our nation’s credit unions and their 120 million members."

NAFCU has led housing finance reform efforts to ensure credit unions' unfettered access to the secondary mortgage market. The association has testified before Congress on the issue, and works closely with FHFA Director Mark Calabria on housing finance-related issues.

"This national health crisis has affirmed the importance of the Enterprises’ mission to serve the American housing market during good times and bad," said Calabria in the proposal's release. "When credit dries up, low- and moderate-income households are hurt most. We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress. More capital means a stronger foundation on which to weather crises. The time to act is now."

While the original proposal remained the "foundation" of the update, the FHFA's enhancements have three primary objectives:

  • preserve the mortgage risk-sensitive framework of the 2018 proposal, with simplifications and refinements;
  • increase the quantity and quality of the regulatory capital of the GSEs to ensure that, during and after conservatorship, each GSE operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle; and
  • address the pro-cyclicality of the risk-based capital requirements of the 2018 proposal, also in furtherance of the safety and soundness of the Enterprises and their countercyclical mission.

Of note, the rule requires the GSEs to maintain the following risk-based capital levels:

  • total capital not less than 8 percent of risk-weighted assets, determined as further described in the rule;
  • adjusted total capital not less than 8 percent of risk-weighted assets;
  • tier 1 capital not less than 6 percent of risk-weighted assets; and
  • common equity tier 1 (CET1) capital not less than 4.5 percent of risk-weighted assets.

In addition, the GSEs would be required to satisfy the following leverage ratios:

  • core capital not less than 2.5 percent of adjusted total assets; and
  • tier 1 capital not less than 2.5 percent of adjusted total assets.

The rule also stipulates that Fannie Mae and Freddie Mac must cumulatively hold over $240 billion in capital, which would reduce their leverage from its current 250-to-1 to 25-to-1. Following the release of housing finance reform plans last year, the FHFA and Treasury Department reached an agreement to allow the GSEs to start rebuilding capital.

The proposal is open for a 60-day comment period; the agency hopes to finalize the rule by the end of the year and prepare to remove the GSEs from conservatorship by 2021 or 2022. NAFCU will continue to review the rule and gather credit unions' feedback to share with the agency.