FHFA proposes extra modifications to enterprises’ capital framework

Fannie Mae and Freddie Mac’s regulator on Thursday released a new series of possible tweaks to some financial parameters they work within, which appear aimed at accommodating recent policy shifts while managing risk.

The new Enterprise Capital Regulatory Framework proposal includes, for example, an update to the treatment of commingled securities. Guarantees for uniform mortgage-backed securities would have a 5% risk weight and 50% credit conversion factor under the Federal Housing Finance Agency changes.

The proposed commingled-securities treatment looks like it reflects “a lower and more reasonable risk weight,” according to a preliminary analysis from the Mortgage Bankers Association. The group plans to more thoroughly review the full set of changes for formal comment later.

“Reduction of the cross-guarantee capital charge is very helpful to the viability of UMBS, and we applaud it,” Michael Bright, CEO of the Structured Finance Association, said in an emailed statement.

The FHFA recently reduced a controversial fee that it imposed on the securities last year. The securities were designed to minimize market differences between the two entities’ bonds that were in Fannie’s favor, and some critics saw the higher fee as undermining their fungibility.

Mortgage bankers also have been hoping changes in the framework could help remedy some of their concerns related to a new loan pricing grid at the government-sponsored enterprises, which the FHFA has described as interlinked with their capital position.

Also in the proposal is a change in the credit score assumption for single-family mortgages lacking one, a population FHFA, Fannie and Freddie have been working to do more to reach with more affordable loans. 

FHFA additionally seeks to change the procedure for determining a representative credit score as Fannie and Freddie plan a shift in the ones they reference in underwriting.

The timing alignment of countercyclical and property adjustments in the single-family market, which come into play in Fannie and Freddie’s earnings, also would be tweaked.

Other changes proposed would affect parameters for certain multifamily mortgage exposures, credit risk transfers, and how servicing rights on mortgages held by the enterprises are defined.

Under President Biden, the FHFA has been making some changes in the capital framework it inherited from the Trump administration to address some differences in their policies and market shifts over time.

The most recent proposal will have a 60-day comment period following its publication in the Federal Register.

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