Mortgage

FHFA proposes modifications to the capital necessities for Fannie and Freddie

WASHINGTON – The Federal Housing Finance Agency is proposing to revise the post-preservation capital framework completed under the Trump administration for Fannie Mae and Freddie Mac to encourage risk transfer to private investors and make leverage requirements more dynamic.

In a proposal released on Wednesday, acting FHFA director Sandra Thompson said the agency's refinements would allow state-sponsored companies to "safely and solidly support the housing market throughout the economic cycle."

In particular, the agency wants to encourage Fannie and Freddie to encourage credit risk transfer, a practice that allows GSEs to sell a loan they guarantee to private investors. The deals were a trademark of the federal conservatory of the two companies because they mitigated potential losses.

Under the proposal, the Agency would lower the risk weight assigned to credit risk transfer positions and remove the requirement that GSE make an "overall effectiveness adjustment" on the part of the risk they retain after a transfer.

In a fact sheet describing the proposed revisions, the FHFA said the changes would align the capital requirements of the GSEs more closely with the leverage requirements for global systemically important banks codified in the Basel Accords.

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The FHFA also suggests making the “Mandatory Leverage Buffer Amount” more dynamic, rather than being set at 1.5% of a GSE's total adjusted assets. The changes would result in a smaller leverage buffer for Fannie and Freddie, the FHFA said.

In a fact sheet describing the proposed revisions, the agency said the changes would align the capital requirements of GSEs more closely with the leverage requirements for global systemically important banks codified in the Basel Accords.

"The proposed requirements provide the necessary incentives for companies to support sustainable credit initiatives by moving a significant portion of the credit risk from taxpayers to private investors who are better positioned to take that risk," Thompson said in a statement. "I look forward to solid feedback on the proposed changes."

The FHFA accepts public statements on the application 60 days after publication in the Federal Register.

Earlier on Wednesday, Thompson had suggested in a speech to the National Association of Federal Insured Credit Unions that the agency was considering "refinements" to the November Capital Rule, but stressed that "the capital rules must change every time there is a new director gives."

"It doesn't offer consistency or stability," she said.

In particular, she highlighted the capital treatment of credit risk transfers as an area that the agency wants to adjust.

"We want to make sure we did it right," she said. "Every time I speak to investors, it's really something they [and] market participants too."

Kate Berry contributed to this story.

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