FHFA proposes annual capital planning for Fannie Mae, Freddie Mac

The regulator for two large government mortgage investors puts forward a proposal that they would submit annual reports for capital planning purposes.

The Federal Housing Finance Agency's proposed scheme, with a 60-day comment period, would incorporate a stress capital buffer into the planning process for state-sponsored companies Fannie Mae and Freddie Mac.

According to the Federal Housing Finance Agency's proposal, Fannie and Freddie would have to include their planned corporate actions in their annual plans. They would also need to outline how their capitalization will change under a variety of stress tests, including the required ratios, which are proposed separately for change.

"The proposed rule will help companies have robust systems and processes in place to monitor and maintain adequate levels of capital," said Sandra Thompson, acting director of FHFA, in a press release. "Adhering to a framework that is similar to other regulatory capital planning frameworks will better position businesses and the mortgage market to withstand a stressful economic environment."

The transparency that annual capital plans could provide for the GSEs' finances could be welcomed as long as they do not result in unnecessarily high increases in their required capital ratios and restrict low-to-moderate income lending, said Rob Zimmer, principal at TVDC and registered lobbyist of the Community Mortgage Lenders of America.

"Stricter reporting on capital is certainly part of the utility model they seem to be heading towards," he said in an interview.

While the Biden government ultimately chose not to nominate a widespread candidate for FHFA director who is a clear proponent of the utility model, but chose Thompson for the role, some experts still expect Fannie and Freddie to come will take this path.

Under a utility model, Fannie and Freddie would be expected to deliver regular dividends but not be subject to capital levels as restrictive as those used by the banking industry, Zimmer said.

While the FHFA's proposed capital planning rule is consistent with the framework for large bank holding companies, the rule makes adjustments to account for differences that exist between the GSEs and the custodians, such as the case where Fannie and Freddie would have to make estimates and Project income, expenditure, losses, reserves and pro forma capital levels according to scenarios set both internally and by the regulator. While the banking framework has a horizon of nine quarters for regulatory and internal scenarios, the FHFA suggests a period of five years for the latter in order to give companies more time to build up adequate capital adequacy in the course of adapting to new standards.

The proposed annual capital planning works well for the GSE model, according to Henry Coffey, Managing Director Equity Research at Wedbush Securities.

Such reporting was "normal" and "what anyone would expect … from a financial institution the size of Fannie and Freddie," he said in an email.

Earlier this year, the FHFA also proposed requiring Fannie and Freddie to make quarterly disclosures in accordance with international capital standards.

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