Banking and Finance Law Daily FHFA announces final capital rule for the Enterprises
Thursday, November 19, 2020

FHFA announces final capital rule for the Enterprises

By Nicole D. Prysby, J.D.

The final rule establishes a new regulatory capital framework for Fannie Mae and Freddie Mac and includes changes from the May 2020 proposed rule.

The Federal Housing Finance Agency (FHFA) announced a final rule establishing a new regulatory capital framework for Fannie Mae and Freddie Mac (the Enterprises). The rule is substantively similar to the proposed rule released in May 2020, which required an Enterprise to maintain tier 1 capital in excess of 4.0 percent to avoid restrictions on capital distributions and discretionary bonuses. The FHFA made three notable changes to the risk-based capital requirements in the final rule, which takes effect 60 days after its publication in the Federal Register. These changes include: increased capital relief for credit risk transfers (CRT), reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance, and an increase to the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20 percent. The FHFA also released a "Fact Sheet" for the rule and a data supplement to the expanded-data FHFA House Price Index (HPI).

The FHFA’s final rule is substantively similar to the proposed rule released in May (see Banking and Finance Law Daily, May 21, 2020). That proposal (published in the Federal Register on June 30, 2020) was a re-proposal of the regulatory capital framework proposed in 2018, which was based on the Conservatorship Capital Framework implemented by the FHFA in 2017. The final rule fulfills Congress’s Housing and Economic Recovery Act of 2008 mandate that the FHFA establish risk-based capital requirements for the Enterprises. As implemented by this final rule, the regulatory capital framework will require each Enterprise to maintain the following risk-based capital: total capital not less than 8.0 percent of risk-weighted assets; adjusted total capital not less than 8.0 percent of risk-weighted assets; Tier 1 capital not less than 6.0 percent of risk-weighted assets; and common equity tier 1 (CET1) capital not less than 4.5 percent of risk-weighted assets.

Each Enterprise also will 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 final rule also makes conforming amendments to definitions in the FHFA’s regulations governing assessments and minimum capital and removes the Office of Federal Housing Enterprise Oversight’s (OFHEO) regulation on capital for the Enterprises.

The preamble to the final rule explains the key modifications from the proposed rule. Those modifications include: changes to the approach to CRTs to better tailor risk-based capital requirements; adjusting the floor on the adjusted risk weight assigned to mortgage exposures to 20 percent instead of 15 percent; tailoring the credit risk capital requirement approach for a single-family mortgage exposure that is or was in forbearance pursuant to a program to provide forbearance for COVID-19-impacted borrowers; modifying the framework for determining credit risk capital requirements to permit a modified re-performing loan to transition to a performing loan after a 5-year period of performance; capping the combined risk multiplier for a single-family mortgage exposure at 3.0; basing the countercyclical adjustment to the standardized credit risk capital requirement for a single-family mortgage exposure on the national, not-seasonally adjusted expanded-data FHFA HPI (expanded-data FHFA HPI) instead of the all-transaction FHFA HPI; and periodically resizing the stress capital buffer to the extent that the FHFA’s eventual program for supervisory stress tests determines that an Enterprise’s peak capital exhaustion under a severely adverse stress would exceed 0.75 percent of adjusted total assets.

Fact sheet; data supplement. The FHFA released a fact sheet on the final rule, which explains the background of the rule, objectives and considerations, key provisions, changes from the proposal, and a discussion of the Financial Stability Oversight Council’s recent review of the secondary mortgage market. The FHFA also released a data supplement to the expanded-data FHFA HPI. The FHFA HPI will now provide a national expanded-data series—beginning with the first quarter of 1975. The augmented data series was provided in support of the final rule, which includes a countercyclical adjustment to single-family mortgage exposures based on the deviation between the inflation adjusted level of the index and an estimated long-run trend. The final rule utilizes the updated expanded-data FHFA HPI as the basis for the countercyclical adjustment.

Companies: Fannie Mae; Freddie Mac

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