The Federal Housing Finance Agency (FHFA) has issued a Final Rule that amends the Enterprise Regulatory Capital Framework (ERCF) by introducing new public disclosure requirements for Fannie Mae and Freddie Mac (the government-sponsored enterprises).
The FHFA’s requirements include quantitative and qualitative disclosures related to risk management, corporate governance, capital structure, and capital requirements and buffers under the standardized approach.
“By allowing market participants to assess key information about the Enterprises’ risk profiles and associated levels of capital, this final rule will promote transparency and encourage sound risk management practices at the Enterprises,” said FHFA Director Sandra L. Thompson, who was officially confirmed as FHFA head just yesterday. “The rule published today will foster financial stability at the Enterprises and in the broader housing finance market.”
The FHFA proposed these amendments to improve market discipline and encourage sound risk management practices at the GSEs by ensuring that market participants have access to sufficient information with which they can assess a GSE’s material risks and capital adequacy, and make informed investment decisions. Public disclosures that are clear, comprehensive, useful, consistent over time, and comparable across each GSE will facilitate such analyses, and contribute to the safety and soundness of the GSEs as entities, thus decreasing risk to U.S. taxpayers.
The Housing and Economic Recovery Act of 2008 amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to require that the FHFA establish, by regulation, risk-based capital requirements for the GSEs to ensure that each enterprise operates in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.
“By allowing market participants to assess key information about the Enterprises’ risk profiles and associated levels of capital, the final rule will promote transparency, increase the amount of information available to the public, and encourage sound risk management practices at the Enterprises,” said the Rule.
The FHFA’s Final Rule adapts the public disclosure requirements in the U.S. banking framework to reflect the ERCF’s standardized approach, combining elements from the U.S. banking framework’s standardized and advanced approaches. While the final rule implements disclosure requirements for the ERCF’s standardized approach only, the FHFA may consider additional disclosure requirements related to the advanced approaches in the future.
According to the Final Rule, quarterly quantitative disclosures and annual qualitative disclosures must be provided by the GSEs no later than the end of the next calendar quarter. The GSEs will publish their first public disclosure reports under the Final Rule in Q1 of 2023 on their respective websites. This timeframe allows the GSEs to establish the internal reporting and governance functions necessary to fulfill these disclosure requirements, and will minimize duplicative reporting by aligning the schedule of annual qualitative disclosures with the Securities and Exchange Commission’s (SEC) reporting schedule for Form 10-K.