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FHFA Finalizes Changes to the GSEs’ Capital Framework

The Federal Housing Finance Agency (FHFA) has published a final rule that amends the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (leverage buffer), and risk-based capital treatment of retained credit risk transfer (CRT) exposures for the government-sponsored enterprises (Fannie Mae and Freddie Mac).

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.

On December 17, 2020, the FHFA published a final rule to establish the Enterprise Regulatory Capital Framework (ERCF).

The FHFA’s final rule will:

  • Replace the fixed leverage buffer equal to 1.5% of an enterprise's adjusted total assets with a dynamic leverage buffer equal to 50% of the enterprise's stability capital buffer;
  • Replace the prudential floor of 10% on the risk weight assigned to any retained CRT exposure with a prudential floor of 5% on the risk weight assigned to any retained CRT exposure; and
  • Remove the requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures.

"The amendments finalized today reflect the feedback FHFA received last year and advance FHFA's mission of ensuring the Enterprises are able to support the housing market throughout the economic cycle," said FHFA Acting Director Sandra L. Thompson. "The final rule provides the enterprises with the necessary incentives to transfer credit risk to private investors, which will help protect taxpayers from the risks posed by the enterprises and will support the enterprises as they strive to provide equitable and sustainable access to mortgage credit."

The final rule would require the GSEs to maintain significant levels of capital to satisfy their risk-based and leverage capital requirements and buffers. Based on their financial condition as of September 30, 2021, the GSEs together would be required to hold approximately $319 billion in adjusted total capital, of which at least $270 billion would need to be Tier 1 capital, and $234 billion would need to be Common Equity Tier 1 capital (CET1).

The final rule also makes technical corrections to various provisions of the ERCF that was published on December 17, 2020. The effective date for the ERCF amendments and technical corrections in this final rule will be 60 days after the day of publication in the Federal Register.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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