The Federal Housing Finance Agency (FHFA) has published a final rule [1] that amends several provisions of the Enterprise Regulatory Capital Framework (ERCF) [2] for Fannie Mae and Freddie Mac (the GSEs).
“The Enterprise Regulatory Capital Framework is a critical tool to ensure the Enterprises responsibly manage their risks,” said FHFA Director Sandra L. Thompson [3]. “Finalizing these proposed changes helps ensure the framework will continue to strengthen the Enterprises’ ability to provide liquidity throughout the economic cycle.”
The final rule includes modifications of certain provisions of the ERCF related to guarantees on commingled securities, multifamily mortgage exposures secured by properties with government subsidies, and derivatives and cleared transactions, among other modifications. These amendments clarify certain aspects of the ERCF and help to further align the ERCF with the risks faced by the Enterprises.
Back on March 13, 2023, the FHFA published in the Federal Register a notice of proposed rulemaking seeking comments on amendments to the ERCF that would modify various regulatory capital requirements for the GSEs.
The FHFA proposed these amendments to implement lessons learned through the continued application of the ERCF, and to better reflect the risks faced by the GSEs in operating their businesses. Regulatory capital requirements that properly account for risk will allow the GSEs to build capital to enhance their safety and soundness and protect U.S. taxpayers against financial losses.
The amendments set forth in the final rule will bolster the ERCF as it aims to ensure that each GSE operates in a safe and sound manner, well positioned to fulfill its mission to provide stability and assistance to the secondary mortgage market throughout the nation’s economic cycles.
Specifically, the final rule will:
- Reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively.
- Introduce a risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies.
- Replace the current exposure methodology (CEM) with the standardized approach for counterparty credit risk (SA-CCR) as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions.
- Update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score.
- Introduce a risk weight of 20% for guarantee assets.
- Align the timing of the first application of the single-family countercyclical adjustment with the first property value adjustment.
- Delay the compliance date for the advanced approaches to January 1, 2028.
FHFA has also identified several aspects of the ERCF where modifications will clarify and enhance the usefulness of the framework. Therefore, the final rule will also:
- Expand the definition of MSAs to include servicing rights on mortgage loans owned by the GSE.
- Explicitly permit eligible time-based call options in the CRT operational criteria, subject to certain restrictions.
- Amend the risk weights for IO MBS to 0%, 20%, and 100%, conditional on whether the security was issued by the GSE, the other GSE, or a non-GSE entity, respectively.
- Clarify the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.
In total, the FHFA received 23 public comment letters on the proposed rule from a variety of interested parties, including private individuals, trade associations, consumer advocacy groups, and financial institutions. The commenters were supportive of FHFA’s proposed amendments to the ERCF.
The final rule will become effective on April 1, 2024, except for the amendments to §§ 1240.36, 1240.37, and 1240.39, which will become effective January 1, 2026.