Today, the Federal Housing Finance Agency (FHFA) sent to the Federal Register for publication a final rule that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac (the Enterprises).
The final rule makes certain changes to the proposed rule published in the Federal Register on June 30, 2020 (proposed rule). That proposed rule was a re-proposal of the regulatory capital framework proposed in 2018 (2018 proposal). The 2018 proposal was based on the Conservatorship Capital Framework that had been implemented by FHFA in 2017. The final rule fulfills Congress’s Housing and Economic Recovery Act of 2008 mandate that FHFA establish risk-based capital requirements for the Enterprises. FHFA received and reviewed 128 comments, carefully assessed the public input, and then revised the proposed rule accordingly. Additionally, FHFA hosted two webinars and listening sessions.
The final rule is intended to ensure the safety and soundness of the Enterprises by increasing the quantity and quality of the Enterprises’ regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements.
“Fannie Mae and Freddie Mac have a mission to serve the American housing market during good times and bad. After considering all the comments on the proposed rule, and the Financial Stability Oversight Council’s (FSOC) review of the secondary mortgage market, FHFA is confident that the final rule puts Fannie Mae and Freddie Mac on a path toward a sound capital footing. Increased capital means that they can serve all Americans, especially low- and moderate-income families, throughout the economic cycle,” said FHFA Director Mark Calabria. “The final rule is another milestone necessary for responsibly ending the conservatorships.”
The final rule is substantively similar to the proposed rule in terms of overall structure and approach. As required by the proposed rule, an Enterprise must maintain tier 1 capital in excess of 4.0 percent to avoid restrictions on capital distributions and discretionary bonuses. FHFA has made three notable changes to the risk-based capital requirements in addition to a number of other refinements. The notable 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
- Increased the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20 percent.
Together, the enhancements in the final rule ensure each Enterprise’s safety and soundness and its ability to fulfill its statutory mission across the economic cycle, particularly during periods of financial stress.
In conjunction with the final rule, FHFA is also releasing a data supplement to the expanded-data FHFA House Price Index (HPI). The FHFA HPI® will now provide a national expanded-data series beginning in 1975Q1. This extends the available index that began in 1991Q1. The augmented data series is 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.
 See Fact Sheet: Re-proposed Rule on Enterprise Capital available at https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Re-proposed-Rule-on-Enterprise-Capital-5202020.pdf.