Today, the Federal Housing Finance Agency (FHFA) announced that it is seeking comments on a notice of proposed rulemaking regarding liquidity requirements for Fannie Mae and Freddie Mac (the Enterprises). The proposed rule builds on existing FHFA guidance and the experience gained from managing the Enterprises’ liquidity positions in conservatorship. Among other things, the proposed rule seeks to implement minimum Enterprise liquidity and funding requirements, daily management reporting of the Enterprises’ liquidity positions, monthly public disclosure reporting requirements, and other liquidity-related requirements.
“During the 2008 financial crisis, Fannie Mae and Freddie Mac did not have enough truly liquid assets nor did they have consistent access to the longer-term unsecured debt markets. This liquidity and funding failure, along with their low capital levels, necessitated placing the Enterprises into conservatorship,” said Director Mark Calabria. “A companion to the new capital rule, today’s proposed rule will better ensure that the Enterprises are positioned to fulfill their countercyclical mission. Requiring the Enterprises to have enough liquid assets to continue supporting the mortgage market during times of severe stress protects taxpayers and the housing market.”
The proposed rule has four liquidity requirements designed to ensure that the Enterprises are a source of strength for the mortgage market during downturns in the economy, and to incentivize the Enterprises to issue an appropriate and stable mix of debt over the long term. To protect taxpayers and support the mortgage market, the proposed rule takes into account the Enterprises’ lack of access to the Federal Reserve Bank discount window, unique structure, and public charter. Currently, the Enterprises would meet or exceed all requirements of the proposed rule.
The four liquidity requirements are:
- Two cash-flow based requirements; and
- A short-term 30-day requirement that, similar to the banking framework’s Liquidity Coverage Ratio rule, is based on a cumulative net cash outflow analysis, plus an additional $10 billion cushion requirement that must be met by highly liquid assets, like Treasury securities; and
- A 365-day requirement extending the short-term cumulative cash outflow analysis to a full year. Over this intermediate term, the Enterprises may count borrowings against certain fixed income instruments that the Fixed Income Clearing Corporation deems eligible collateral (subject to a haircut), which they cannot count under the 30-day requirement. There is no separate excess cushion required under this metric.
- Two long-term liquidity and funding requirements.
- The ratio of long-term unsecured debt to less-liquid assets must be greater than 120 percent; and
- The ratio of the spread duration of unsecured debt to the spread duration of retained portfolio assets must be greater than 60 percent.
FHFA invites interested parties to submit comments on the notice of proposed rulemaking within 60 days of its publication in the Federal Register via FHFA.gov or via mail, FHFA, Eighth Floor, 400 Seventh Street, SW, Washington, DC 20219.