FHFA Finalizes Changes to GSE Capital Framework

In an important step toward facilitating the exit of Fannie Mae and Freddie Mac from conservatorship, the Federal Housing Finance Agency today finalized its regulatory capital framework for the GSEs. The 375-page final rule includes several key modifications from this summer’s re-proposal of a framework that was originally proposed in 2018.

Among other things, the final rule includes changes that would increase the dollar amount of capital relief afforded to Fannie and Freddie’s credit risk transfers; better mitigate the model risks associated with a mortgage risk-sensitive framework; more fully align credit risk capital requirements with those of other market participants; and reduce credit risk capital requirements on single-family mortgage exposures to borrowers affected by COVID-19.

According to FHFA, the final rule also seeks to ensure that Fannie and Freddie maintain high-quality regulatory capital; as well as to strengthen the quantity of regulatory capital through a number of requirements; imposes backstop leverage requirements, including a minimum leverage ratio and an additional prescribed leverage buffer amount; addresses pro-cyclicality through buffers and other measures; and requires each of the GSEs to calculate its risk-based capital requirements using its internal models and maintain the greater of the regulatory capital required under the advanced approach or the standardized approach.

Under the final rule—which takes effect 60 days after publication in the Federal Register—Fannie and Freddie will ultimately be required to maintain just over $280 billion in capital based upon their current book of business. FHFA did not specify how that capitalization will be achieved or a timeframe for meeting that target.

In comments on the proposal earlier in the year, ABA asked FHFA to further delineate the specific role it envisions for the GSEs in a post-conservatorship environment, noting that that information is needed to adequately evaluate the sufficiency of the capital standards being developed. The association is currently reviewing the final rule and will provide additional analysis in the coming days.