Mar 13 -- The Federal Housing Finance Agency (FHFA or the Agency) is seeking comments on a notice of proposed rulemaking (proposed rule) that would amend several provisions in the Enterprise Regulatory Capital Framework (ERCF) for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an Enterprise). The proposed rule would include modifications related to guarantees on commingled securities, multifamily mortgage exposures secured by government-subsidized properties, derivatives and cleared transactions, and credit scores, among other items. Comments must be received on or before May 12, 2023.
FHFA is seeking comments on amendments to the ERCF that would enhance, clarify, or otherwise refine various regulatory capital requirements for the Enterprises. The proposed rule would modify provisions in the ERCF related to the following items: guarantees on commingled securities, multifamily mortgage exposures secured by properties with a government subsidy, derivatives and cleared transactions, credit scores for single-family mortgage exposures, guarantee assets, mortgage servicing assets (MSAs), time-based calls for credit risk transfer (CRT) exposures, interest-only (IO) mortgage-backed securities (MBS), the single-family countercyclical adjustment, the stability capital buffer, and the compliance date for the advanced approaches.
The proposed amendments would implement the lessons learned through the continued application of the ERCF and better reflect the risks inherent in the Enterprises' business models. In addition, the proposed rule would clarify certain areas of the ERCF. In doing so, the modifications in this proposed rule would enhance the safety and soundness of the Enterprises and contribute to the furtherance of the Enterprises' missions.
FHFA adopted the ERCF on December 17, 2020, with the purpose of implementing a going-concern regulatory capital standard to ensure that each of Fannie Mae and Freddie Mac operates in a safe and sound manner, and, across the economic cycle is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market. The ERCF satisfied a statutory requirement that FHFA establish by regulation, risk-based capital requirements to safeguard the Enterprises against the risks that arise in the operation and management of their businesses. The ERCF also implemented a new leverage framework that included both a minimum requirement and a leverage buffer. The ERCF became effective on February 16, 2021. FHFA subsequently amended the ERCF three times. The amendments refined the prescribed leverage buffer amount (PLBA or leverage buffer) and the risk-based capital treatment of CRT, implemented a more comprehensive set of public disclosure requirements for the standardized approach, and required the Enterprises to submit capital plans to FHFA on an annual basis. Each of the amendments became effective in 2022.
Since the adoption of the ERCF, the Enterprises have been operating under the capital requirements and buffers outlined in the standardized approach while simultaneously building their capital positions. However, despite their recent progress accumulating capital, the Enterprises remain severely undercapitalized. Since the Enterprises were placed into conservatorships in September 2008, they have been supported by Senior Preferred Stock Purchase Agreements (PSPAs) between the U.S. Department of the Treasury (Treasury) and each Enterprise.
As conservator and prudential regulator, FHFA continuously monitors the risk inherent in the Enterprises' business operations and reviews the appropriateness of the ERCF's capital requirements and buffers to mitigate those risks. FHFA has identified several provisions in the ERCF that could be revised to enhance the ERCF. Specifically, the proposed rule would introduce:
• A 5 percent risk weight and 50 percent credit conversion factor for guarantees on commingled securities,
• A risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies,
• A standardized approach for counterparty credit risk (SA-CCR) as the method for computing risk weights for derivatives and cleared transactions,
• A modified procedure for determining a representative credit score for single-family mortgage exposures,
• A modified credit score assumption for single-family mortgage exposures originated without a representative credit score,
• A 20 percent risk weight for guarantee assets, and
• A timing alignment between the application of single-family countercyclical adjustments and property value adjustments.
FHFA has also identified several aspects of the ERCF where specific language would clarify and enhance the usefulness of the ERCF. The proposed rule would:
• Expand the definition of MSAs to include servicing rights on mortgage loans owned by the Enterprise,
• Explicitly permit eligible time-based call options in the CRT operational criteria,
• Amend the risk weights for IO MBS to 0 percent, 20 percent, and 100 percent, conditional on whether the security was issued by the Enterprise, the other Enterprise, or a non-Enterprise entity, respectively, and
• Clarify the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.
Finally, the proposed rule would extend the compliance date for the advanced approaches. Each item is discussed below. . . .
FRN:
https://www.federalregister.gov/d/2023-04041 [28 pages]
