In 2022, Fannie Mae and Freddie Mac made progress on their goals of
Both large mortgage investors "have limited ability to absorb more than potential nominal losses from their respective business activities" without relying on their government backstop (with senior preferred stock excluded), the report noted. It characterized them as "critically undercapitalized."
The report confirms the view that it would be difficult to untether Fannie and Freddie from conservatorship as attempted during the previous administration and in line with
The FHFA found that the two enterprises had a "combined adjusted total risk-based capital shortfall of $421 billion," under the existing capital framework.
But how undercapitalized Fannie and Freddie are is somewhat subjective, the agency noted in the report, reiterating past concerns with the methodology used to define goals under the framework.
"Despite considerable growth in each enterprise's loss-absorbing capacity (net worth), available capital remains in deficit, in large part because the senior preferred stock issued by the enterprises is excluded from regulated capital," the report said.
In addition to making note of the exclusion of the senior preferred stock from capital, the report reprised concerns about deferred tax assets which "have less loss-absorbing capacity during a period of financial stress."
Because a lot of the FHFA's directives are grounded in statutory law, Congress determines how much it can do to improve capital or modernize measures in its framework and bring them more in line with bank standards, the report noted.
"If Congress were to give FHFA the same flexibility as the federal banking regulators by amending or removing the statutory capital definitions, FHFA could streamline the regulation," the agency said in its report.
Meanwhile, the FHFA has been working to improve the government-sponsored enterprises' capital position through fee hikes it's been mandated to deliver but some Republican members of Congress have opposed.
Last year's goals called for pricing updates "to increase support for core mission borrowers, while fostering a level playing field for small and large sellers, fostering capital accumulation and achieving viable returns," the report noted.
While 2022's fee hikes related to increases for certain loans,
Other parts of the report with a cautionary tone included one noting that while performance has held up well to date, the rise in rates in the past year has shifted the production mix toward homebuyer loans that tend not to do as well as refinances.
Purchase mortgage characteristics, "such as generally higher loan-to-value ratios and lower credit scores, are associated with higher credit risk," the report noted.
The report also pointed to the fact that the higher-rate market has introduced more risk to the companies Fannie and Freddie count on to deliver and
That's something the FHFA sought to address with
"FHFA requires the enterprises to incorporate a counterparty default scenario," the agency said.
Dodd-Frank Act Stress Tests for the GSEs dated June 12, which involve different criteria than the capital framework, found that "without establishing an allowance on [DTAs], both reported comprehensive income in the severely adverse scenario."
Stress tests measure a "hypothetical future economic environment designed to assess the strength of the enterprises and other financial institutions and their resilience to unfavorable market conditions," suggesting that Fannie and Freddie would still produce income in this circumstance.
