FHFA nears target date for final rule on capital framework

The Federal Housing Finance Agency may soon deliver another capital rule update to a mortgage industry that's juggling other ongoing and potential policy changes in this area.

The final rule on the Enterprise Regulatory Capital Framework is on track to arrive later this year, according to the agency's latest performance plan for fiscal year 2024, a period that started Oct. 1.

The Dec. 31 target date set for that final rule means mortgage companies could face new shifts in how two major government-related mortgage investors, Fannie Mae and Freddie Mac, price loans for nonbanks and depositories.

FHFA officials have emphasized that the framework is closely tied to pricing policies that have both business and political sensitivities, and reiterated that they have sought industry feedback on whether to adjust their proposed changes.

Comment letters on pricing have revived debate on whether the agency should consider moving away from risk-based measures and revert to the flat pricing model used prior to the Great Recession. Some housing advocates have sought a reversion. Other commenters disagree.

At the same time, bank rules also are undergoing updates, the latest proposed changes to which could make it more difficult for depositories to hold some mortgages. However, the bank proposal has a longer-term timeline. 

"The proposed Basel III implementation has a number of negative consequences for home financing, and contrary to the administration's goals, will depress credit for first-time homebuyers," said Ed DeMarco, president, Housing Policy Council, and a former regulator.

The FHFA changes, in contrast, could treat some mortgage assets more leniently.

The agency has assigned more leeway to credit-risk transfers under the Biden administration and the current proposal contains a related technical correction. FHFA was more cautious about the capital treatment of CRT during the Trump administration. 

Some industry groups have also asked for leniency for other types of assets in comment letters.

Among the pricing changes the Mortgage Bankers Association has requested for inclusion in the final rule is more of a level playing field for third-party originated loans.

"At least one of the GSEs is providing worse execution/pricing on TPO loans relative to retail loans solely due to this difference in origination channel, and the disparity in pricing stems from the higher risk multiplier for those loans in the ERCF," the group said in a comment letter.

The association also requested an adjustment for multifamily loans that would limit the effect of any drop in value or income to account for normal seasonal variations, only allowing for a full impact to capital if a decline in value goes beyond -35% or an income falloff surpasses -15%.

While some mortgage companies will likely have to reconcile the agency's pending update of the capital framework with the Basel III endgame proposal for depositories, others may need to navigate its interactions with a new risk-based capital rule coming to the Ginnie Mae market.

The Ginnie Mae rule for issuers of mortgage-backed securities, which affects another large mortgage market with more direct government ties, is set to take effect at the end of 2024.

Both the Ginnie measure and the proposed bank capital rule could particularly discourage holding servicing. Depository regulators already assign a high risk weighting to mortgage servicing rights, and the Ginnie Mae rule would also extend one to MSRs that nonbanks hold.