WASHINGTON — The Federal Housing Finance Agency is proposing to revise the post-conservatorship capital framework for Fannie Mae and Freddie Mac that was finalized under the Trump administration in order to encourage the transfer of risk to private investors and make the leverage requirements more dynamic.
In a proposal issued Wednesday, acting FHFA Director Sandra Thompson said the refinements the agency is looking to implement would enable the government-sponsored enterprises “to support the housing market throughout the economic cycle in a safe and sound manner.”
In particular, the agency is looking to provide Fannie and Freddie with more of an incentive to engage in credit-risk transfer, a practice that enables the GSEs to sell a piece of loans they guarantee to private investors. The deals have been a hallmark of the federal conservatorship of the two companies because they mitigate potential losses.
Under the proposal, the agency would lower the risk weight assigned to credit-risk transfer exposures and remove the requirement that the GSEs apply an “overall effectiveness adjustment” to the portion of the risk that they keep after a transfer.
The FHFA is also proposing to make the “prescribed leverage buffer amount” in the framework more dynamic, instead of being fixed at 1.5% of a GSE’s adjusted total assets. The changes would result in a smaller leverage buffer for both Fannie and Freddie, the FHFA said.
In a fact sheet describing the proposed revisions, the agency said the changes would align the GSEs’ capital requirements more closely with the leverage requirements codified in the Basel accords for global systemically important banks.
“The proposed requirements provide the Enterprises with the necessary incentives to support sustainable lending initiatives by transferring a significant amount of credit risk away from the taxpayers to private investors that are better positioned to take this risk,” Thompson said in a statement. “I look forward to receiving robust feedback on the proposed amendments.”
The FHFA is accepting public comments on the proposal for 60 days after it is published in the Federal Register.
Earlier Wednesday, Thompson had indicated in a speech to the National Association of Federally-Insured Credit Unions that the agency was looking at "refinements" to the November capital rule, but she emphasized that “it doesn't make a lot of sense for the capital rules to change every time there's a new director.”
“It doesn't provide consistency or stability,” she said.
She specifically highlighted the capital treatment of credit risk transfers as an area that the agency was looking to adjust.
"We want to make sure that we got that right,” she said. “Every time I talk to investors it's really something that they bring up, [and] also market participants."
Kate Berry contributed to this story.
