FHFA Finalizes Capital Framework for Fannie Mae and Freddie Mac
FHFA adopted a final rule that establishes risk-based and leverage capital requirements for the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac)—collectively known as the Enterprises. The final rule also makes conforming amendments to the definitions in FHFA regulations governing assessments and minimum capital and removes the Office of Federal Housing Enterprise Oversight (OFHEO) regulation on capital for the Enterprises. This rule becomes effective from February 16, 2021.
FHFA had proposed a new regulatory capital framework for Fannie Mae and Freddie Mac on June 30, 2020. After considering the comments on the proposed rule, FHFA has determined to make a number of changes to the proposed rule to ensure that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission across the economic cycle, in particular during periods of financial stress. Key modifications to the proposed rule include the following:
- Changes to the approach to credit risk transfers will better tailor the risk-based capital requirements to the risk retained by an Enterprise on its credit risk transfers. These enhancements include a change to the overall effectiveness adjustment for a credit risk transfer on a pool of mortgage exposures that has a relatively lower aggregate credit risk capital requirement. It also includes a change to the method for assigning a risk-weight to a retained credit risk transfer exposure, to increase the risk-sensitivity of the risk-weight.
- The floor on the adjusted risk-weight assigned to mortgage exposures will be 20%, instead of 15%. This adjustment may increase to some extent the dollar amount of the capital relief provided by credit risk transfer on a pool of mortgage exposures that, absent the 20% risk-weight floor, would have had a smaller aggregate net credit risk capital requirement.
- The credit risk capital requirement for a single-family mortgage exposure that is, or was, in forbearance, pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act or a program established by FHFA, to provide forbearance for COVID-19-impacted borrowers will be assigned under an approach that is specifically tailored to these exposures. This approach will significantly reduce the credit risk capital requirement for a non-performing loan that is subject to a COVID-19-related forbearance and, following a reinstatement, will then disregard that period of non-performance.
- The framework for determining credit risk capital requirements will permit a modified re-performing loan to transition to a performing loan after a 5-year period of performance, treat a single-family mortgage exposure in a repayment plan as a non-modified re-performing loan instead of a modified re-performing loan, and apply a more risk-sensitive approach to single-family mortgage exposures with marked-to-market loan-to-value ratios between 30% and 60%.
- The combined risk multiplier for a single-family mortgage exposure will be capped at 3.0.
- The countercyclical adjustment to the standardized credit risk capital requirement for a single-family mortgage exposure will be based on the national, not-seasonally adjusted expanded-data FHFA House Price Index instead of the all-transaction FHFA House Price Index.
- The stress capital buffer will be periodically re-sized to the extent that FHFA's eventual program for supervisory stress tests determines that an Enterprise's peak capital exhaustion under a severely adverse stress would exceed 0.75% of adjusted total assets.
- The advanced approaches requirements will have a delayed effective date of the later of January 01, 2025 and any later compliance date provided by a transition order applicable to the Enterprise. During that interim period, an Enterprise's operational risk capital requirement will be 15 basis points of its adjusted total assets.
Related Link: Federal Register Notice
Effective Date: February 16, 2021
Keywords: Americas, US, Banking, Regulatory Capital, Basel, Credit Risk, Market Risk, Operational Risk, Leverage Ratio, Fannie Mae, Freddie Mac, COVID-19, CARES Act, FHFA
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