WASHINGTON — The Federal Housing Finance Agency on Tuesday proposed new minimum capital requirements for Fannie Mae and Freddie Mac that would only go into effect if the government ends its conservatorships of the two mortgage giants.
The plan, which FHFA Director Mel Watt previewed in congressional testimony last month, would assess credit risk for different mortgage categories and include components for market risk and operational risk.
The proposal also asked for comment on two different minimum leverage ratio requirements for the government-sponsored enterprises. Under one option, the GSEs would have to hold capital equal to 2.5% of assets and off-balance-sheet guarantees. The second method would require Fannie and Freddie’s capital to be equal to 1.5% of trust assets and 4% of nontrust assets.
“This approach, consistent with the Enterprises’ Safety and Soundness Act, differentiates between the greater funding risks of the Enterprises’ non-trust assets and the lower funding risks of the Enterprises’ trust assets while increasing the capital requirements for both relative to the current statutory requirements,” the FHFA said in a fact sheet accompanying the proposal. (The public has 60 days to comment on the plan.)
A risk-based capital plan would aim to address persistent uncertainty about the two companies’ solvency as their government conservatorships have dragged on for a decade. In December, Watt announced a deal with the Treasury Department to let Fannie and Freddie retain a $3 billion capital buffer as it looked increasingly likely that they would need another Treasury draw. The companies have effectively had to sweep their profits back into the government while in conservatorship.
In his testimony last month, Watt said the proposal “will provide valuable transparency to the public” about the GSEs.
“We think it is important for FHFA, as the prudential regulator for Fannie Mae and Freddie Mac, to articulate our views on capital requirements and to start a healthy discussion about the amount of capital the Enterprises should have to appropriately shield taxpayers from assistance,” Watt said in a press release Tuesday. “In addition, feedback on this proposed rule will inform FHFA’s views as conservator in making possible refinements to our assumptions about capital as we evaluate the Enterprises’ business decisions during conservatorship.”
However, no risk-based capital plan can go into effect while the companies are still in conservatorship — a state of limbo that will only end likely when Congress is able to enact a long-term GSE reform plan.
The FHFA stressed that the proposal does not take a position on any legislative discussions related to reforming the firms.
“By proposing this rule, FHFA is not attempting to take a position on housing finance reform and the proposed rule is not connected to efforts or ideas about recapitalizing the Enterprises or administratively releasing them from conservatorship,” the agency said in the fact sheet. “FHFA continues to believe that it is the role of Congress to determine the future of housing finance reform and what role, if any, the Enterprises should play in that reform.”
The FHFA ended regulatory capital requirements for the GSEs in September 2008 after putting Fannie and Freddie into conservatorships. A similar framework was in place under the FHFA’s pre-crisis predecessor, the Office of Federal Housing Enterprise Oversight.
This announcement comes as Watt’s tenure as head of the FHFA winds down. Watt testified before the Senate Banking Committee in May to evaluate the status of the housing finance system, and said he would continue to implement reforms that do not require congressional action.