The Federal Housing Finance Agency (FHFA) Publishes Final Capital Rule
February 25, 2022
On February 25, the Federal Housing Finance Agency (FHFA) published a final rule that amends the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (leverage buffer) and risk-based capital treatment of retained credit risk transfer (CRT) exposures for Fannie Mae and Freddie Mac (the Enterprises). The effective date for the ERCF amendments and technical corrections in this final rule will be 60 days after the day of publication in the Federal Register.
The final rule will:
- Replace the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of the Enterprise’s stability capital buffer;
- Replace the prudential floor of 10% on the risk weight assigned to any retained CRT exposure with a prudential floor of 5% on the risk weight assigned to any retained CRT exposure; and
- Remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT exposures.
“The final rule provides the Enterprises with the necessary incentives to transfer credit risk to private investors, which will help protect taxpayers from the risks posed by the Enterprises and will support the Enterprises as they strive to provide equitable and sustainable access to mortgage credit,” said Acting Director Sandra L. Thompson.
On November 23, 2021, CREFC submitted a response to the FHFA’s proposed revisions. CREFC applauded FHFA’s proposed changes related to CRT capital requirements and the leverage ratio, and focused on the need to modify current multifamily capital requirements so that they more appropriately reflect the actual risk of that sector:
- CREFC believes that the risk weights for multifamily exposure should be adjusted downward relative to single-family, given the multifamily sector’s strong historical performance and conservative underwriting over the past decade plus.
- FHFA applies a countercyclical adjustment to single-family exposure. Given the balloon risk at maturity in multifamily loans, and therefore relatively high level of exposure for the life of the loan, FHFA should also incorporate a countercyclical adjustment for multifamily. In calculating this adjustment, CREFC would recommend using readily available data from the National Council of Real Estate Investment Fiduciaries (NCREIF), which has been producing a property-level return index – NCREIF Property Index (NPI) – since 1978.
In its introduction to the final rule, FHFA noted that over half of the 89 comments they received focused on issues not directly related to the proposed amendments or technical corrections. FHFA acknowledged the importance of these topics, including the magnitude of single-family and multifamily risk weights, and “will thoroughly consider the public’s feedback on these issues when relevant rulemakings and policy decisions are under consideration.”
FHFA also stated that it remains committed to addressing the pro-cyclicality in the capital required for multifamily mortgage exposures. However, FHFA “has determined that this topic requires further consideration, potentially in a future rulemaking. Therefore, FHFA has determined not to take action related to a multifamily countercyclical adjustment at this time.”
Please contact Sairah Burki with any questions.