FHFA issues final rule establishing new regulatory capital framework

The FHFA issued a final rule on Wednesday that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac.

The final rule is intended to ensure the “safety and soundness” of Fannie Mae and Freddie Mac by increasing the quantity and quality of their regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements, according to the FHFA.

The final rule includes changes to the proposed rule published in the Federal Register on June 30, 2020, which was a re-proposal of the regulatory capital framework proposed in 2018, a FHFA press release stated. The 2018 proposal was based on the Conservatorship Capital Framework that had been implemented by FHFA in 2017, while the final rule fulfills the Housing and Economic Recovery Act of 2008 mandate by Congress that FHFA establish risk-based capital requirements.

The final rule is similar to the proposed rule in terms of overall structure and approach, according to the FHFA. As required by the proposed rule, Fannie Mae and Freddie Mac must maintain tier 1 capital in excess of 4% to avoid restrictions on capital distributions and discretionary bonuses.

Three notable changes to the risk-based capital requirements — in addition to other refinements — include:

  • increased capital relief for credit risk transfers;
  • reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance; and
  • increased exposure level risk-weight floor for single-family and multi-family mortgage exposures to 20%.

Click here to view the FHFA’s fact sheet on the final rule on enterprise capital.

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