FHFA proposes modification of capital rules for Fannie and Freddie

FHFA proposes modification of capital rules for Fannie and Freddie

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FHFA proposes modification of capital rules for Fannie and Freddie

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.

In a fact sheet describing the proposed revisions, FHFA 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.

Bloomberg News

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.