FHFA close to unveiling capital plan for privatized GSEs

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WASHINGTON — Federal Housing Finance Agency Director Mark Calabria signaled the agency is close to issuing a revised proposal on Fannie Mae and Freddie Mac's post-conservatorship capital levels.

Calabria said the proposal, which the agency is redrafting after the director shelved a previous capital plan proposed by his predecessor, should be out "very soon."

Speaking at a virtual event held by the Mortgage Bankers Association Tuesday, Calabria said the FHFA has been working simultaneously on responding to the COVID-19 pandemic and capital rule proposal. The agency announced in November that it would re-propose the capital framework rather than use the plan developed by former FHFA Director Mel Watt.

“Everything that we have experienced the past few months with the pandemic and national emergency reinforces the need for Fannie and Freddie to be well-capitalized and operate in a safe and sound manner,” Calabria said.

In comment letters to the FHFA submitted in 2018, a number of lenders and other stakeholders called for Fannie Mae and Freddie Mac to hold a higher amount of capital post-conservatorship.
In comment letters to the FHFA submitted in 2018, a number of lenders and other stakeholders called for Fannie Mae and Freddie Mac to hold a higher amount of capital post-conservatorship.

Calabria also reiterated his belief that nonbank mortgage servicers are still on solid financial ground, despite growing concern among some in the market that servicers are struggling under the weight of loan forbearance plans resulting from the coronavirus crisis.

Watt had originally put forward a post-conservatorship capital proposal in June 2018. But after Calabria took office last year and later entered into an agreement with the Treasury Department that allowed for the government-sponsored enterprises to hold higher levels of capital, the agency decided it would revisit the plan.

In Watt’s proposal, the agency had asked for comment on two different minimum leverage ratio requirements that would incorporate credit risk for different mortgage categories and include components for market risk and operational risk. 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 have required Fannie and Freddie’s capital to be equal to 1.5% of trust assets and 4% of nontrust assets.

But in comment letters to the FHFA submitted in 2018, a number of lenders and other stakeholders called for the GSEs to hold a higher amount of capital post-conservatorship than Watt’s proposal suggested, and expressed concern that the framework was too procyclical.

Calabria emphasized that because of Fannie and Freddie’s thin layer of capital, “taxpayers are still at risk of bearing the cost of a bailout.”

“The entire housing system is at risk because Fannie and Freddie currently do not have the capital to withstand a serious downturn in the housing market,” he said. “And as we learned in 2008, when the enterprises fail, they are unable to fulfill their mission and role as a countercyclical support to the market in times of stress.”

Although Fannie and Freddie will not need to meet the capital standard established by the framework before they exit conservatorship, Calabria has said previously that the rule will give investors a clear idea of what will be required once the two companies return to the private market.

“Of course, having a re-proposed capital rule is not the same as having capital. But it is a critical step on the path toward building the capital necessary to end the conservatorships and to stand between mortgage credit risk and American taxpayers,” he added.

Calabria also discussed his agency’s response to the coronavirus. He said the rates of Fannie- and Freddie-backed loans that are in forbearance “remain manageable,” and that the agency has conducted internal stress tests with multiple different rates of forebearance.

Currently, that rate is about 6.25%, he said. That level of missed payments translates to about $500 million per month for which nonbank mortgage servicers must compensate investors with advances. The financial burden for servicers caused by the forbearance plans has caused some commentators to demand federal relief for the sector.

“Were we to see forbearance rates dramatically increase to 15%, that uptake would be roughly $1.2 billion in monthly advance obligations,” said Calabria. “We are not projecting that forbearance will go this high, but this helps provide some context around the numbers we are seeing today.”

“Going forward, obviously we will keep an incredibly close eye on this and let the data drive our decisions,” he added.

But he pushed back on the idea that mortgage servicers need government assistance to stay afloat. Because mortgage servicers are legally obligated to distribute payments to investors even if a borrower is in forbearance or does not make a mortgage payment, many have expressed concern that servicers could quickly find themselves underwater.

But, according to Calabria, “for most servicers, they actually have better liquidity today than they did two months ago.”

Overall, the coronavirus has likely delayed Fannie and Freddie’s ultimate exit from conservatorship by three or four months, Calabria said, but he is still confident that the GSEs will be able to go to market in 2021, he said.

“I think it’s fair to say that even if Fannie and Freddie were ready to go to market today, this probably isn’t the best environment to try to score a large IPO or a large re-offering,” he said.

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GSE reform GSEs Housing finance reform FHFA Mark Calabria Fannie Mae Freddie Mac Capital requirements Mortgage Bankers Association