House lawmaker warns of CECL's impact on Fannie, Freddie

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WASHINGTON — A senior Republican on the House Financial Services Committee is seeking details from Fannie Mae and Freddie Mac's chief regulator on the impact of the current expected credit loss accounting standard on the two mortgage giants.

Rep. Blaine Luetkemeyer, R-Mo., told acting Federal Housing Finance Agency Director Joseph Otting that he is concerned the Financial Accounting Standards Board’s new model for estimating loan losses, which has long drawn industry criticism, could pose risk across the mortgage market.

“By requiring the lifetime credit losses for existing loans to be observed up front, CECL will force financial institutions to increase their credit loss reserves which could lead to decreased lending or the rising cost of certain products,” Luetkemeyer, the ranking Republican on the consumer protection and financial institutions subcommittee, said in a letter dated Thursday. “This is particularly threatening to mortgage rates and availability. Because Fannie Mae and Freddie Mac are currently subject to private sector GAAP accounting requirements, they will also be forced to comply with CECL.”

Specifically, Luetkemeyer is asking Otting to explain how much in additional loss reserves the government-sponsored enterprises would be forced to set aside and where would they get the capital to back up those reserves.

The CECL model, adopted by FASB in 2016, is a more conservative approach than the current loss accounting standard, requiring financial institutions to estimate losses over the entire life of a loan. Publicly traded banks must convert to the new model by Jan. 1, 2020, followed by privately held institutions and credit unions, which have until Jan. 1, 2022.

In January, regional banks proposed to split the loan-loss estimates in two to soften the burden of CECL. But that idea was met with opposition from the biggest banks.

Luetkemeyer is also asking if the cost of additional reserves under CECL will affect the ability of the GSEs to meet their affordable housing goals and what impact the additional reserves will have on mortgage costs, particularly for low-income borrowers.

“With over $5 trillion in mortgage-backed securities and the federal government investing in or insuring over 90 percent of mortgages in the United States, understanding the effects of CECL will have on the GSEs is vital,” Luetkemeyer said.

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CECL GSEs Accounting Loan-loss provisions Joseph Otting FASB FHFA Fannie Mae Freddie Mac House Financial Services Committee