FHFA recently issued a notice of proposed rulemaking and request for comments on amendments to the Enterprise Regulatory Capital Framework (ERCF) for Fannie Mae and Freddie Mac (the Enterprises). The ERCF was originally published in December 2020 and became effective February 16, 2021 (see WBK’s previous coverage here).
In explaining the rationale for the proposed amendments to the ERCF, FHFA noted its concern that particular aspects of the current ERCF may create disincentives in the credit risk transfer (CRT) programs of the Enterprises that “may result in taxpayers bearing excessive undue risk for as long as the Enterprises are in conservatorships and excessive risk to the housing finance market both during and after conservatorships.” FHFA further expressed its consideration of “the transfer of risk, particularly credit risk, to a broad set of investors as an important tool to reduce taxpayer exposure to the risks posed by the Enterprises and to mitigate systemic risk caused by the size and monoline nature of the Enterprises’ businesses.”
Specifically, the amendments would:
- Replace the fixed prescribed leverage buffer amount (PLBA), currently equal to 1.5% of an Enterprise’s adjusted total assets, with a dynamic PLBA that equals 50% of the Enterprise’s stability capital buffer (calculated in accordance with FHFA regulations);
- Replace the current 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;
- Remove the current requirement that an Enterprise apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCF’s securitization framework; and
- Make technical corrections to parts of the current ERCF.
The comment period for the notice of proposed rulemaking closes on November 26, 2021.