Calabria has been “pushing for higher reserves,” i.e., more capital, since he became director of FHFA. What he hasn’t done is worked with Treasury to cancel the net worth sweep, or even allow the companies to defer their June sweep payment to build capital while still owing the money to Treasury (by adding the deferred payments to Treasury’s liquidation preference). He may have his reasons for that, but it’s been his show since April. Now that we have the Treasury reform plan and the Fifth Circuit en banc ruling, maybe we’ll see some concrete steps taken soon–although Calabria gives no hint of that in his prepared remarks to the Senate Banking Committee.His comment mentions that the Dodd Frank stress test results show a decline in home prices of 25% (which is consistent with the decline in prices of 27% during the last downturn) would result in combined losses of $43.3B. On page two he says that he will act to build capital consistent with their risk profiles. Wouldn’t it make sense that he base his proposed capital rule on the figure he references of $43.3B since it’s based on their current risk profile? Maybe a multiple of it and not bank-like capital? I know you have mentioned that the validity of the test might not be the best, but it looks like Calabria puts some value in it.
jtimothyhoward
September 9, 2019 at 9:34 pm
I did note the mention of the stress test results, and wondered if Calabria knew how favorable they really were. And the $43.5 billion is overstated, because it includes the assumption that a $25.3 billion reserve is set up for the companies’ deferred tax assets, which (a) none of the Dodd-Frank stress tests for banks do, and (b) isn’t appropriate because with only $12.8 billion in projected stress credit losses, each company would be viable as a going concern, and GAAP would neither require nor permit a deferred tax asset (DTA) reserve to be set up under those circumstances. Take the DTA reserve away and Fannie and Freddie’s combined stress losses are only $18.0 billion, or about 35 basis points of their total assets. I do hope, though, that the FHFA staff instructs Calabria both on the workings of the Dodd-Frank test and the stress test mandated by the Housing and Economic Recovery Act. That might help get him to move away from his insistence that the companies hold “bank-like” capital; they don’t have anything close to “bank-like” losses. Sorry for the long read this was on T Howards Board...
