jtimothyhoward
NOVEMBER 18, 2020 AT 5:54 PM
Looking at the fact sheet, the May 20 capital proposal required Fannie and Freddie to hold $233.9 billion in capital as of September 30, 2019. Growth in the companies’ business since that time would have raised the amount of their required capital as of June 30, 2020 to $262.7 billion. Changes made by FHFA to the structure of the final capital rule pushed required Fannie and Freddie capital at June 30, 2020 UP by another $20.7 billion, to a total of $283.4 billion. The main driver of that increase was a decision made by FHFA to increase the minimum capital requirement on ANY mortgage loan from 1.2 percent to 1.6 percent. (FHFA did give some additional credit for credit risk transfers, but that only trimmed $2.7 billion off the companies’ total capital requirement–less than one-quarter of what the increase in the minimum capital requirement had added to it.)
FHFA had received an overwhelming number of comments on its May 20 capital proposal saying that the capital requirement was too high, and determined too arbitrarily. Even the American Bankers Association and the Mortgage Bankers Association said that. So…FHFA raised it further. And it did so in probably the worst way possible–by adding to the (indefensible) minimum capital requirement on any mortgage guaranteed by the company. With this change, the companies now effectively are left with no means for cross-subsidizing higher-risk affordable housing loans, as they had been able to do in the past.
In the write up in the fact sheet, FHFA justified this increase by referencing the Financial Stability Oversight Council report (which Director Calabria had sought, and enthusiastically endorsed), and also doubling down on the insistence that what it calls Fannie and Freddie’s “peak cumulative capital losses”–which include the $300 billion-plus in non-cash expenses FHFA required them to book after they were forced into conservatorship, designed to ramp up their draws of non-repayable senior preferred stock paying a 10 percent annual dividend in perpetuity to Treasury–is a real number, and a more valid basis for a capital requirement than actual incurred credit losses.
It is impossible to escape the conclusion that Calabria is using the main tool he has, the power to set Fannie and Freddie’s capital requirements, to force them to price the only business they are allowed by charter to do–guaranteeing the credit of residential mortgages–in a way that makes them uncompetitive with banks, the FHA and other sources of mortgage credit, and thus shrink their role in the market. He is thumbing his nose at historical market data and comparative economics, and insisting these capital requirements are necessary to “protect the taxpayer.”
Setting aside for the moment what happens with the net worth sweep and when–whether it is eliminated in a negotiated settlement with plaintiffs in the lawsuits or ruled invalid by the Supreme Court–three parties now face decisions about how they will react to the final capital rule. Fannie and Freddie will have to determine how they will manage their companies, and price their business, in the face of a capital requirement that is absurdly misaligned with the risks of the loans they guarantee. Investors will have to decide whether they want to invest any new money in companies whose regulator is so overtly determined to marginalize them competitively. And the incoming administration will have to decide whether it wants Fannie and Freddie–which if properly capitalized and regulated could serve as the engines of an efficient and effective system for financing affordable housing–to continue to be run by a director who so obviously does not believe in their chartered missions, or indeed even their existence.
