"Simply put, it has terrible optics. It looks like the results were suppressed for political and ideological reasons. Specifically, at the usual time scheduled for the release (August 2020), then-Director Calabria was heavily involved in trying to complete a new regulatory capital requirement to apply to the two GSEs, which – as per his well-known viewpoint – he wanted to be very high. His narrative justifying such a very high capital requirement – namely, that the GSEs for years had excessively lax credit underwriting standards and thus would be subject to very large losses in a downturn – was directly contradicted and undermined by the stress test results from last year. Hence, one can reasonably conclude he may have used the pandemic as an excuse to suppress the test results because they contradicted his narrative.
Additionally, this episode certainly looks like a high-handed regulatory action, which sets a troubling precedent about regulator discretion. Since the Dodd-Frank stress test and the disclosure of a summary of the results is legally required, it certainly seems rather questionable.
Given that the stress test results from a year ago were known inside the FHFA in the summer of 2020, the second troubling decision was that the agency, just a few months later, went ahead anyway and finalized the proposed combined GSE capital requirement at a very high level – specifically $283 billion (based upon June 2020 data). This was generally regarded by commenters on the capital proposal as far too high. Given the actual stress test results from the end of 2019 (the last known at that time inside the FHFA, but not disclosed to the public until now), this means the required capital was 40 times the “without DTA write-down” amount of $7.1B (which I believe to be the likely outcome) and nearly 10 times the “with DTA write-down” amount of $29.1B (the unlikely outcome). Those are excessive ratios, reflecting that the regulatory capital requirement seems wholly inconsistent with the stress test results. And when considering the stress losses from the end of 2020, which even includes positive income for the “without DTA write-down” calculation, the regulatory capital requirement seems to be even more out of line with the reality of modeled stress loss.
To sum up, the doubled-up stress test results just released are good news for the US housing finance system because they show that the GSEs, as its biggest players, have very significantly reduced their risk exposure, making the entire system stronger and more stable. The results, however, are not good when it comes to evaluating the Calabria era at the FHFA, as they highlight two troubling decisions that appear to show politics and ideology unduly distorting proper regulation."
