Fannie Mae-No Politics (FNMA)

[kthomp19]

As an aside on this topic, FnF have been reporting statutory core capital requirements in their 10-K forms based on a 0.45% weight on MBS even though they are on the balance sheet, in contravention of the 2.5% weight on all balance sheet assets (which have included MBS since 2010) that 12 USC 4612(a)(1) requires.

My previous post showed that FHFA has decided to not give FnF capital classifications in conservatorship, and Tim Howard said the following last September:

For Fannie and Freddie’s minimum capital requirement, the clear choice is 2.5 percent, for three reasons. First, a 2.5 percent capital requirement for the companies’ on-balance sheet assets already is in HERA, as is a 45 basis-point requirement for their off-balance sheet credit guarantees (on which they take only credit risk). When the FASB required Fannie and Freddie to put credit guarantees on the balance sheet in 2010, FHFA sensibly kept their minimum capital at 45 basis points by regulation, since their economic substance hadn’t changed. If FHFA simply removes that regulatory waiver, the result will be to more than quintuple the required capital on credit guarantees relative to pre-crisis times—“serious reform” by any measure.

It appears that FHFA has applied a similar regulatory waiver to FnF's statutory core capital requirement reporting, which would also expire when conservatorship ends. At that point the minimum core capital requirement will revert to 2.5% of all balance sheet assets (inclusive of MBS) as HERA requires. The FHFA director can also require more core capital (for the purposes of capital classifications) by 12 USC 4612(c).

The upshot is that the 0.45% reported in the 10-K forms is meaningless because it will be updated to 2.5% at (or perhaps before) exit from conservatorship.