In March, the Federal Housing Finance Agency (FHFA) announced their intention to propose a new set of capital requirements for Fannie Mae and Freddie Mac. The federal register published the proposed new FHFA capital rule on June 30, and the very next day, 17 trade groups released a letter asking the agency to extend the comment period for two additional months. 

This extension would push the deadline to the end of October, just a few days before the 2020 presidential election. 

A cynical person might think that these groups—including the American Bankers Association, the Center for Responsible Lending, the Mortgage Bankers Association, the Housing Policy Council, and the National Association of Realtors—want to delay the new rule as long as possible while hoping for a favorable outcome in the election (one that ensures the higher capital requirements are never implemented). This is Washington, D.C., after all.

Does anyone—much less these particular lobbyists—really need another 60 days to comment on the proposal? Everyone has known that the new rule was coming since at least November 2019. Another poorly kept secret was that the FHFA was going to base the new rule on the one they released in 2018. (The rule was proposed in 2018, but the capital framework itself was released in 2017).

Sure enough, the new FHFA rule is based on the 2018 version, and it would require Fannie Mae and Freddie Mac (combined) to carry close to $200 billion in equity capital.

This new proposal is a great start because the amount required is approximately equal to the companies’ cumulative losses during the 2008 financial crisis. Those losses would have been much worse, of course, had the federal government not stepped in and placed the companies in conservatorship. So the FHFA should increase the required amount.

On the other hand, it is possible that those losses would not have been so bad—or so devastating in terms of costs to taxpayers—had the GSEs been held to higher capital requirements in the first place. Historically, though, the lack of any meaningful capital rules fueled the companies’ abnormal growth and, therefore, the outsize risk they posed to the housing finance system, borrowers, and taxpayers.

The weak rules that did exist also provided Fannie and Freddie with a funding advantage relative to banks, even though there is no objective reason to let the GSEs operate with dramatically higher leverage than large U.S. banks. 

Combined, Fannie and Freddie have total assets of almost $6 trillion, roughly half the total assets of all eight U.S.-based global systemically important banks (G-SIBs). Unlike the G-SIBs, though, nearly all of Fannie’s and Freddie’s assets are concentrated in just one type of asset (home mortgages). Arguably, this concentration makes them even riskier than the banks. 

The largest U.S. banks have to meet an 8 percent capital ratio, as well as additional capital buffers (like the supplemental leverage ratio and the capital conservation buffer) that effectively serve to increase the minimum requirement. On a risk-weighted basis, the G-SIBs have an average 14 percent ratio of equity to assets. 

It does not appear that the FHFA rule will go this far—doing so would require Fannie and Freddie to carry closer to $400 billion in equity. But the proposed rule would dramatically shrink the funding advantage and increase the equity ratio relative to what it has been in the past.

The core of the newly proposed rule includes a total capital ratio of 8 percent, including various requirements for tier 1 equity and common equity, a capital conservation buffer and a leverage buffer (see page 39368), as well as a minimum leverage ratio of 2.5 percent. (Technically, the proposal requires core capital to be no less than 2.5 percent of adjusted total assets, and tier 1 capital to be no less than 2.5 percent of adjusted total assets (see page 39275).)

The leverage ratio is critical because it serves as a backstop to the (proposed) risk-based capital requirements. 

Calabria has wisely stated that Fannie and Freddie should “maintain capital levels commensurate with their risk profiles,” and “operate under essentially the same capital rules as other large financial institutions.” No plan is perfect, but the new FHFA proposal is a great first step toward reaching these two goals. 

If the housing lobby wants weaker—or lower—capital requirements on the GSEs, they should explain why. And they should do so by August 31.