Today, the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, unveiled an updated proposed rule on the level of capital the mortgage-finance companies will be required to hold once they exit conservatorship. We commend FHFA Director Calabria for his continued dedication to promoting a housing finance system that protects taxpayers, homeowners, renters, and the entire financial system.
Conservatorship was never intended to be a permanent arrangement. What was supposed to be a temporary patch to the financial crisis has metastasized into 11 years of inaction toward a long-term solution. Worse yet, in many ways the GSEs are in a more precarious position than they were before the crisis, as they hold more mortgages than they did in 2008. With taxpayers backing close to half of the entire US mortgage system, totaling $6.5 trillion, the prospect of another significant bailout of Fannie and Freddie remains high. Even during the COVID-19 crisis, in which Fannie and Freddie have necessarily taken important steps to provide some stability in the mortgage market, it is still important to at least keep an eye on long-term systemic health.
Under the updated proposal, the GSEs will be required to hold a combined $234 billion in frontline capital, leaving investors - not taxpayers - on the hook for any initial losses. At present, Fannie and Freddie currently hold about $45 billion in capital, according to the FHFA, far less than what they will need to eventually exit government control. As a proportion of assets, the new capital requirements represent 3.85 percent of GSE assets, compared to the 2.25 percent required by the 2018 rule. In addition to increasing the quantity of capital the GSEs will be required to hold, they must also hold higher quality capital based on the “U.S. banking framework’s definitions of capital.”
In the current economic environment, some would say that such requirements must take a back seat to other, more immediate considerations. Even if policy makers decide this must be the case for now, the updated rule can provide a valuable benchmark for navigating through the inevitable challenges that will need to be confronted in the future. In the nearer term, it can also prudently inform the tradeoffs that legislative and executive branch officials decide to make in response to America’s strained financial markets.
Given the parameters set in the Housing and Economic Recovery Act of 2008, FHFA can only do so much to administratively improve the GSEs. As such, we once again urge Congress to turn to the task of comprehensive housing finance reform as soon as is practically possible. Until then, we look forward to reviewing the details of the proposed rule and submitting written comments.