Enterprise Regulatory Capital Framework

Cited as:85 FR 39274
Court:Federal Housing Enterprise Oversight Office
Publication Date:30 Jun 2020
Record Number:2020-11279
Federal Register, Volume 85 Issue 126 (Tuesday, June 30, 2020)
[Federal Register Volume 85, Number 126 (Tuesday, June 30, 2020)]
                [Proposed Rules]
                [Pages 39274-39406]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-11279]
                [[Page 39273]]
                Vol. 85
                Tuesday,
                No. 126
                June 30, 2020
                Part II
                Federal Housing Finance Agency
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                12 CFR Parts 1206, 1225, and 1240
                Department of Housing and Urban Development
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                Office of Federal Housing Enterprise Oversight
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                12 CFR Part 1750
                Enterprise Regulatory Capital Framework; Proposed Rule
                Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 /
                Proposed Rules
                [[Page 39274]]
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                FEDERAL HOUSING FINANCE AGENCY
                12 CFR Parts 1206, 1225, and 1240
                DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                Office of Federal Housing Enterprise Oversight
                12 CFR Part 1750
                RIN 2590-AA95
                Enterprise Regulatory Capital Framework
                AGENCY: Federal Housing Finance Agency; Office of Federal Housing
                Enterprise Oversight.
                ACTION: Notice of proposed rulemaking; request for comments.
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                SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
                seeking comments on a new regulatory capital framework for the Federal
                National Mortgage Association (Fannie Mae) and the Federal Home Loan
                Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an
                Enterprise). The proposed rule would also make conforming amendments to
                definitions in FHFA's regulations for assessments and minimum capital
                and would also remove the Office of Federal Housing Enterprise
                Oversight's (OFHEO) regulation on capital for the Enterprises.
                DATES: Comments must be received on or before August 31, 2020.
                ADDRESSES: You may submit your comments on the proposed rule,
                identified by regulatory information number (RIN) 2590-AA95, by any one
                of the following methods:
                 Agency Website: www.fhfa.gov/open-for-comment-or-input.
                 Federal eRulemaking Portal: http://www.regulations.gov.
                Follow the instructions for submitting comments. If you submit your
                comment to the Federal eRulemaking Portal, please also send it by email
                to FHFA at fhfa.gov">[email protected]fhfa.gov to ensure timely receipt by FHFA.
                Include the following information in the subject line of your
                submission: Comments/RIN 2590-AA95.
                 Hand Delivered/Courier: The hand delivery address is:
                Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA95,
                Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW,
                Washington, DC 20219. Deliver the package at the Seventh Street
                entrance Guard Desk, First Floor, on business days between 9 a.m. and 5
                p.m.
                 U.S. Mail, United Parcel Service, Federal Express, or
                Other Mail Service: The mailing address for comments is: Alfred M.
                Pollard, General Counsel, Attention: Comments/RIN 2590-AA95, Federal
                Housing Finance Agency, Eighth Floor, 400 Seventh Street SW,
                Washington, DC 20219. Please note that all mail sent to FHFA via U.S.
                Mail is routed through a national irradiation facility, a process that
                may delay delivery by approximately two weeks. For any time-sensitive
                correspondence, please plan accordingly.
                FOR FURTHER INFORMATION CONTACT: Naa Awaa Tagoe, Senior Associate
                Director, Office of Financial Analysis, Modeling & Simulations, (202)
                649-3140, fhfa.gov">[email protected]fhfa.gov; Andrew Varrieur, Associate Director,
                Office of Financial Analysis, Modeling & Simulations, (202) 649-3141,
                fhfa.gov">[email protected]fhfa.gov; or Miriam Smolen, Associate General Counsel,
                Office of General Counsel, (202) 649-3182, fhfa.gov">[email protected]fhfa.gov.
                These are not toll-free numbers. The telephone number for the
                Telecommunications Device for the Deaf is (800) 877-8339.
                SUPPLEMENTARY INFORMATION:
                Comments
                 FHFA invites comments on all aspects of the proposed rule and will
                take all comments into consideration before issuing a final rule.
                Copies of all comments will be posted without change, and will include
                any personal information you provide such as your name, address, email
                address, and telephone number, on the FHFA website at http://www.fhfa.gov. In addition, copies of all comments received will be
                available for examination by the public through the electronic
                rulemaking docket for this proposed rule also located on the FHFA
                website.
                Table of Contents
                I. Introduction
                II. Overview of the Proposed Rule
                 A. Regulatory Capital Requirements
                 B. Capital Buffers
                 C. Key Enhancements
                 D. Sizing of Regulatory Capital Expectations
                 1. Aggregate Regulatory Capital
                 2. 2018 Proposal's Capital Requirements
                 3. 2008 Financial Crisis Loss Experience
                III. Background
                 A. Pre-Crisis Regulatory Capital Framework
                 B. Lessons of the 2008 Financial Crisis
                 1. Capital Adequacy
                 2. Going-Concern Standard
                 3. High-Quality Capital
                 4. Stability of the National Housing Finance Markets
                 C. Post-Crisis Changes to Regulatory Capital Frameworks
                IV. Rationale for Re-Proposal
                 A. Responsibly Ending the Conservatorships
                 B. Ensuring Capital Adequacy
                 1. Quality of Capital
                 2. Quantity of Capital
                 C. Addressing Pro-Cyclicality
                V. Definitions of Regulatory Capital
                 A. Statutory Definitions
                 B. Supplemental Definitions
                 1. Loss-Absorbing Capacity
                 2. Components of Regulatory Capital
                 3. Regulatory Adjustments and Deductions
                VI. Capital Requirements
                 A. Risk-Based Capital Requirements
                 1. Supplemental Requirements
                 2. Risk-Weighted Assets
                 B. Leverage Ratio Requirements
                 1. Adjusted Total Assets
                 2. Tier 1 Leverage Ratio Requirement
                 3. Sizing of the Requirements
                 C. Enforcement
                VII. Capital Buffers
                 A. Prescribed Capital Conservation Buffer Amount (PCCBA)
                 1. Stress Capital Buffer
                 2. Countercyclical Capital Buffer
                 3. Stability Capital Buffer
                 B. Leverage Buffer
                 C. Payout Restrictions
                VIII. Credit Risk Capital: Standardized Approach
                 A. Single-Family Mortgage Exposures
                 1. Single-Family Business Models
                 2. Calibration Framework
                 3. Base Risk Weights
                 4. Countercyclical Adjustment
                 5. Risk Multipliers
                 6. Credit Enhancement Multipliers
                 7. Minimum Adjusted Risk Weight
                 B. Multifamily Mortgage Exposures
                 1. Multifamily Business Models
                 2. Calibration Framework
                 3. Base Risk Weights
                 4. Countercyclical Adjustment
                 5. Risk Multipliers
                 6. Minimum Adjusted Risk Weight
                 C. CRT and Other Securitization Exposures
                 1. Background
                 2. PLS and Other Non-CRT Securitization Exposures
                 3. Retained CRT Exposures
                 D. Other Exposures
                 1. Commitments and Other Off-Balance Sheet Exposures
                 2. Exposures to Sovereigns
                 3. Crossholdings of Enterprise MBS
                 4. Corporate Exposures
                 5. OTC Derivative Contracts
                 6. Cleared Transactions
                 7. Credit Risk Mitigation
                IX. Credit Risk Capital: Advanced Approach
                X. Market Risk Capital
                 A. Standardized Approach
                 1. Single Point Approach
                 2. Spread Duration Approach
                 3. Internal Models Approach
                 B. Advanced Approach
                 C. Market Risk Management
                XI. Operational Risk Capital
                XII. Impact of the Enterprise Capital Rule
                 A. Enterprise-Wide
                 B. Single-Family Business
                 C. Multifamily Business
                 D. Other Assets
                XIII. Comparisons to the U.S. Banking Framework
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                XIV. Compliance Period
                XV. Temporary Increases of Minimum Capital Requirements and Other
                Conforming Amendments
                XVI. Paperwork Reduction Act
                XVII. Regulatory Flexibility Act
                XVIII. Proposed Rule
                I. Introduction
                 FHFA is seeking comments on a new regulatory capital framework for
                the Enterprises. This notice of proposed rulemaking (proposed rule) is
                a re-proposal of the regulatory capital framework set forth in the
                notice of proposed rulemaking published in the Federal Register on July
                17, 2018 (2018 proposal).\1\ The 2018 proposal, which remains the
                foundation of the proposed rule, contemplated risk-based capital
                requirements based on a granular assessment of credit risk specific to
                different mortgage loan categories, as well as two alternatives for an
                updated leverage ratio requirement. With this re-proposal, FHFA is
                proposing enhancements to establish a post-conservatorship regulatory
                capital framework that ensures that each Enterprise operates in a safe
                and sound manner and is positioned to fulfill its statutory mission to
                provide stability and ongoing assistance to the secondary mortgage
                market across the economic cycle, in particular during periods of
                financial stress.\2\
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                 \1\ FHFA Enterprise Capital Requirements, 83 FR 33312 (Jul. 17,
                2018).
                 \2\ Other enhancements to the Enterprises' supervisory and
                regulatory framework might also be necessary, for example with
                respect to the Enterprises' liquidity risk management.
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                 Pursuant to the Federal Housing Enterprises Financial Safety and
                Soundness Act of 1992 \3\ (Safety and Soundness Act), as amended by the
                Housing and Economic Recovery Act of 2008 \4\ (HERA), the FHFA
                Director's principal duties include, among other duties, ensuring that
                each Enterprise operates in a safe and sound manner, that the
                operations and activities of each Enterprise foster liquid, efficient,
                competitive, and resilient national housing finance markets, and that
                each Enterprise carries out its statutory mission only through
                activities that are authorized under and consistent with the Safety and
                Soundness Act and its charter.\5\ Pursuant to their charters, the
                statutory purposes of the Enterprises are, among other purposes, to
                provide stability in, and ongoing assistance to, the secondary market
                for residential mortgages.\6\ Consistent with these statutory duties
                and purposes, FHFA's enhancements contemplated by the proposed rule are
                intended to achieve three primary objectives:
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                 \3\ Public Law 102-550, 106 Stat. 3941 (1992).
                 \4\ Public Law 110-289, 122 Stat. 2654 (2008).
                 \5\ 12 U.S.C. 4513(a)(1).
                 \6\ Id. sections 1451 note, 1716.
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                 Preserve the mortgage risk-sensitive framework of the 2018
                proposal, with simplifications and refinements;
                 Increase the quantity and quality of the regulatory
                capital of the Enterprises to ensure that, during and after
                conservatorship, each Enterprise operates in a safe and sound manner
                and is positioned to fulfill its statutory mission to provide stability
                and ongoing assistance to the secondary mortgage market across the
                economic cycle; and
                 Address the pro-cyclicality of the risk-based capital
                requirements of the 2018 proposal, also in furtherance of the safety
                and soundness of the Enterprises and their countercyclical mission.
                 FHFA believes it is important to re-propose the regulatory capital
                framework to afford interested parties an opportunity to comment on the
                enhancements contemplated by the proposed rule in its entirety in light
                of FHFA's intent to responsibly end the conservatorships of the
                Enterprises. This policy change is a departure from FHFA's stated
                policy at the time of the 2018 proposal, when the prospects for
                indefinite conservatorships might have informed the expectations of
                interested parties, their decision to comment, and the nature of
                comments submitted. Despite this, the comments received on the 2018
                proposal were valuable and important. FHFA emphasizes that the purpose
                of the proposed rule is to establish a regulatory capital framework
                that ensures the safety and soundness of each Enterprise and its
                ability to fulfill its statutory mission across the economic cycle.
                II. Overview of the Proposed Rule
                A. Regulatory Capital Requirements
                 In response to the comments and feedback on the 2018 proposal and
                in furtherance of FHFA's stated objectives, the regulatory capital
                framework contemplated by the proposed rule would require each
                Enterprise to maintain the following risk-based capital:
                 Total capital not less than 8.0 percent of risk-weighted
                assets, determined as described below;
                 Adjusted total capital not less than 8.0 percent of risk-
                weighted assets;
                 Tier 1 capital not less than 6.0 percent of risk-weighted
                assets; and
                 Common equity tier 1 (CET1) capital not less than 4.5
                percent of risk-weighted assets.
                 Each Enterprise also would be required to satisfy the following
                leverage ratios:
                 Core capital not less than 2.5 percent of adjusted total
                assets; and
                 Tier 1 capital not less than 2.5 percent of adjusted total
                assets.
                 Adjusted total assets would be defined as total assets under
                generally accepted accounting principles (GAAP), with adjustments to
                include certain off-balance sheet exposures. Total capital and core
                capital would have the meaning given in the Safety and Soundness Act.
                Adjusted total capital, tier 1 capital, and CET1 capital would be
                defined based on the definitions of total capital, tier 1 capital, and
                CET1 capital set forth in the regulatory capital framework (the Basel
                framework) developed by the Basel Committee on Bank Supervision (BCBS)
                that is the basis for the United States banking regulators' regulatory
                capital framework (U.S. banking framework). These supplemental
                regulatory capital definitions would fill certain gaps in the statutory
                definitions of core capital and total capital by making customary
                deductions and other adjustments for certain deferred tax assets
                (DTAs), goodwill, intangibles, and other assets that tend to have less
                loss-absorbing capacity during a financial stress.
                 To calculate its risk-based capital requirements, an Enterprise
                would determine its risk-weighted assets under two approaches--a
                standardized approach and an advanced approach--with the greater of the
                two used to determine its risk-based capital requirements. Under both
                approaches, an Enterprise's risk-weighted assets would equal the sum of
                its credit risk-weighted assets, market risk-weighted assets, and
                operational risk-weighted assets.
                 Under the standardized approach, the credit risk-weighted assets
                for mortgage loans secured by 1-4 unit residences (single-family
                mortgage exposures) and mortgage loans secured by five or more unit
                residences (multifamily mortgage exposures) would be determined using
                lookup grids and multipliers that assign an exposure-specific risk
                weight based on the risk characteristics of the mortgage exposure. The
                underlying exposure-specific credit risk capital requirements generally
                would be similar to those in the grids and multipliers of the 2018
                proposal, subject to some simplifications and refinements discussed in
                Sections VIII.A and VIII.B.\7\
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                 \7\ This base risk weight would be equal to the unadjusted
                credit risk capital requirement for the mortgage exposure expressed
                in basis points and divided by 800, which is the 8.0 percent
                adjusted total capital requirement also expressed in basis points.
                For example, the credit risk capital requirement for a mortgage
                exposure with a base risk weight of 50 percent would be 400 basis
                points (800 multiplied by 50 percent).
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                [[Page 39276]]
                 Like the 2018 proposal, the base risk weight would be a function of
                the mortgage exposure's loan-to-value (LTV) ratio with the property
                value generally marked to market (MTMLTV). For single-family mortgage
                exposures, the MTMLTV would be subject to a countercyclical adjustment
                to the extent that national house prices are 5.0 percent greater or
                less than an inflation-adjusted long-term trend. For both single-family
                and multifamily mortgage exposures, this base risk weight would then be
                adjusted to reflect additional risk attributes of the mortgage exposure
                and any loan-level credit enhancement, with the associated risk
                multipliers also generally similar to those of the 2018 proposal. To
                ensure an appropriate level of capital, this adjusted risk weight would
                be subject to a minimum floor of 15 percent.
                 As of September 30, 2019, under the proposed rule's standardized
                approach, the Enterprises' average risk weight for single-family
                mortgage exposures would have been 26 percent, and the Enterprises'
                average risk weight for multifamily mortgage exposures would have been
                51 percent.\8\ The average risk weights for single-family and
                multifamily mortgage exposures originated and acquired by an Enterprise
                in the previous six months would have been approximately 36 percent and
                67 percent, respectively.\9\
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                 \8\ These average risk weights are determined based on the
                credit risk capital requirement for single-family and multifamily
                mortgage exposures after adjustments for mortgage insurance and
                other loan-level credit enhancement but before any adjustment for
                credit risk transfers.
                 \9\ While not shown, new originations are a subset of the
                mortgage exposures included in Tables 26 and 29.
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                 While the standardized approach would utilize FHFA-prescribed
                lookup grids and risk multipliers, the advanced approach for credit
                risk-weighted assets would rely on each Enterprise's internal models.
                The advanced approach requirements would require each Enterprise to
                maintain its own processes for identifying and assessing credit risk,
                market risk, and operational risk. These requirements should ensure
                that each Enterprise continues to enhance its risk management system
                and also that neither Enterprise simply relies on the standardized
                approach's lookup grids and multipliers to define credit risk
                tolerances, measure its credit risk, or allocate capital. In the course
                of FHFA's supervision of each Enterprise's internal models for credit
                risk, FHFA also could identify opportunities to update or otherwise
                enhance the standardized approach's lookup grids and multipliers in a
                future rulemaking.
                 Under both the standardized and advanced approaches, an Enterprise
                would determine the capital treatment for eligible credit risk
                transfers (CRT) under a securitization framework by assigning risk
                weights to retained CRT exposures. Under the standardized approach,
                tranche-specific risk weights would be subject to a 10 percent floor.
                The proposed rule seeks comment on two approaches to determining the
                risk-weighted assets for retained CRT exposures, one of which
                contemplates adjustments to the exposure amounts of the retained CRT
                exposures to reflect counterparty risk, loss timing risk, and a general
                adjustment for the differences between CRT and regulatory capital, and
                the other of which is based on the U.S. banking framework.
                 Each Enterprise also would determine a market risk capital
                requirement for spread risk. Market risks other than spread risk would
                not be assigned a market risk capital requirement, but FHFA is seeking
                comment on more comprehensive approaches. Under the standardized
                approach, an Enterprise would determine its market risk-weighted assets
                using FHFA-specified formulas for some covered positions and its own
                models for other covered positions. An Enterprise would separately
                determine its market risk-weighted assets under an advanced approach
                that relies only on its own internal models for all covered positions.
                 The proposed rule also would require each Enterprise to determine
                its operational risk capital requirement utilizing the U.S. banking
                framework's advanced measurement approach, subject to a floor equal to
                15 basis points of the Enterprise's adjusted total assets.
                 Each of these risk-based and leverage ratio requirements would be
                enforceable by FHFA under its general authority to order an Enterprise
                to cease and desist from a violation of law, which would include the
                proposed rule and its regulatory capital requirements. Pursuant to that
                authority, FHFA may require an Enterprise to develop and implement a
                capital restoration plan or take other appropriate corrective action.
                FHFA also could elect to enforce the risk-based and leverage ratio
                requirements pursuant to its authority to require an Enterprise to
                develop a plan to achieve compliance with prescribed prudential
                management and operational standards, and FHFA also could enforce the
                core capital leverage ratio requirement or the risk-based total capital
                requirement pursuant to its separate authority to require prompt
                corrective action if an Enterprise fails to maintain certain prescribed
                regulatory levels.
                B. Capital Buffers
                 To avoid limits on capital distributions and discretionary bonus
                payments, an Enterprise would have to maintain regulatory capital that
                exceeds each of its adjusted total capital, tier 1 capital, and CET1
                capital requirements by at least the amount of its prescribed capital
                conservation buffer amount (PCCBA). That PCCBA would consist of three
                separate component buffers--a stress capital buffer, a countercyclical
                capital buffer, and a stability capital buffer.
                 The stress capital buffer would be 0.75 percent of the
                Enterprise's adjusted total assets, with this buffer in effect
                replacing the 2018 proposal's going-concern buffer. The 2018 proposal's
                going-concern buffer was a part of the Enterprise's total capital
                requirement, such that an Enterprise would be subject to enforcement
                action if it drew down this going-concern buffer. In contrast, under
                the proposed rule, drawing down the stress capital buffer generally
                would trigger only limits on capital distributions and discretionary
                bonus payments. By prescribing less severe sanctions for drawing down
                this buffer during a period of financial stress, the proposed rule's
                approach should help position an Enterprise to fulfill its statutory
                mission across the economic cycle and also dampen the pro-cyclicality
                of the aggregate risk-based capital requirements. FHFA is also seeking
                comment on whether to periodically re-size the stress capital buffer,
                similar to the approach recently adopted by the U.S. banking
                regulators,\10\ to the extent that FHFA's eventual program for
                supervisory stress tests determines that an Enterprise's peak capital
                exhaustion under a severely adverse stress would exceed 0.75 percent of
                adjusted total assets.
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                 \10\ See e.g. Federal Reserve Board Regulations Q, Y, and YY:
                Regulatory Capital, Capital Plan, and Stress Test Rules Final Rule,
                85 FR 15576 (Mar. 18, 2020).
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                 The countercyclical capital buffer amount initially would
                be set at 0 percent of the Enterprise's adjusted total assets. FHFA
                does not expect to adjust this buffer in the place of, or to
                supplement, the countercyclical adjustment to the risk-based capital
                requirements. Instead, as under the Basel and U.S. banking frameworks,
                FHFA would adjust the countercyclical capital buffer taking into
                account the macro-financial environment in which the Enterprises
                operate, such that it
                [[Page 39277]]
                would be deployed only when excess aggregate credit growth is judged to
                be associated with a build-up of system-wide risk. This focus on excess
                aggregate credit growth means the countercyclical buffer likely would
                be deployed on an infrequent basis, and generally only when similar
                buffers are deployed by the U.S. banking regulators.
                 An Enterprise's stability capital buffer would be tailored
                to the risk that the Enterprise's default or other financial distress
                could have on the liquidity, efficiency, competitiveness, or resiliency
                of national housing finance markets. FHFA is proposing a stability
                capital buffer based on the Enterprise's share of residential mortgage
                debt outstanding, and seeking comment on an alternative based on the
                U.S. banking framework's methodology. Under either methodology, the
                stability capital buffer would be a percent of adjusted total assets.
                Under the market share approach, as of September 30, 2019, Freddie
                Mac's and Fannie Mae's stability capital buffers would have been,
                respectively, 0.64 and 1.05 percent of adjusted total assets.
                 Fixing the PCCBA at a specified percent of an Enterprise's adjusted
                total assets, instead of risk-weighted assets, is a notable departure
                from the Basel framework. FHFA intends a fixed-percent PCCBA, among
                other things, to reduce the impact that the PCCBA potentially could
                have on higher risk exposures, to avoid amplifying the secondary
                effects of any model or similar risks inherent to the calibration of
                granular risk weights for mortgage exposures, and to further mitigate
                the pro-cyclicality of the aggregate risk-based capital requirements.
                 Finally, to avoid limits on capital distributions and discretionary
                bonus payments, the Enterprise also would be required to maintain tier
                1 capital in excess of the amount required under its tier 1 leverage
                ratio requirement by at least the amount of its prescribed leverage
                buffer amount (PLBA). The PLBA would equal 1.5 percent of the
                Enterprise's adjusted total assets, such that the PLBA-adjusted
                leverage ratio requirement would remain a credible backstop to the
                PCCBA-adjusted risk-based capital requirements.
                C. Key Enhancements
                 The proposed rule contemplates a number of key enhancements to the
                2018 proposal, including:
                 Simplifications and refinements of the grids and risk
                multipliers for the credit risk capital requirements for single-family
                mortgage exposures, including removal of the single-family risk
                multipliers for loan balance and the number of borrowers.
                 A countercyclical adjustment to the credit risk capital
                requirements for single-family mortgage exposures.
                 A prudential floor on the credit risk capital requirement
                for mortgage exposures.
                 Refinements to the capital treatment of CRT structures,
                including a minimum capital requirement on senior tranches of CRT
                retained by an Enterprise and an adjustment to reflect that CRT does
                not have the same loss-absorbing capacity as equity capital.
                 The addition of a credit risk capital requirement for
                Enterprise crossholdings of mortgage-backed securities (MBS).
                 Risk-based capital requirements for a number of other
                exposures not explicitly addressed by the 2018 proposal.
                 Supplemental capital requirements based on the Basel
                framework's definitions of total capital, tier 1 capital, and CET1
                capital.
                 Capital buffers that would subject an Enterprise to
                increasing limits on capital distributions and discretionary bonus
                payments to the extent that its regulatory capital falls below the
                prescribed buffer amounts.
                 A stability capital buffer tailored to the risk that an
                Enterprise's default or other financial distress could have on the
                liquidity, efficiency, competitiveness, and resiliency of national
                housing finance markets.
                 A revised method for determining operational risk capital
                requirements, as well as a higher floor.
                 A requirement that each Enterprise maintain internal
                models for determining its own estimates of risk-based capital
                requirements.
                D. Sizing of Regulatory Capital Expectations
                1. Aggregate Regulatory Capital
                 Table 1 details how much regulatory capital the Enterprises
                together would have been required to maintain under the proposed rule
                as of September 30, 2019 to avoid restrictions on capital distributions
                and discretionary bonus payments.\11\
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                 \11\ The analogous breakdown of requirements by Enterprise is
                included in Section XII.A.
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                [GRAPHIC] [TIFF OMITTED] TP30JN20.000
                 Table 1 shows a combined Enterprise statutory total risk-based
                capital requirement of $135 billion (8 percent of risk-weighted
                assets). The statutory risk-based capital framework does not include
                any capital buffers. In contrast, the supplementary risk-based capital
                framework includes three capital requirements (CET1, tier 1, and
                adjusted total capital) along with three capital buffers
                (countercyclical, stress capital, and stability) that comprise the
                PCCBA. While the capital buffers are not strictly a capital
                requirement, they would materially increase the regulatory capital that
                each Enterprise would have to maintain to avoid restrictions on capital
                distributions and discretionary bonuses.
                 Focusing on high-quality capital, the combined Enterprise CET1
                capital requirement was $76 billion (4.5 percent of risk-weighted
                assets), the tier 1 capital requirement was $101 billion (6 percent of
                risk-weighted assets), and the adjusted total capital requirement was
                $135 billion (8 percent of risk-weighted assets). The combined PCCBA
                was $99 billion, comprising the $46 billion stress capital buffer, $53
                billion stability capital buffer, and $0 countercyclical capital
                buffer. The capital requirements and PCCBA totaled $175 billion for
                CET1 capital, $200 billion for tier 1 capital, and $234 billion for
                adjusted total capital. A more nuanced look at the importance of high-
                quality capital, and specifically how the Enterprises' supplemental
                capital measures would have evolved in relation to their statutory
                capital measures leading up to the 2008 financial crisis, is included
                in Section III.B.3.
                 Table 1 then shows a combined leverage ratio requirement of $152
                billion under the proposed rule. Both the core capital and
                supplementary tier 1 leverage ratio requirements are equal to 2.5
                percent of adjusted total assets, so there is no difference between the
                two leverage ratio requirements. However, there are important
                differences between core capital and tier 1 capital related to the
                loss-absorbing capacity of each capital metric, as discussed in Section
                V.B.
                 The supplementary framework also includes a tier 1 capital PLBA
                equal to 1.5 percent of adjusted total assets, or $91 billion for the
                Enterprises combined. In aggregate, the Enterprises' combined tier 1
                leverage ratio requirement and PLBA would have been $243 billion as of
                September 30, 2019.
                2. 2018 Proposal's Capital Requirements
                 Table 2 presents estimates of the Enterprises' combined regulatory
                capital under the proposed rule broken out by risk category and asset
                category as of September 30, 2019. Table 2 also presents estimates of
                the Enterprises' combined capital requirements under the 2018 proposal,
                both as of September 30, 2017--the as-of date in the 2018 proposal--and
                as of September 30, 2019.\12\
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                 \12\ A more detailed walk-forward from the capital requirements
                in the 2018 proposal to the capital requirements under the proposed
                rule is presented for each Enterprise in Section XII.
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                [[Page 39279]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.001
                 Table 2 shows an estimated combined risk-based capital requirement
                of $135.1 billion, or 2.22 percent of the Enterprises' adjusted total
                assets, under the proposed rule as of September 30, 2019, then provides
                a further breakdown by risk category. Net credit risk capital accounts
                for $134.9 billion before CRT and $112.8 billion after CRT, market risk
                capital accounts for $13.6 billion, and operational risk capital
                accounts for $8.7 billion. The DTA requirement is zero as of September
                30, 2019.
                 Using the same September 30, 2019 portfolio date, the combined
                risk-based capital requirement under the 2018 proposal would have been
                similar to the combined risk-based capital requirement under the
                proposed rule. The differences in required regulatory capital between
                the two proposals are in post-CRT net credit risk capital (+45.0
                billion), removal of the going-concern buffer (-$43.5 billion),
                operational risk (+$4.1 billion), and DTA (-$7.4 billion). The capital
                requirement for market risk was unchanged. Primary drivers of the $45.0
                billion increase in post-CRT net credit risk capital are a new
                prudential floor on the credit risk capital requirement for mortgage
                exposures and refinements to the capital treatment of CRT structures,
                including a minimum capital requirement on senior tranches of CRT
                retained by an Enterprise. A caveat to this comparison is that the 2018
                proposal increased the total capital requirement by a DTA offset, while
                the proposed rule, consistent with the Basel framework, proposes
                instead to deduct the amount of that DTA offset from CET1 capital (and
                therefore tier 1 and adjusted total capital). The 2018 proposal's
                $136.9 billion combined risk-based capital requirement would have been,
                in effect, $129.5 billion under the DTA approach of the proposed rule.
                 In contrast to the 2018 proposal, the proposed rule includes a set
                of three buffers that would materially increase the regulatory capital
                that each Enterprise would have to maintain to avoid restrictions on
                capital distributions and discretionary bonuses. The proposed rule's
                stress capital buffer of $45.5 billion replaces the 2018 proposal's
                $43.5 billion going-concern buffer, and is complemented by the
                stability capital buffer of $53.3 billion and the countercyclical
                capital buffer that is currently set to zero. The three buffers in
                aggregate form the PCCBA, which totals $98.8 billion for the
                Enterprises combined, or 1.63 percent of the adjusted total assets. The
                aggregate risk-based capital requirement and PCCBA is a combined $234.3
                billion under the proposed rule, or 3.86 percent of the Enterprises'
                adjusted total assets.
                [[Page 39280]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.002
                 Table 3 again shows an estimated combined risk-based capital
                requirement of $135.1 billion, or 2.22 percent of the Enterprises'
                adjusted total assets under the proposed rule as of September 30, 2019,
                then provides a further breakdown by asset category. The Enterprises'
                combined risk-based capital requirement for single-family mortgage
                exposures is $111.0 billion under the proposed rule, while the combined
                risk-based capital requirement for multifamily mortgage exposures is
                $17.8 billion. In addition, the combined risk-based capital
                requirements for DTA and other assets under the proposed rule is zero
                and $6.3 billion, respectively.
                 Excluding the going-concern buffer, which was a capital requirement
                in the 2018 proposal but has been replaced by the stress capital buffer
                in the proposed rule, the combined risk-based capital requirements
                under the 2018 proposal for the single-family and multifamily
                businesses were $67.8 billion and $12.2 billion, respectively, as of
                September 30, 2019. As discussed above and shown in Table 3, the
                enhancements in the proposed rule would have increased the required
                capital for single-family assets and multifamily assets by $43.2
                billion and $5.6 billion, respectively. Similarly, the risk-based
                capital requirement for other assets has increased by $0.2 billion.
                Finally, the risk-based capital requirement for DTA decreased by $7.4
                billion in the proposed rule due to its new capital treatment.
                 The pro-cyclicality of the 2018 proposal's risk-based capital
                requirements complicates comparisons to the proposed rule. Under the
                2018 proposal, the Enterprises would have likely found it necessary to
                maintain a considerable capital surplus in anticipation of a financial
                stress. One Enterprise's comment letter suggested that its total
                capital requirement would be expected to increase as much as 80
                [[Page 39281]]
                percent in a severely adverse stress.\13\ The amount of this managerial
                cushion would have depended on the extent to which the Enterprises
                viewed it to be potentially costly or difficult to raise new capital in
                the midst of a financial stress.\14\ The 2018 proposal's enforcement
                framework amplified the necessity of a managerial cushion by
                incorporating the going-concern buffer into the capital requirements, a
                violation of which could trigger significant regulatory sanctions. In
                contrast, the proposed rule converts the going-concern buffer into a
                stress capital buffer that an Enterprise may draw down during a period
                of financial stress. Because a managerial cushion in anticipation of an
                eventual stress would have been a practical, if not legal, necessity
                for the Enterprises, comparisons to the 2018 proposal should start with
                a reasonable assumption regarding the amount of this capital
                surplus.\15\
                ---------------------------------------------------------------------------
                 \13\ See Comment Letter from Fannie Mae at 2 (Nov. 15, 2018).
                 \14\ Id. at 2 (``To ensure adequate capital in such a scenario,
                any Regulated Institution would need to hold a sizeable capital
                surplus during more normal economic environments. The need for such
                a surplus is real, because consistent with their mission, the
                Regulated Institutions must maintain a constant presence in the
                housing market and would want to avoid being forced to raise capital
                in times of stress.'').
                 \15\ On the one hand, the managerial cushion likely to be held
                by an Enterprise to mitigate the problem of having to raise
                regulatory capital in a period of financial stress could be
                considered a mitigant to safety and soundness risk. On the other
                hand, significant reductions in credit risk capital requirements due
                to sustained periods of house price growth and favorable economic
                conditions could contribute to safety and soundness risk.
                ---------------------------------------------------------------------------
                 FHFA is cognizant that the leverage ratio requirements would
                currently exceed the risk-based capital requirements. FHFA has settled
                on this calibration of the leverage ratio requirements after
                considerable deliberation. The leverage ratio requirements are intended
                to serve as non-risk-based measures that provide a credible backstop to
                the risk-based capital requirements to safeguard against model risk and
                measurement error with a simple, transparent, independent measure of
                risk. The leverage ratio requirements would have the added benefit of
                dampening some of the pro-cyclicality inherent in the risk-based
                capital requirements. As discussed in Section VI.B.3, FHFA has sized
                the leverage ratio requirements to be a credible backstop to the risk-
                based capital requirements, taking into account considerations relating
                to the Enterprises' historical loss experiences, the model and related
                risks posed by the calibration of the risk-based capital requirements,
                and the analogous leverage ratio requirements under the U.S. banking
                framework and of the Federal Home Loan Banks. If the leverage ratio
                requirements are to be a credible backstop, there will inevitably be
                periods when leverage ratio requirements require more regulatory
                capital than the risk-based capital requirements, as is the case as of
                September 30, 2019. FHFA believes that mortgage market conditions as of
                September 30, 2019 reflect circumstances consistent with a period under
                which a credible leverage ratio would be binding, given the exceptional
                single-family house price appreciation since 2012, the unemployment
                rate at an historically low level, the strong credit performance of
                mortgage exposures as of that time, the significant progress by the
                Enterprises to materially reduce legacy exposure to non-performing
                loans (NPLs) and re-performing loans, robust CRT market access enabling
                substantial risk transfer, and the generally strong condition of key
                counterparties, such as mortgage insurers.
                ---------------------------------------------------------------------------
                 \16\ In 2008, the entire net worth of both Enterprises was
                depleted by losses. The U.S. Department of the Treasury (Treasury
                Department) invested in senior preferred stock of both Enterprises
                to offset the losses. Fannie Mae drew $116 billion from the Treasury
                between 2008 and the fourth quarter of 2011, while Freddie Mac drew
                $71 billion between 2008 and the first quarter of 2012.
                 \17\ Peak cumulative capital losses are defined as cumulative
                losses, net of revenues earned, between 2008 and the respective date
                at which an Enterprise no longer required draws under the PSPA.
                ---------------------------------------------------------------------------
                3. 2008 Financial Crisis Loss Experience \16\
                 This section examines the peak cumulative capital losses of each
                Enterprise relative to several different regulatory capital metrics:
                The statutory risk-based and leverage ratio requirements applicable to
                the Enterprise in 2007; the aggregate risk-based capital (requirement
                plus the PCCBA) under the proposed rule but without the contemplated
                single-family countercyclical adjustment; and the aggregate leverage
                capital (requirement plus the PLBA) under the proposed rule but without
                the contemplated single-family countercyclical adjustment.\17\ As
                discussed in Section IV.B.2, under the 2018 proposal, Fannie Mae's and
                Freddie Mac's peak losses would have left, respectively, only $3
                billion and $12 billion in remaining capital, not enough to have
                sustained the market confidence necessary for either Enterprise to
                continue as a going concern.
                [[Page 39282]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.003
                 Table 4 shows that as of December 31, 2007, Fannie Mae's statutory
                risk-based capital requirement was $25 billion, or 0.8 percent of
                adjusted total assets. The Enterprise's statutory minimum leverage
                ratio requirement was $42 billion, or 1.4 percent of adjusted total
                assets. For comparison, as of the same date, Fannie Mae's proposed
                risk-based measures (adjusted total capital requirement plus PCCBA)
                would have been $209 billion or 6.9 percent of adjusted total assets,
                and the proposed leverage measures (leverage ratio requirement plus
                PLBA) would have been $122 billion or 4.0 percent of adjusted total
                assets. While the leverage measure would have fallen $45 billion short
                of Fannie Mae's peak cumulative capital losses of $167 billion (5.5
                percent of adjusted total assets), the proposed risk-based measures
                would have exceeded those peak losses by $42 billion. These comparisons
                are subject to the caveat that Fannie Mae's $167 billion in peak
                cumulative capital losses include a valuation allowance on DTAs of $64
                billion. Because much of Fannie Mae's DTAs would have been deducted
                from adjusted total capital and tier 1 capital, the adjusted total
                capital and tier 1 capital that actually would have been exhausted
                during the 2008 financial crisis would have been considerably less than
                the $167 billion in peak cumulative capital losses reflected in Table
                4.
                [[Page 39283]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.004
                 Table 5 shows that as of December 31, 2007, Freddie Mac's statutory
                risk-based capital requirement was $14 billion, or 0.6 percent of
                adjusted total assets. The Enterprise's statutory minimum leverage
                ratio requirement was $34 billion, or 1.6 percent of adjusted total
                assets. For comparison, as of the same date, Freddie Mac's proposed
                risk-based measures (adjusted total capital requirement plus PCCBA)
                would have been $128 billion or 5.9 percent of adjusted total assets,
                and the proposed leverage measures (leverage ratio requirement plus
                PLBA) would have been $87 billion or 4.0 percent of adjusted total
                assets. While the leverage measure would have fallen $11 billion short
                of Freddie Mac's peak cumulative capital losses of $98 billion (4.5
                percent of adjusted total assets), the proposed risk-based measures
                would have exceeded those peak losses by $30 billion. These comparisons
                are subject to the caveat that Freddie Mac's $98 billion in peak
                cumulative capital losses include a valuation allowance on DTAs of $34
                billion. Because much of Freddie Mac's DTAs would have been deducted
                from adjusted total capital and tier 1 capital, the adjusted total
                capital and tier 1 capital that actually would have been exhausted
                during the 2008 financial crisis would have been considerably less than
                the $98 billion in peak cumulative capital losses reflected in Table 5.
                 As discussed in Section VIII.A.4, FHFA is proposing that the base
                risk weights for single-family mortgage exposures would be subject to a
                countercyclical adjustment due to MTMLTV adjustments an Enterprise
                would be required to make when national house prices deviate by more
                than 5.0 percent above or below an estimated inflation-adjusted long-
                term trend. It is important to note that any additional regulatory
                capital that would have been required under the proposed single-family
                countercyclical adjustment is not included in the estimates of
                regulatory capital in either Tables 4 or 5. Looking back, it is likely
                that, given the considerable house price appreciation in the decade
                before the financial crisis, this countercyclical adjustment would have
                been in effect as of December 31, 2007. However, there are too many
                unknowns to quantify with any reasonable degree of certainty what that
                effect would have been, how the Enterprises' actions might have changed
                because of it, and how changes in the actions of the Enterprises might
                have affected the overall market. Therefore, FHFA is presenting the
                estimates without including a countercyclical adjustment, and
                acknowledging that with the countercyclical adjustment in place, the
                Enterprises would likely have had an even larger capital surplus
                relative to their peak cumulative capital losses than is presented in
                Tables 4 and 5.
                III. Background
                A. Pre-Crisis Regulatory Capital Framework
                 The Safety and Soundness Act established FHFA's predecessor agency,
                the Office of Federal Housing Enterprise Oversight (OFHEO), as the
                safety and soundness regulator of the Enterprises. As originally
                enacted, the Safety and Soundness Act specified a minimum capital
                requirement for the Enterprises
                [[Page 39284]]
                in the form of a leverage ratio requirement set in statute at an amount
                equal to the sum of 2.5 percent of on-balance sheet assets and 0.45
                percent of credit guarantees of MBS held by outside investors. OFHEO
                did not have the authority to adjust this minimum capital requirement.
                 The Safety and Soundness Act also required OFHEO to establish by
                regulation a risk-based capital stress test such that each Enterprise
                could survive a ten-year period with credit losses arising out of a
                prolonged regional stress \18\ and large movements in interest
                rates.\19\ Over a 7-year period, OFHEO issued a series of Federal
                Register notices to solicit public comments on the risk-based capital
                stress test regulation, eventually finalizing the rule in 2001. The
                final risk-based capital requirements, however, had little practical
                impact. The capital required under the statutory leverage ratio
                requirement consistently exceeded the capital required under OFHEO's
                risk-based regulation, in large part due to the prescriptive
                restrictions imposed by statute on the underlying stress scenario and
                also due to model risk-related failures to update the underlying data
                and model calibrations.\20\ This pre-crisis regulatory capital
                framework would soon prove inadequate.
                ---------------------------------------------------------------------------
                 \18\ The statutory stress scenarios contemplated a period in
                which ``losses occur throughout the United States at a rate of
                default and severity (based on any measurements of default
                reasonably related to prevailing practice for that industry in
                determining capital adequacy) reasonably related to the rate and
                severity that occurred in contiguous areas of the United States
                containing an aggregate of not less than 5 percent of the total
                population of the United States that, for a period of not less than
                2 years, experienced the highest rates of default and severity of
                mortgage losses, in comparison with such rates of default and
                severity of mortgage losses in other such areas for any period of
                such duration.'' Safety and Soundness Act section 1361(a) (as in
                effect before amended by HERA).
                 \19\ The statutory stress scenarios contemplated two periods:
                (i) A period in which the 10-year Treasury yield decreased to the
                lesser of 600 basis points below the average yield during the
                preceding 9 months or 60 percent of the average yield during the
                preceding three years; and (ii) a period in which the 10-year
                Treasury yield increased to the greater of 600 basis points above
                the average yield during the preceding 9 months or 160 percent of
                the average yield during the preceding three years. Id.
                 \20\ See W. Scott Frame et al, The Failure of Supervisory Stress
                Testing: Fannie Mae, Freddie Mac, and OFHEO (Working Paper 2015-3)
                at 3, available at https://www.frbatlanta.org/-/media/documents/research/publications/wp/2015/03.pdf.
                ---------------------------------------------------------------------------
                B. Lessons of the 2008 Financial Crisis
                 Starting in 2006, house prices in some regional markets began to
                decline, mortgage defaults began to rise, and the Enterprises began to
                incur credit and mark-to-market losses. In 2007, housing price declines
                spread across the nation, and issuances of private-label securities
                (PLS) largely ceased. The Enterprises' losses continued to mount into
                2008, their share prices rapidly fell, and the spreads on their
                unsecured debt and mortgage-backed securities (MBS) widened.
                 In July 2008, following growing concern about the Enterprises'
                solvency, Congress passed HERA, establishing FHFA as the regulator for
                the Enterprises and authorizing the Treasury Department to support the
                Enterprises through purchases of their obligations and other
                securities. On September 6, 2008, FHFA used its new authorities under
                HERA to place each Enterprise into conservatorship. The next day, the
                Treasury Department exercised its HERA authority to enter into Senior
                Preferred Stock Purchase Agreements (each a PSPA) to support the
                Enterprises. The Enterprises ultimately required $191.5 billion in cash
                draws from the Treasury Department under the PSPAs.
                1. Capital Adequacy
                 The scale of the Enterprises' capital exhaustion during the 2008
                financial crisis is critically relevant to the capital necessary to
                ensure that each Enterprise operates in a safe and sound manner and is
                positioned to fulfill its statutory mission across the economic cycle.
                 As discussed in Section II.D.3, the Enterprises' crisis-era
                cumulative capital losses peaked at $265 billion, approximately 4.8
                percent of their total assets as of December 31, 2007. Setting aside
                the valuation allowances on their DTAs, which are subject to deductions
                and other adjustments to regulatory capital under the proposed rule,
                the Enterprises' peak cumulative capital losses were $167 billion,
                approximately 3.0 percent of their total assets as of December 31,
                2007.
                 The Enterprises' crisis-era cumulative capital losses, while
                significant, could have been greater. The Enterprises' losses were
                likely mitigated by unprecedented federal government support of the
                housing market and the economy during the crisis, including the Home
                Affordable Modification Program, the Troubled Asset Relief Program, the
                2009 stimulus package,\21\ and the Federal Reserve System's purchases
                of more than $1.2 trillion of the Enterprises' debt and MBS from
                January 2009 to March 2010. The Enterprises' losses also were likely
                dampened by the declining interest rate environment of the period, when
                the interest rates on 30-year fixed-rate mortgage loans declined by
                approximately 200 basis points through the end of 2011, facilitating
                re-financings and loss mitigation programs.\22\
                ---------------------------------------------------------------------------
                 \21\ See American Recovery and Reinvestment Act of 2009, Public
                Law 111-5, 123 Stat. 115 (2009).
                 \22\ The average interest rate on 30-year mortgage loans was
                approximately 6.14 percent at the end of 2007, and fell to 4.2
                percent toward the end of October 2011. Over this period, yields on
                10-year Treasuries fell from approximately 3.88 percent at the end
                of 2008 to 2.06 percent at the end of October 2011.
                ---------------------------------------------------------------------------
                 The Enterprises did later recoup a portion of the underlying
                valuation adjustments and other losses. However, peak cumulative
                capital losses are relevant to assessing the amount of capital that
                creditors and other counterparties would require to regard the
                Enterprises as viable going concerns throughout the duration of another
                severe economic downturn. Indeed, the Enterprises were still operating
                and able to recoup some of these losses only because the Treasury
                Department's support through the PSPAs kept them solvent going
                concerns.
                2. Going-Concern Standard
                 The Enterprises' crisis-era funding difficulties established that
                each Enterprise must be capitalized to remain a viable going concern
                both during and after a severe economic downturn. Calibrating capital
                adequacy based on ``claims paying capacity'' or an insurance-like or
                similar standard that does not emphasize a going-concern standard is
                inconsistent with this lesson of the crisis in at least two respects.
                 First, the Enterprises fund themselves with a significant amount of
                short-term unsecured debt that must be regularly refinanced. Each
                Enterprise's funding needs are very likely to increase during an
                economic downturn, all else equal, as the Enterprise funds purchases of
                NPLs out of securitization pools. This is a funding need that peaked at
                $345 billion in 2010.
                 These ordinary course and pro-cyclical funding needs can be met
                only if the Enterprise continues to be regarded as a viable going
                concern by creditors throughout the duration of a financial stress.
                Creditors will be most skeptical of an Enterprise's continued solvency
                during periods of market turmoil, and it was the increase in the
                Enterprises' borrowing costs and the associated difficulties that the
                Enterprises faced in refinancing their debt that were among the most
                immediate grounds for FHFA placing the Enterprises into
                conservatorship.\23\
                ---------------------------------------------------------------------------
                 \23\ See Memorandum dated September 6, 2008 re: Proposed
                Appointment of the Federal Housing Finance Agency as Conservator for
                the Fannie Mae at 29 (``The Enterprise's practice of relying upon
                repo financing of its agency collateral to raise cash in the current
                credit and liquidity environment is an unsafe or unsound practice
                that has led to an unsafe or unsound condition, given the
                unavailability of willing lenders to provide secured financing in
                significant size to reduce pressure on its discount notes
                borrowings.''); and Memorandum dated September 6, 2008 re: Proposed
                Appointment of the Federal Housing Finance Agency as Conservator for
                the Freddie Mac at 28 (``The Enterprise's prolonged reliance almost
                exclusively on 30-day discount notes is an untenable long-term
                source of funding and an unsafe or unsound practice that poses
                abnormal risk to the viability of the Enterprise. Operating without
                an adequate liquidity funding contingency plan is an unsafe or
                unsound condition to transact business.''); and Fin. Crisis Inquiry
                Comm'n, The Financial Crisis Inquiry Report: Final Report of the
                National Commission on the Causes of the Financial and Economic
                Crisis in the United States at 316 (2011) (the FCIC Report),
                available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; (``In July and August 2008, Fannie suffered a liquidity
                squeeze, because it was unable to borrow against its own securities
                to raise sufficient cash in the repo market.''); see id. at 316
                (``By June 2008, the spread [between the yield on the GSEs' long-
                term bonds and rates on Treasuries] had risen 65 percent over the
                2007 level; by September 5, just before regulators parachuted in,
                the spread had nearly doubled from its 2007 level to just under 1
                percent, making it more difficult and costly for the GSEs to fund
                their operations.'').
                ---------------------------------------------------------------------------
                [[Page 39285]]
                 Second, only a going-concern capital adequacy standard can ensure
                that each Enterprise will be positioned to fulfill its statutory
                mission to provide stability and ongoing assistance to the secondary
                mortgage market across the economic cycle. The Enterprises were not
                positioned to effectively support the secondary mortgage market as
                their financial conditions deteriorated in 2007 and 2008.\24\ In an
                attempt to enable the Enterprises to continue to support the secondary
                mortgage market, OFHEO relaxed the mortgage portfolio caps and reduced
                a capital buffer that had been imposed by consent order.\25\
                ---------------------------------------------------------------------------
                 \24\ See FCIC Report at 311, available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; (``Few
                doubted Fannie and Freddie were needed to support the struggling
                housing market. The question was how to do so safely. Purchasing and
                guaranteeing risky mortgage-backed securities helped make money
                available for borrowers, but it could also result in further losses
                for the two huge companies later on. `There's a real tradeoff,'
                Lockhart said in late 2007--a trade-off made all the more difficult
                by the state of the GSEs' balance sheets.'''); Statement of FHFA
                Director James B. Lockhart at News Conference Announcing
                Conservatorship of Fannie Mae and Freddie Mac (Sept. 7, 2008),
                available at https://www.fhfa.gov/Media/PublicAffairs/Pages/
                Statement-of-FHFA-Director-James-B_Lockhart-at-News-Conference-
                Annnouncing-Conservatorship-of-Fannie-Mae-and-Freddie-Mac.aspx;
                (``Unfortunately, as house prices, earnings and capital have
                continued to deteriorate, their ability to fulfill their mission has
                deteriorated . . . . The result has been that they have been unable
                to provide needed stability to the market. They also find themselves
                unable to meet their affordable housing mission.''); id. (``The lack
                of confidence has resulted in continuing spread widening of their
                MBS, which means that virtually none of the large drop in interest
                rates over the past year has been passed on to the mortgage
                markets.'').
                 \25\ News Release, OFHEO, Fannie Mae and Freddie Mac Announce
                Initiative to Increase Mortgage Market Liquidity (Mar. 19, 2008),
                available at https://www.fhfa.gov/Media/PublicAffairs/Pages/OFHEO,-Fannie-Mae-and-Freddie-Mac-Announce-Initiative-to-Increase-Mortgage-Market-Liquidity.aspx; (``OFHEO estimates that Fannie Mae's and
                Freddie Mac's existing capabilities, combined with this new
                initiative and the release of the portfolio caps announced in
                February, should allow the GSEs to purchase or guarantee about $2
                trillion in mortgages this year.'').
                ---------------------------------------------------------------------------
                3. High-Quality Capital
                 Another lesson of the 2008 financial crisis is that it is not only
                the quantity but also the quality of the regulatory capital, especially
                its loss-absorbing capacity, that is critical to the Enterprises'
                safety and soundness. Market confidence in the Enterprises came into
                doubt in mid-2008 when Fannie Mae and Freddie Mac had total capital of,
                respectively, $55.6 billion and $42.9 billion. Questions about the
                Enterprises' solvency likely arose in part due to their sizeable DTAs,
                which counted toward total capital but had less loss-absorbing capacity
                during a period of negative income. Freddie Mac would have actually had
                a negative book value as of June 30, 2008 after deducting its DTAs.
                Besides the DTA valuation allowances, there was also uncertainty as to
                the sufficiency of the Enterprises' allowances for loan losses
                (ALLL).\26\ For these and other reasons, the Basel framework includes
                deductions and other adjustments for DTAs and ALLL, as well as other
                capital elements that might have less loss-absorbing capacity.\27\
                ---------------------------------------------------------------------------
                 \26\ See FCIC Report at 317, available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; (``[T]he Fed
                found that the GSEs were significantly `underreserved,' with huge
                potential losses . . . The OCC rejected the forecasting
                methodologies on which Fannie and Freddie relied. Using its own
                metrics, it found insufficient reserves for future losses . . .
                .'').
                 \27\ See BCBS, The Basel Framework CAP10 (Dec. 15, 2019),
                available at https://www.bis.org/basel_framework/chapter/CAP/10.htm?inforce=20191215&export=pdf; see also BCBS, Basel: A Global
                Regulatory Framework for More Resilient Banks and Banking Systems,
                paragraphs 8 and 9, (Dec. 2010; revised June 2011), available at
                http://www.bis.org/publ/bcbs189.htm; (``The crisis demonstrated that
                credit losses and writedowns come out of retained earnings, which is
                part of banks' tangible common equity base . . . . To this end, the
                predominant form of Tier 1 capital must be common shares and
                retained earnings.'').
                ---------------------------------------------------------------------------
                 Table 6 illustrates the importance of requiring high-quality
                capital by showing the evolution of CET1 capital, tier 1 capital,
                adjusted total capital, core capital, and total capital at each
                Enterprise leading up to the 2008 financial crisis. As the table
                indicates, the Enterprises' combined core capital increased from $77.3
                billion in 2006 to $84.1 billion in 2008, suggesting at first glance a
                position of some financial strength. However, over the same time period
                the Enterprises' combined tier 1 capital decreased markedly from $76.3
                billion to $24.1 billion, indicating a capital position with
                deteriorating and substantially less loss-absorbing capacity.
                Similarly, the Enterprises' combined total capital increased from $78.7
                billion in 2006 to $98.5 billion in 2008, while over the same time
                period the Enterprises' adjusted total capital decreased from $85.9
                billion to $29.6 billion.
                [[Page 39286]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.005
                4. Stability of the National Housing Finance Markets
                 After the taxpayer-funded rescue of the Enterprises in 2008, there
                can be no doubt as to the risk posed by an insolvent or otherwise
                financially distressed Enterprise to the stability of the national
                housing finance markets. The Enterprises were then, and remain today,
                the dominant participants in the housing finance system, owning or
                guaranteeing 37 percent of residential mortgage debt outstanding as of
                December 31, 2007 and 44 percent of residential mortgage debt
                outstanding as of September 30, 2019. Both then and still today, banks,
                insurance firms, and securities broker-dealers own significant amounts
                of the Enterprises' unsecured debt and MBS. Both then and still today,
                the Enterprises control critical infrastructure for securitizing and
                administering $5.5 trillion of outstanding single-family and
                multifamily conventional MBS.\28\ Given the nature, scope, size, scale,
                concentration, and interconnectedness of each Enterprise, the financial
                distress of an Enterprise could have significant adverse effects on the
                liquidity, efficiency, competitiveness, or resiliency of national
                housing finance markets. For these and related reasons, the Treasury
                Department ultimately invested $191.5 billion under the PSPAs in the
                Enterprises to keep them solvent going concerns.
                ---------------------------------------------------------------------------
                 \28\ During the conservatorship, some of that functionality has
                been moved to the Common Securitization Platform, which is jointly
                owned and operated by the Enterprises. In January 2020, FHFA
                announced that it had directed the Enterprises to amend the
                governance of the entity that operates the Common Securitization
                Platform to include an independent, non-executive chairman of the
                board of directors and add up to three additional independent
                directors.
                ---------------------------------------------------------------------------
                C. Post-Crisis Changes to Regulatory Capital Frameworks
                 After the 2008 financial crisis, financial services regulators in
                the U.S. and internationally revisited their regulatory capital
                frameworks to address lessons learned. The international efforts of the
                leading banking regulators through the BCBS culminated in 2010 in
                enhancements to the Basel framework.\29\ That comprehensive reform
                package was designed to improve the quality and quantity of regulatory
                capital and to build additional capacity into the banking system to
                absorb losses during future periods of financial stress. Revisions to
                the international capital standards included a more restrictive
                definition of regulatory capital, higher regulatory capital
                requirements, a capital conservation buffer that could be drawn down
                during periods of financial stress, and also capital surcharges for
                systemic importance.
                ---------------------------------------------------------------------------
                 \29\ See BCBS, Basel: A Global Regulatory Framework for More
                Resilient Banks and Banking Systems (Dec. 2010; revised June 2011),
                available at http://www.bis.org/publ/bcbs189.htm.
                ---------------------------------------------------------------------------
                 With respect to the Enterprises, HERA gave FHFA greater authority
                to determine capital standards for the Enterprises by removing the
                Safety and Soundness Act's restrictions on the risk-based capital
                requirements and by giving FHFA authority to increase leverage ratio
                requirements above the statutory minimum. Each Enterprise was placed
                into conservatorship shortly after enactment of HERA, and FHFA
                suspended the Enterprises' statutory capital classifications and
                regulatory capital requirements. FHFA, in its capacity as conservator,
                then began to develop a framework known as the Conservatorship Capital
                Framework to ensure that each Enterprise assumed appropriate regulatory
                capital requirements in managing their businesses. The Conservatorship
                Capital Framework was implemented in 2017, and ultimately was the
                foundation of the 2018 proposal.
                IV. Rationale for Re-Proposal
                 FHFA is re-proposing the regulatory capital framework for the
                Enterprises for three key reasons:
                [[Page 39287]]
                 First, FHFA has begun the process to responsibly end the
                conservatorships of the Enterprises. This policy change is a departure
                from the expectations of interested parties at the time of the 2018
                proposal, when the prospects for indefinite conservatorships informed
                comments and perhaps even the decision whether to comment at all.
                 Second, FHFA is proposing to increase the quantity and
                quality of the regulatory capital at the Enterprises to ensure the
                safety and soundness of each Enterprise and that each Enterprise can
                fulfill its statutory mission to provide stability and ongoing
                assistance to the secondary mortgage market across the economic cycle,
                in particular during periods of financial stress.
                 Third, to facilitate regulatory capital planning and also
                in furtherance of the safety and soundness of the Enterprises and their
                countercyclical mission, FHFA is proposing changes to mitigate the pro-
                cyclicality of the aggregate risk-based capital requirements of the
                2018 proposal.
                 While these enhancements preserve the 2018 proposal as the
                foundation of the Enterprises' regulatory capital framework, FHFA has
                nonetheless determined to solicit comments on this revised framework in
                its entirety in light of the changed policy environment, the extent and
                nature of the enhancements, the technical nature of the underlying
                issues, the diverse range of interested parties, and the critical
                importance of the Enterprises' regulatory capital framework to the
                national housing finance markets.
                A. Responsibly Ending the Conservatorships
                 FHFA stated in the 2018 proposal that ``this proposed rule is not a
                step towards recapitalizing the Enterprises and administratively
                releasing them from conservatorship.'' \30\ FHFA also noted that
                ``[p]ublication of this proposed rule will assist with FHFA's
                administration of the conservatorships of Fannie Mae and Freddie Mac by
                potentially refining the [Conservatorship Capital Framework].'' \31\ It
                is possible that these and other statements made by FHFA, as well as
                the generally prevailing uncertainty at the time as to the Enterprises'
                prospects for exiting conservatorships, might have influenced
                interested parties' views as to the practical relevance of the 2018
                proposal or otherwise dissuaded the submission of some comments. In
                fact, more than half of the comments on the 2018 proposal related to
                the ongoing conservatorships rather than the proposed regulatory
                capital framework.
                ---------------------------------------------------------------------------
                 \30\ 83 FR at 33313.
                 \31\ Id.
                ---------------------------------------------------------------------------
                 The policy environment has since changed. In September 2019, the
                Treasury Department released its housing reform plan that recommended
                that FHFA begin the process to end each Enterprise's conservatorship in
                a manner consistent with the preconditions set forth in that plan, and
                also recommended a recapitalization plan be developed for each
                Enterprise.\32\ Shortly thereafter, the Treasury Department and FHFA,
                on behalf of each Enterprise in its capacity as conservator, entered
                into letter agreements permitting the Enterprises to together retain up
                to $45 billion in capital. In October 2019, FHFA then issued a new
                Strategic Plan and Scorecard for the Enterprises that stated that
                ``[e]nding the conservatorships of Fannie Mae and Freddie Mac is a
                central and necessary element of this new roadmap.''
                ---------------------------------------------------------------------------
                 \32\ Treasury, Housing Reform Plan at 27 (Sept. 2019), available
                at https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.
                ---------------------------------------------------------------------------
                 These developments were important factors in FHFA's decision to re-
                propose the regulatory capital framework in its entirety. FHFA
                considered extensively the comments received on the 2018 proposal and
                made significant adjustments to multiple aspects of the proposed
                regulatory capital framework in response to the comments received. FHFA
                now hopes and expects that the clarity as to the Enterprises' eventual
                exit from conservatorship will lead to new, different, and more
                extensive comments. To that end, FHFA emphasizes that the purpose of
                the proposed rule is to establish a regulatory capital framework that
                ensures the safety and soundness of each Enterprise and that each
                Enterprise is positioned to fulfill its statutory mission across the
                economic cycle, in particular during periods of financial stress.
                B. Ensuring Capital Adequacy
                1. Quality of Capital
                 As discussed in Section III.B.3, a lesson of the 2008 financial
                crisis is that the Enterprises' safety and soundness depends not only
                on the quantity but also on the quality of their regulatory capital. In
                light of the lessons learned, FHFA has determined enhancements are
                necessary to address two key concerns with respect to the quality of
                the Enterprise's regulatory capital.
                 First, enhancements are necessary to limit the amount of regulatory
                capital that may consist of certain components of capital such as DTAs
                that might tend to have less loss-absorbing capacity during a period of
                financial stress. FHFA noted in the 2018 proposal that the Enterprises'
                DTAs, which are included in total capital and core capital by statute,
                ``may provide minimal to no loss-absorbing capability during a period
                of [financial] stress as recoverability (via taxable income) may become
                uncertain.'' \33\ The 2018 proposal addressed this issue by
                establishing a risk-based capital requirement for DTAs. However, the
                2018 proposal did not include adjustments for other capital elements
                that tend to have less loss-absorbing capacity during a financial
                stress (e.g., ALLL, goodwill, and intangibles). The 2018 proposal also
                did not adjust for accumulated other comprehensive income (AOCI),
                leaving open the possibility that an Enterprise could have positive
                total capital and core capital despite being insolvent under GAAP,
                though FHFA did request comment on whether to include offsetting
                capital requirements to AOCI similar to the treatment of DTAs.
                ---------------------------------------------------------------------------
                 \33\ 83 FR at 33388. Deducting the Enterprises' DTAs from their
                $98.5 billion in total capital in mid-2008 in a manner generally
                consistent with the U.S. banking regulators' approach would have
                left the Enterprises with little regulatory capital, reflective of
                the financial distress that the Enterprises were experiencing at the
                time and also consistent with the $53.8 billion in capital
                reductions realized a few months later with the valuation allowances
                on the Enterprises' DTAs.
                ---------------------------------------------------------------------------
                 Second, the statutory definitions of regulatory capital used in the
                2018 proposal did not limit the extent to which preferred shares could
                satisfy the risk-based capital requirements. Specifically, there was
                neither a risk-based capital requirement for core capital nor a
                requirement that retained earnings and other common equity be the
                predominant form of capital, as under the Basel framework.\34\ The 2018
                proposal sought feedback on this issue and commenters recommended FHFA
                limit the inclusion of preferred shares in regulatory capital to align
                with the U.S. banking framework's definition of tier 1 capital.
                ---------------------------------------------------------------------------
                 \34\ See BCBS, Basel: A Global Regulatory Framework for More
                Resilient Banks and Banking Systems, paragraphs 8 and 9 (Dec. 2010;
                revised June 2011), available at http://www.bis.org/publ/bcbs189.htm; (``It is critical that banks' risk exposures are backed
                by a high quality capital base. The crisis demonstrated that credit
                losses and writedowns come out of retained earnings, which is part
                of banks' tangible common equity base . . . . To this end, the
                predominant form of Tier 1 capital must be common shares and
                retained earnings.'').
                ---------------------------------------------------------------------------
                 To address these and related concerns, and as described in more
                detail in Section V.B., FHFA is proposing to supplement the total
                capital and core capital requirements with additional capital
                requirements
                [[Page 39288]]
                based on the Basel framework's definitions of total capital, tier 1
                capital, and CET1 capital. These supplemental capital requirements
                would include customary deductions and other adjustments for certain
                DTAs, goodwill, intangibles, and other assets that tend to have less
                loss-absorbing capacity during a financial stress. The risk-based tier
                1 and CET1 capital requirements also would ensure that retained
                earnings and other high-quality capital are the predominant form of
                regulatory capital.
                2. Quantity of Capital
                 FHFA has also determined enhancements to the 2018 proposal are
                necessary to ensure a safe and sound quantity of regulatory capital at
                each Enterprise. In particular, due in part to the lack of prudential
                floors on risk-based capital requirements and capital buffers, the 2018
                proposal's credit risk capital requirements were insufficient to ensure
                the safety and soundness of each Enterprise and that each Enterprise
                could continue to fulfill its statutory mission during a period of
                financial stress. In determining the need for these enhancements, FHFA
                considered the following facts, among others:
                 Cumulative Crisis-Era Capital Losses. Fannie Mae and
                Freddie Mac's peak cumulative capital losses from 2008 through 2011 and
                the first quarter of 2012, respectively, were, respectively, $167
                billion and $98 billion. Had the 2018 proposal been in effect at the
                end of 2007, the 2018 proposal's risk-based capital requirements for
                Fannie Mae and Freddie Mac would have been, respectively, $171 billion
                and $110 billion. Fannie Mae and Freddie Mac's peak losses would have
                left, respectively, only $3 billion and $12 billion in remaining
                capital. At 0.1 percent and 0.5 percent of their total assets and off-
                balance sheet guarantees respectively, these amounts would not have
                sustained the market confidence necessary for the Enterprises to
                continue as going concerns, particularly given the prevailing stress in
                the financial markets at that time and also given the uncertainty as to
                the potential for other write-downs and the adequacy of the
                Enterprises' allowances for loan losses. Indeed, in October 2010, FHFA
                projected $90 billion in additional PSPA draws through 2013 under the
                baseline scenario, although only $34 billion in additional draws proved
                necessary.\35\
                ---------------------------------------------------------------------------
                 \35\ See Fed. Hous. Fin. Agency, Projections of the Enterprises'
                Financial Performance at 10 (Oct. 2010), available at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2010-10_Projections_508.pdf.
                ---------------------------------------------------------------------------
                 Single-family Credit Losses. Freddie Mac's estimated
                single-family credit risk capital requirement under the 2018 proposal
                of $59 billion as of December 31, 2007 would have been less than its
                lifetime single-family credit losses of $64 billion on its December 31,
                2007 guarantee portfolio. Even excluding loans that Freddie Mac no
                longer acquires, Freddie Mac's estimated single-family credit risk
                capital requirement of $24 billion under the 2018 proposal would have
                exceeded projected lifetime losses of $20 billion by only $4 billion
                (0.4 percent of the unpaid principal balance on the single-family book
                as of December 31, 2007). Fannie Mae's estimated single-family credit
                risk capital requirement under the 2018 proposal would have exceeded
                projected lifetime losses on its December 31, 2007 guarantee portfolio
                whether including or excluding loans that it no longer acquires, but
                only by $9 billion in both scenarios (0.4 percent and 0.7 percent,
                respectively, of the unpaid principal balance of the single-family book
                as of December 31, 2007).
                 Comparison to the Basel and U.S. Banking Frameworks. Had
                the 2018 proposal been in effect on September 30, 2019, the average
                pre-CRT net credit risk capital requirement on the Enterprises' single-
                family mortgage exposures would have been 1.6 percent of unpaid
                principal balance, implying an average risk weight of 20 percent.\36\
                The U.S. banking framework generally assigns a 50 percent risk weight
                to single-family mortgage exposures to determine the credit risk
                capital requirement (equivalent to a 4.0 percent adjusted total capital
                requirement), while the current Basel framework generally assigns a 35
                percent risk weight (equivalent to a 2.8 percent adjusted total capital
                requirement). Before adjusting for the capital buffers under the
                proposed rule and the Basel and U.S. banking frameworks, the
                Enterprises' regulatory capital requirements for single-family mortgage
                exposures under the 2018 proposal would have been 40 percent that of
                U.S. banking organizations and less than 60 percent that of non-U.S.
                banking organizations. The BCBS has finalized a more risk-sensitive set
                of risk weights for residential mortgage exposures, which are to be
                implemented by January 1, 2022.\37\ With those changes, the lowest
                standardized risk weight would be 20 percent for single-family
                residential mortgage loans with LTVs at origination less than 50
                percent. The 20 percent average risk weight would have been the same as
                the Basel framework's 20 percent minimum, notwithstanding the
                Enterprises having an average single-family original loan-to-value
                (OLTV) of approximately 77 percent as of September 30, 2019. These
                comparisons are complicated by the fact that the 20 percent average
                risk weight reflects capital relief for loan-level credit enhancement
                and MTMLTV. In particular, some meaningful portion of the gap between
                the credit risk capital requirements of the banking organizations and
                the Enterprises under the 2018 proposal is due to the 2018 proposal's
                use of MTMLTV instead of OLTV, as under the U.S. banking framework, to
                assign credit risk capital requirements for mortgage exposures. In a
                different house price environment, perhaps after several years of
                declining house prices, the mark-to-market framework could have
                resulted in higher credit risk capital requirements than the Basel and
                U.S. banking frameworks. Similarly, some of this gap might have been
                expected to narrow had real property prices moved toward their long-
                term trend. However, the sizing of the current gap under the 2018
                proposal is still an important consideration informing the enhancements
                to the 2018 proposal. Notably, the 20 percent average risk weight would
                have been the same as the Basel framework's 20 percent risk weight
                assigned to exposures to sovereigns and central banks with ratings A+
                to A- and claims on banks and corporates with ratings AAA to AA-.\38\
                The 20 percent average risk weight also would have been the same as the
                20 percent risk weight assigned under the U.S. banking framework to
                Enterprise-guaranteed MBS.
                ---------------------------------------------------------------------------
                 \36\ This average risk weight equals the average post-CRT net
                credit risk capital requirement, excluding the going-concern buffer,
                under the 2018 proposal of approximately 164 basis points, divided
                by a total capital requirement of 800 basis points.
                 \37\ BCBS, Basel III: Finalising Post-Crisis Reforms, paragraph
                64, at 21 (Dec. 2017), available at https://www.bis.org/bcbs/publ/d424.pdf.
                 \38\ See BCBS, The Basel Framework, paragraphs 20.4 and 20.14
                (Dec. 15, 2019), available at https://www.bis.org/basel_framework/index.htm?export=pdf.
                ---------------------------------------------------------------------------
                 Monoline businesses. As discussed in the 2018 proposal,
                comparisons to the U.S. banking framework's capital requirements are
                complicated by the different risk profiles of the Enterprises and large
                banking organizations.\39\ The Enterprises, for example, transfer much
                of the interest rate and funding risk on their mortgage exposures
                through their sales of their guaranteed MBS, while large banking
                organizations generally must fund those loans through customer deposits
                and other sources. While the interest rate and funding risk profiles
                are different, that difference should not
                [[Page 39289]]
                preclude comparisons of the credit risk capital requirements of the
                U.S. banking framework to the credit risk capital requirements of the
                Enterprises. The Basel and U.S. banking frameworks generally do not
                contemplate an explicit capital requirement for interest rate risk on
                banking book exposures, leaving interest rate risk capital requirements
                to bank-specific tailoring through the supervisory process.\40\ If
                anything, the monoline nature of the Enterprises' mortgage-focused
                businesses actually suggests that the concentration risk of an
                Enterprise might be greater than that of a diversified banking
                organization with a similar amount of credit risk. FHFA has not
                attempted to make a specific adjustment to the risk-based capital
                requirements to mitigate the Enterprises' concentration risk, but the
                heightened risk associated with the Enterprises' sector-specific
                concentration is nonetheless an important consideration in determining
                the need for the enhancements contemplated by the proposed rule.
                ---------------------------------------------------------------------------
                 \39\ 83 FR at 33323.
                 \40\ See BCBS, Interest Rate Risk in the Banking Book, paragraph
                1 (April 2016), available at https://www.bis.org/bcbs/publ/d368.pdf;
                (``Interest rate risk in the banking book (IRRBB) is part of the
                Basel capital framework's Pillar 2 (Supervisory Review Process) and
                subject to the Committee's guidance set out in the 2004 Principles
                for the management and supervision of interest rate risk
                (henceforth, the IRR Principles).'').
                ---------------------------------------------------------------------------
                 More generally, enhancements are necessary to mitigate certain
                risks and limitations associated with the underlying historical data
                and models used to calibrate the 2018 proposal's credit risk capital
                requirements. For example:
                 Limitations of crisis-era data. Under the 2018 proposal,
                the credit risk capital requirement for a mortgage exposure was
                calibrated to be sufficient to absorb the lifetime unexpected losses
                incurred on loans of that type experiencing a shock to house prices
                similar to that observed during the 2008 financial crisis. As discussed
                in Section III.B, the Enterprises' financial crisis-era losses likely
                were mitigated to at least some extent by the unprecedented support by
                the federal government of the housing market and the economy, and also
                by the declining interest rate environment of the period. There is
                therefore some risk that the 2018 proposal's risk-based capital
                requirements, notwithstanding the required going-concern buffer, were
                not calibrated to ensure each Enterprise would be regarded as a viable
                going concern following an economic downturn that potentially entails
                more unexpected losses, whether because there is less or no Federal
                support of the economy, because there is less or no reduction in
                interest rates, or because of other causes. For example, post-crisis
                changes in federal, state, and local loss mitigation and other
                foreclosure requirements might increase the uncertainty as to loss
                estimations.
                 High-risk loan products. A disproportionate share of the
                Enterprises' crisis-era credit losses (approximately $108 billion)
                arose from certain single-family mortgage exposures that are no longer
                eligible for acquisition by the Enterprises. The calibration of the
                2018 proposal's credit risk capital requirements attributed a
                significant portion of the Enterprises' crisis-era losses to these
                product characteristics, including ``Alt-A,'' negative amortization,
                interest-only, and low or no documentation loans, as well as loans with
                debt-to-income ratio at origination greater than 50 percent, cash out
                refinances with total LTV greater than 85 percent, and investor loans
                with LTV greater than or equal to 90 percent. The statistical methods
                used to allocate losses between borrower-related risk attributes and
                product-related risk attributes pose significant model risk. To ensure
                safety and soundness, the capital requirements should mitigate the risk
                of potential underestimation of credit losses that would be incurred in
                an economic downturn with national housing price declines of similar
                magnitude, even absent those loan types and even assuming a repeat of
                Federal support of the economy and the declining interest rate
                environment.\41\
                ---------------------------------------------------------------------------
                 \41\ Reliance on static look-up grids and multipliers might also
                introduce additional model risk as borrower behavior, mortgage
                products, underwriting practices, or the national housing markets
                continue to evolve.
                ---------------------------------------------------------------------------
                 Gaps in risk coverage. There are some material risks to
                the Enterprises that were not assigned a risk-based capital requirement
                under either the 2018 proposal and the proposed rule--for example,
                risks relating to uninsured or underinsured losses from flooding,
                earthquakes, or other natural disasters or radiological or biological
                hazards. There also is no risk-based capital requirement for the risks
                that climate change could pose to property values in some localities.
                 Related to these capital adequacy concerns, the 2018 proposal's
                required capital was not tailored to the risk that a default or other
                financial distress of an Enterprise could have on the liquidity,
                efficiency, competitiveness, or resiliency of national housing finance
                markets. As described in Section VII.A.3, the absence of a stability
                capital buffer poses not only a risk to the national housing finance
                markets but also a risk to the safety and soundness of the Enterprises
                by perpetuating their funding advantages and undermining market
                discipline over their risk taking.
                 To address these and related concerns, and as described in more
                detail below, FHFA is proposing, among other changes:
                 A prudential floor on the credit risk capital requirement
                for mortgage exposures to mitigate the model and other risks associated
                with the methodology for calibrating the credit risk capital
                requirements.
                 A credit risk capital requirement on senior tranches of
                CRT held by an Enterprise, an adjustment to the CRT capital treatment
                to reflect that CRT is not equivalent in loss-absorbing capacity to
                equity financing, and operational criteria for CRT structures that
                together would mitigate the structuring, recourse, and other risks
                associated with these securitizations.
                 Risk-based capital requirements for a number of exposures
                not expressly addressed by the 2018 proposal, including credit risk on
                commitments to acquire mortgage loans, counterparty risk on interest
                rate and other derivatives, and credit risk on an Enterprise's holdings
                or guarantees of the other Enterprise's MBS.
                 A countercyclical adjustment for single-family credit risk
                that would result in greater capital retention when housing markets may
                be vulnerable to correction, while better enabling the Enterprises to
                play a countercyclical role.
                 A stress capital buffer that would, among other things,
                enhance the resiliency of the Enterprises and ensure that each
                Enterprise would continue to be regarded as a viable going concern by
                creditors and other counterparties after a severe economic downturn.
                 A stability capital buffer tailored to the risk that the
                Enterprise's default or other financial distress could have on the
                liquidity, efficiency, competitiveness, and resiliency of national
                housing finance markets.
                 A revised method for determining operational risk capital
                requirements, as well as a higher floor.
                 A requirement that each Enterprise maintain internal
                models for determining its own risk-based capital requirements that
                would prompt each Enterprise to develop its own view of credit and
                other risks and not rely solely on the risk assessments underlying the
                standardized risk weights assigned under this regulatory capital
                framework.
                 A 2.5 percent leverage ratio and a 1.5 percent PLBA that
                would together serve as a credible backstop to the risk-based capital
                requirements and mitigate the inherent risks and limitations of any
                [[Page 39290]]
                methodology for calibrating those requirements.
                C. Addressing Pro-Cyclicality
                 Consistent with many of the comments on the 2018 proposal, FHFA has
                determined that mitigating the pro-cyclicality of the 2018 proposal's
                risk-based capital requirements would facilitate capital management,
                enhance the safety and soundness of the Enterprises by preventing risk-
                based capital requirements from decreasing to unsafe and unsound
                levels, and help position the Enterprises to fulfill their statutory
                mission to provide stability and ongoing assistance to the national
                housing finance markets across the economic cycle. A pro-cyclical
                framework could have incentivized the Enterprises to expand credit when
                house prices increased, potentially left the Enterprises without
                regulatory capital that could be drawn down during a period of
                financial stress, and perhaps even exacerbated the housing price cycle
                itself. A pro-cyclical framework also could have led to large swings in
                required capital, leading to the practical necessity that prudent
                management would maintain a managerial capital surplus well above the
                capital requirements.
                 As described in more detail below, FHFA is proposing several
                enhancements to address this pro-cyclicality while preserving the
                mortgage risk-sensitive framework of the 2018 proposal. Among other
                changes, FHFA is proposing:
                 A countercyclical adjustment to adjust each single-family
                mortgage exposure MTMLTV when national housing prices are 5.0 percent
                above or below the inflation-adjusted long-term trend.
                 A stress capital buffer and a separate leverage buffer
                that will, in addition to enhancing the resiliency of the Enterprises,
                dampen pro-cyclicality by encouraging each Enterprise to retain capital
                during good times while remaining able to provide stability and ongoing
                assistance to the secondary mortgage market during a period of
                financial stress by utilizing capital buffers as losses are
                experienced.
                 A prudential floor on the credit risk capital requirement
                for mortgage exposures that, in addition to mitigating the model and
                other risks associated with the methodology for calibrating the credit
                risk capital requirements, would also provide further stability to the
                risk-based capital requirements through the cycle.
                 A requirement that each Enterprise maintain its own view
                of credit and other risks, including as to the relationship between
                housing prices and market fundamentals, by maintaining its own internal
                models for determining risk-based capital.
                V. Definitions of Regulatory Capital
                A. Statutory Definitions
                 As discussed in Sections VI.A and VI.B, the proposed rule would
                require each Enterprise to maintain required amounts of core capital
                and total capital, as defined in the Safety and Soundness Act.
                 Core capital means, with respect to an Enterprise, the sum of the
                following (as determined in accordance with GAAP):
                 The par or stated value of outstanding common stock;
                 The par or stated value of outstanding perpetual,
                noncumulative preferred stock;
                 Paid-in capital; and
                 Retained earnings.
                 Core capital does not include any amounts that the Enterprise could
                be required to pay, at the option of investors, to retire capital
                instruments.
                 Total capital means, with respect to an Enterprise, the sum of the
                following:
                 The core capital of the Enterprise;
                 A general allowance for foreclosure losses, which: (i)
                Includes an allowance for portfolio mortgage losses, an allowance for
                non-reimbursable foreclosure costs on government claims, and an
                allowance for liabilities reflected on the balance sheet for the
                Enterprise for estimated foreclosure losses on mortgage-backed
                securities; and (ii) does not include any reserves of the Enterprise
                made or held against specific assets; and
                 Any other amounts from sources of funds available to
                absorb losses incurred by the Enterprise, that the Director by
                regulation determines are appropriate to include in determining total
                capital.
                 Notably, as discussed in Section IV.B.1, these statutory
                definitions do not include deductions and other adjustments for capital
                elements that might tend to have less loss-absorbing capacity during a
                period of financial stress (e.g., DTAs, ALLL, goodwill, and
                intangibles). These statutory definitions also do not limit the extent
                to which preferred shares may satisfy the risk-based capital
                requirements.
                B. Supplemental Definitions
                1. Loss-Absorbing Capacity
                 Following HERA's amendments to the Safety and Soundness Act, FHFA
                has wide authority to prescribe regulatory capital requirements for the
                Enterprises. The Safety and Soundness Act generally authorizes FHFA to
                prescribe by regulation risk-based capital requirements for the
                Enterprises.\42\ The Safety and Soundness Act also authorizes FHFA to
                prescribe minimum capital levels that are greater than the levels
                prescribed by statute.\43\ The FHFA Director has general regulatory
                authority over the Enterprises, as well as the authority to issue
                regulations to carry out the duties of the FHFA Director.\44\ The FHFA
                Director also may establish such other operational and management
                standards as the FHFA Director determines to be appropriate.\45\ As
                amended by HERA, these and other provisions of the Safety and Soundness
                Act give the FHFA Director generally broad and flexible authority to
                tailor regulatory capital requirements for the Enterprises, including
                to prescribe additional capital requirements that supplement the
                statutory capital classifications based on total capital and core
                capital.
                ---------------------------------------------------------------------------
                 \42\ 12 U.S.C. 4611.
                 \43\ 12 U.S.C. 4612.
                 \44\ 12 U.S.C. 4511, 4526.
                 \45\ 12 U.S.C. 4513b.
                ---------------------------------------------------------------------------
                 FHFA is proposing to supplement the statutory definitions of total
                capital and core capital requirements with additional regulatory
                capital definitions based on the Basel framework's definitions of total
                capital, tier 1 capital, and CET1 capital. These supplemental
                definitions would include customary deductions and other adjustments
                for certain DTAs, goodwill, intangibles, and other assets that tend to
                have less loss-absorbing capacity during a financial stress. As
                discussed in Section IV.B.1, the supplemental definitions of regulatory
                capital would fill certain gaps in the statutory definitions of core
                capital and total capital. For example, neither core capital nor total
                capital adjust for AOCI, leaving open the possibility that an
                Enterprise could have positive total capital and core capital but yet
                be insolvent under GAAP. The supplemental tier 1 and CET1 capital
                requirements also would ensure that retained earnings and other high-
                quality capital are the predominant form of regulatory capital.
                 Because the supplemental definitions of regulatory capital in the
                proposed rule are adopted from the Basel framework, the supplemental
                definitions would be familiar to market participants. This familiarity
                should facilitate comparisons between the regulatory capital
                requirements of the Enterprises, banking organizations, and other
                market participants. The use of well-understood definitions of
                regulatory capital should also facilitate market discipline over the
                Enterprises' risk-taking by positioning future
                [[Page 39291]]
                shareholders, creditors, and other counterparties to more readily
                understand the regulatory capital that is available to absorb losses.
                 Consistent with the 2018 proposal, neither the statutory
                definitions nor the supplemental definitions of regulatory capital
                would include a measure of future guarantee fees or other future
                revenues. Counting future revenues toward capital requirements could be
                appropriate under a ``claims-paying capacity'' or similar framework
                that seeks only to ensure that an Enterprise has the ability to perform
                its guarantee and other financial obligations over time, perhaps
                subject to a stay or other pause in the payment of claims and other
                financial obligations during a resolution proceeding. The proposed rule
                instead seeks to ensure that each Enterprise is capitalized to remain a
                viable going concern both during and after a severe economic downturn,
                as discussed in Section III.B.2. Historical experience has established
                that credit, market, and operational losses can be incurred quickly
                during a stress, and it is an Enterprise's capacity to absorb those
                losses as incurred that defines creditors' and other counterparties'
                views as to whether the financial institution is a viable going
                concern. As discussed in Sections III.B.2 and III.B.3, market
                confidence in the Enterprises waned in mid-2008 when Fannie Mae and
                Freddie Mac had total capital of, respectively, $55.6 billion and $42.9
                billion, notwithstanding their right to future guarantee fees.
                 FHFA's approach does, however, still give consideration to the
                loss-absorbing capacity of future guarantee fees or other revenues. As
                discussed in Section VII.A.1, FHFA has calibrated the stress capital
                buffer as the amount of regulatory capital sufficient for an Enterprise
                to withstand a severely adverse stress and still remain above the
                capital requirements.\46\ Under this calibration methodology, the
                stress capital buffer has been sized based on net capital exhaustion in
                a severely adverse scenario. The determination of net capital
                exhaustion takes into account the guarantee fees and other revenues
                received during that stress.
                ---------------------------------------------------------------------------
                 \46\ See BCBS, Calibrating Regulatory Minimum Capital
                Requirements and Capital Buffers: A Top-down Approach, paragraph
                I.A. (Oct. 2010) (``[T]he regulatory minimum requirement is the
                amount of capital needed for a bank to be regarded as a viable going
                concern by creditors and counterparties, while a buffer can be seen
                as an amount sufficient for the bank to withstand a significant
                downturn period and still remain above minimum regulatory
                levels.''), available at https://www.bis.org/publ/bcbs180.pdf; and
                Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary
                Leverage Ratio Standards for Certain Bank Holding Companies and
                Their Subsidiary Insured Depository Institutions, 78 FR 51101, 51105
                (Aug. 20, 2013) (Joint Agency Proposed Rule) (``In calibrating the
                revised risk-based capital framework, the BCBS identified those
                elements of regulatory capital that would be available to absorb
                unexpected losses on a going-concern basis. The BCBS agreed that an
                appropriate regulatory minimum level for the risk-based capital
                requirements should force banking organizations to hold enough loss-
                absorbing capital to provide market participants a high level of
                confidence in their viability.'').
                ---------------------------------------------------------------------------
                2. Components of Regulatory Capital
                a. CET1 Capital
                 Consistent with the Basel and U.S. banking frameworks, CET1 capital
                would be the sum of an Enterprise's outstanding CET1 capital
                instruments that satisfy the criteria set forth below, related surplus
                (net of treasury stock), retained earnings, and AOCI, less regulatory
                adjustments and deductions.
                 The criteria for CET1 capital instruments are intended to ensure
                that CET1 capital instruments do not possess features that would cause
                an Enterprise's condition to further weaken during a period of
                financial stress. The CET1 capital instruments are any common stock
                instruments (plus any related surplus) issued by the Enterprise, net of
                treasury stock, that meet the criteria specified at Sec.
                1240.20(b)(1).
                b. Additional Tier 1 Capital
                 Consistent with the Basel and U.S. banking frameworks, additional
                tier 1 capital would equal the sum of the additional tier 1 capital
                instruments that satisfy the criteria set forth at Sec. 1240.20(c)(1)
                and related surplus, less applicable regulatory adjustments and
                deductions. The criteria are intended to ensure that additional tier 1
                capital instruments would be available to absorb losses on a going-
                concern basis.
                 An Enterprise would not be permitted to include an instrument in
                its additional tier 1 capital unless FHFA has determined that the
                Enterprise has made appropriate provision, including in any resolution
                plan of the Enterprise, to ensure that the instrument would not pose a
                material impediment to the ability of an Enterprise to issue common
                stock instruments following any future appointment of FHFA as
                conservator or receiver under the Safety and Soundness Act.
                c. Tier 2 Capital
                 Adjusted total capital would be the sum of CET1 capital, additional
                tier 1 capital, and tier 2 capital. Generally consistent with the Basel
                and U.S. banking frameworks, tier 2 capital would equal the sum of:
                Tier 2 capital instruments that satisfy the criteria set forth at Sec.
                1240.20(d)(1); related surplus; and limited amounts of excess credit
                reserves, less any applicable regulatory adjustments and deductions.
                 As under the U.S. banking framework for advanced approaches banking
                organizations, an Enterprise may include in tier 2 capital only the
                excess of its eligible credit reserves over its total expected credit
                loss, provided the amount does not exceed 0.6 percent of its credit
                risk-weighted assets. The limited inclusion of ALLL in tier 2 capital
                is a logical outgrowth of FHFA's calibration methodology for mortgage
                exposures under which the base risk weights and risk multipliers are
                intended to require credit risk capital sufficient to absorb the
                lifetime unexpected losses incurred on mortgage exposures experiencing
                a shock to house prices similar to that observed during the 2008
                financial crisis. The same is also true for non-mortgage exposures,
                where FHFA generally has adopted the credit risk capital requirements
                of the U.S. banking framework, which also calibrates credit risk
                capital requirements to absorb unexpected losses.
                 An alternative approach perhaps could be to include general ALLL in
                adjusted total capital and then calibrate the credit risk capital
                requirements based on stress losses (i.e., unexpected and expected
                losses). The resulting required loss-absorbing capacity for a mortgage
                exposure would be substantially the same. That approach however would
                raise safety and soundness risk relating to the loss-absorbing capacity
                of each Enterprise's ALLL in a period of financial stress, particularly
                if there is no limit on the share of total capital that may be ALLL. An
                approach that calibrates credit risk capital requirements based on
                stress losses also would limit FHFA's ability to rely on the credit
                risk capital requirements under the U.S. banking framework for non-
                mortgage exposures, an important consideration to the extent that FHFA
                does not have the data or models to calibrate its own credit risk
                capital requirements for non-mortgage exposures.
                 As with additional tier 1 capital, an Enterprise would not be
                permitted to include an instrument in its tier 2 capital unless FHFA
                has determined that the Enterprise has made appropriate provision,
                including in any resolution plan of the Enterprise, to ensure that the
                instrument would not pose a material impediment to the ability of an
                Enterprise to issue common stock instruments following any future
                appointment of FHFA as conservator or
                [[Page 39292]]
                receiver under the Safety and Soundness Act.
                 Question 1. Is each of the definitions of CET1 capital, tier 1
                capital, and tier 2 capital appropriately formulated and tailored to
                the Enterprises?
                 Question 2. Should FHFA include additional amounts of an
                Enterprise's ALLL or excess credit reserves in any of the components of
                regulatory capital?
                 Question 3. Should any other capital elements qualify as CET1
                capital, additional tier 1 capital, or tier 2 capital elements?
                3. Regulatory Adjustments and Deductions
                a. Deductions From CET1 Capital
                 Under the U.S. banking framework, goodwill and other intangible
                assets have long been either fully or partially excluded from
                regulatory capital because of the high level of uncertainty regarding
                the ability of a banking organization to realize value from these
                assets, especially under adverse financial conditions. The regulatory
                capital treatment of DTAs has posed particular safety and soundness
                risks for the Enterprises, as discussed in Section IV.B.1. The proposed
                rule would require an Enterprise to deduct from CET1 capital elements:
                 Goodwill;
                 Intangible assets other than mortgage-servicing assets
                (MSA) net of associated deferred tax liabilities (DTLs);
                 DTAs that arise from net operating loss and tax credit
                carryforwards net of any related valuation allowances and net of DTLs
                in accordance with certain restrictions discussed under Section
                V.B.3.d; and
                 Any defined benefit pension fund net asset, net of DTLs in
                accordance with certain DTL-related restrictions, and subject to
                certain exceptions with FHFA's approval.
                 An Enterprise also would deduct from CET1 capital any after-tax
                gain-on-sale associated with a securitization exposure. Gain-on-sale
                would be defined as an increase in the equity capital of an Enterprise
                resulting from a traditional securitization other than an increase in
                equity capital resulting from (i) the Enterprise's receipt of cash in
                connection with the securitization or (ii) reporting of a mortgage
                servicing asset.
                 Finally, an Enterprise also would deduct from CET1 capital the
                amount of expected credit loss that exceeds the Enterprise's eligible
                credit reserves. Eligible credit reserves would be defined as all
                general allowances that have been established through a charge against
                earnings to cover estimated credit losses associated with on- or off-
                balance sheet wholesale and retail exposures, including the ALLL
                associated with such exposures, but excluding other specific reserves
                created against recognized losses.
                b. Adjustments to CET1 Capital
                 An Enterprise would subtract from CET1 capital any accumulated net
                gains and add any accumulated net losses on cash-flow hedges included
                in AOCI that relate to the hedging of items that are not recognized at
                fair value on the balance sheet. This adjustment would remove an
                element that gives rise to artificial volatility in CET1 capital as it
                would avoid a situation in which the changes in the fair value of the
                cash-flow hedge are reflected in regulatory capital but the changes in
                the fair value of the hedged item is not.
                 An Enterprise also would be required to deduct any net gain and add
                any net loss related to changes in the fair value of liabilities that
                are due to changes in the Enterprise's own credit risk. An Enterprise
                must deduct the difference between its credit spread premium and the
                risk-free rate for derivatives that are liabilities as part of this
                adjustment.
                 To avoid the double-counting of regulatory capital, an Enterprise
                would deduct the amount of its investments in its own capital
                instruments, including direct and indirect exposures, to the extent
                such instruments are not already excluded from regulatory capital.
                Specifically, an Enterprise would deduct its investment in its own
                CET1, additional tier 1, and tier 2 capital instruments from the sum of
                its CET1, additional tier 1, and tier 2 capital, respectively. In
                addition, any CET1, additional tier 1, or tier 2 capital instrument
                issued by an Enterprise that the Enterprise could be contractually
                obligated to purchase also would be deducted from CET1, additional tier
                1, or tier 2 capital elements, respectively.
                c. Items Subject to the 10 and 15 Percent CET1 Capital Threshold
                Deductions
                 An Enterprise would deduct from its CET1 capital the amount of each
                of the following items that individually exceeds the 10 percent CET1
                capital deduction threshold described below:
                 DTAs arising from temporary differences that could not be
                realized through net operating loss carrybacks (net of any related
                valuation allowances and net of DTLs in accordance with certain
                restrictions discussed under Section V.B.3.d); and
                 MSAs, net of associated DTLs in accordance with certain
                restrictions discussed under Section V.B.3.d.
                 An Enterprise would calculate the 10 percent CET1 capital deduction
                threshold by taking 10 percent of the sum of an Enterprise's CET1
                elements, less the adjustments to, and deductions from, CET1 capital
                discussed above.
                 The aggregate amount of the items subject to the threshold
                deductions that are not deducted as a result of the 10 percent CET1
                capital deduction threshold must not exceed 15 percent of an
                Enterprise's CET1 capital, as calculated after applying all regulatory
                adjustments and deductions required under the proposed rule (the 15
                percent CET1 capital deduction threshold). That is, an Enterprise would
                deduct in full the amounts of the items subject to the threshold
                deductions on a combined basis that exceed 17.65 percent (the
                proportion of 15 percent to 85 percent) of CET1 capital, less all
                regulatory adjustments and deductions required for the calculation of
                the 10 percent CET1 capital deduction threshold mentioned above, and
                less the items subject to the 10 and 15 percent deduction thresholds.
                d. Netting of Deferred Tax Liabilities Against Deferred Tax Assets and
                Other Deductible Assets
                 An Enterprise would be permitted to net DTLs against assets (other
                than DTAs) subject to deduction under the proposed rule, provided the
                DTL is associated with the asset and the DTL would be extinguished if
                the associated asset becomes impaired or is derecognized under GAAP. An
                Enterprise would be prohibited from using the same DTL more than once
                for netting purposes.
                 With respect to the netting of DTLs against DTAs, the amount of
                DTAs that arise from net operating loss and tax credit carryforwards,
                net of any related valuation allowances, and the amount of DTAs arising
                from temporary differences that the Enterprise could not realize
                through net operating loss carrybacks, net of any related valuation
                allowances, could be netted against DTLs if certain conditions are met.
                VI. Capital Requirements
                A. Risk-Based Capital Requirements
                1. Supplemental Requirements
                 FHFA is proposing to require the Enterprises to maintain the
                following risk-based capital:
                 Total capital not less than 8.0 percent of risk-weighted
                assets;
                 Adjusted total capital not less than 8.0 percent of risk-
                weighted assets;
                 Tier 1 capital not less than 6.0 percent of risk-weighted
                assets; and
                 CET1 capital not less than 4.5 percent of risk-weighted
                assets.
                [[Page 39293]]
                 As discussed in Section III.B.3, a lesson of the 2008 financial
                crisis is that the Enterprises' safety and soundness depends not only
                on the quantity but also on the quality of their capital. To that end,
                FHFA is proposing to supplement the risk-based capital requirement
                based on statutorily defined total capital with additional risk-based
                capital requirements based on the Basel framework's definitions of
                total capital, tier 1 capital, and CET1 capital.
                 As discussed in Section IV.B.1, FHFA noted in the 2018 proposal
                that the Enterprises' DTAs, which are included in total capital and
                core capital by statute, ``may provide minimal to no loss-absorbing
                capability during a period of [financial] stress as recoverability (via
                taxable income) may become uncertain.'' \47\ The 2018 proposal
                addressed this issue by establishing a risk-based capital requirement
                for DTAs. However, the 2018 proposal did not include adjustments for
                other capital elements that tend to have less loss-absorbing capacity
                during a financial stress (e.g., ALLL, goodwill, and intangibles),
                although FHFA did request comment on how best to compensate for the
                loss-absorbing deficiencies of ALLL and preferred stock within the
                framework of the 2018 proposal. The 2018 proposal also requested
                comment on, but did not adjust for, AOCI, leaving open the possibility
                that an Enterprise could have positive total capital and core capital
                despite being insolvent under GAAP. The supplemental risk-based capital
                requirements for adjusted total capital, tier 1 capital, and CET1
                capital would address these safety and soundness issues to the extent,
                as discussed in Section V.B, the underlying regulatory capital
                definitions incorporate deductions and other adjustments for those
                capital elements that tend to have less loss-absorbing capacity.
                ---------------------------------------------------------------------------
                 \47\ 83 FR at 33388.
                ---------------------------------------------------------------------------
                 Related to this, one of the lessons of the 2008 financial crisis is
                that retained earnings and other high-quality capital should be the
                predominant form of regulatory capital. In addition to not limiting the
                extent to which general ALLL counted toward regulatory capital, the
                2018 proposal did not limit the extent to which preferred shares could
                satisfy the risk-based capital requirements, although FHFA did solicit
                comment on these issues. Specifically, there was neither a risk-based
                capital requirement for core capital nor a requirement that retained
                earnings and other common equity be the predominant form of capital.
                The risk-based capital requirements for tier 1 capital and CET1 capital
                would address this safety and soundness issue in a way that should be
                familiar to market participants.
                2. Risk-Weighted Assets
                 An Enterprise would determine its risk-weighted assets under two
                approaches--a standardized approach and an advanced approach--with the
                greater of the two used to determine its risk-based capital
                requirements. Under both approaches, an Enterprise's risk-weighted
                assets would equal the sum of its credit risk-weighted assets, market
                risk-weighted assets, and operational risk-weighted assets.
                 Specifying each of the aggregate risk-based capital requirements as
                a percent of risk-weighted assets is a change from the 2018 proposal,
                but the change itself would not impact the quantity of required total
                capital. Both under the 2018 proposal and the proposed rule, and
                consistent with the Basel and U.S. banking frameworks,\48\ the risk-
                based capital requirements should be calibrated to require each
                Enterprise to hold enough loss-absorbing capital to maintain the
                confidence of creditors and other counterparties in its viability as a
                going concern. More specifically, FHFA calibrated the credit risk
                capital requirements for mortgage exposures to require capital
                sufficient to absorb the lifetime unexpected losses incurred on
                exposures experiencing a shock to house prices similar to that observed
                during the 2008 financial crisis, as discussed in Sections VIII.A.2 and
                VIII.B.2. The base risk weight for a mortgage exposure is equal to the
                adjusted total capital requirement for the exposure expressed in basis
                points and divided by 800, which is the 8.0 percent adjusted total
                capital requirement also expressed in basis points. Expressing the
                risk-based capital requirement for an exposure as a risk weight, or the
                aggregate risk-based capital requirement as a percent of risk-weighted
                assets, is simply a matter of terminology.
                ---------------------------------------------------------------------------
                 \48\ 78 FR at 51105 (``In calibrating the revised risk-based
                capital framework, the BCBS identified those elements of regulatory
                capital that would be available to absorb unexpected losses on a
                going-concern basis. The BCBS agreed that an appropriate regulatory
                minimum level for the risk-based capital requirements should force
                banking organizations to hold enough loss-absorbing capital to
                provide market participants a high level of confidence in their
                viability.'').
                ---------------------------------------------------------------------------
                 Although the shift to a terminology of risk-weighted assets is more
                form than substance, FHFA has made this change for at least two
                reasons. First, the addition of three new risk-based capital
                requirements raises the need for a straightforward mechanism to specify
                the aggregate regulatory capital required for each. Risk-weighted
                assets accomplishes this by offering a common denominator across the
                2018 proposal's risk-based total capital requirement and the
                supplemental risked-based capital requirements contemplated by the
                proposed rule. Second, this approach and its associated terminology are
                well-understood by those familiar with the U.S. banking framework.
                Expressing the risk-based capital requirement for an exposure as a
                risk-weight will facilitate transparency and comparability with the
                U.S. banking framework and other regulatory capital frameworks. Because
                these concepts are well-understood, this approach also should
                facilitate market discipline over each Enterprise's risk-taking by its
                creditors and other counterparties.
                B. Leverage Ratio Requirements
                1. Adjusted Total Assets
                 Each Enterprise would be required to maintain capital sufficient to
                satisfy the following leverage ratio requirements:
                 Core capital not less than 2.5 percent of adjusted total
                assets; and
                 Tier 1 capital not less than 2.5 percent of adjusted total
                assets.
                 Adjusted total assets would be defined as total assets under GAAP,
                with adjustments to include many of the off-balance sheet and other
                exposures that are included in the supplemental leverage ratio
                requirements of the U.S. banking framework.
                2. Tier 1 Leverage Ratio Requirement
                 As with the risk-based capital requirements, and as discussed in
                Section IV.B.1, the proposed rule would supplement the core capital
                leverage ratio requirement with a leverage ratio requirement based on a
                definition of regulatory capital, here tier 1 capital, that has
                deductions and other adjustments for capital elements that tend to have
                less loss-absorbing capacity during a period of financial stress. Tier
                1 capital is also a well-understood concept for market participants
                familiar with the U.S. banking framework. That in turn would facilitate
                transparency and comparability with the leverage ratio requirements for
                U.S. banking organizations, as well as market discipline by the
                Enterprises' creditors and other counterparties.
                3. Sizing of the Requirements
                 The primary purpose of the leverage ratio requirements is to
                provide a credible, non-risk-based backstop to the risk-based capital
                requirements to safeguard against model risk and
                [[Page 39294]]
                measurement error with a simple, transparent, independent measure of
                risk. From a safety-and-soundness perspective, each type of requirement
                offsets potential weaknesses of the other, and well-calibrated risk-
                based capital requirements working with a credible leverage ratio
                requirement are more effective than either type would be in isolation.
                The leverage ratio requirements would have the added benefit of
                dampening some of the pro-cyclicality inherent in the aggregate risk-
                based capital requirements. The core capital leverage ratio requirement
                also would replace the current statutory leverage ratio requirement for
                purposes of the corrective action provisions of the Safety and
                Soundness Act.
                 FHFA has sized the leverage ratio requirements to be a credible
                backstop to the risk-based capital requirements, taking into account
                the analogous leverage ratio requirements of U.S. banking organizations
                and the Federal Home Loan Banks, considerations relating to the
                Enterprises' historical loss experiences, and the model and related
                risks posed by the calibration of the risk-based capital requirements.
                 First, the proposed leverage ratio requirements are generally
                aligned with the analogous leverage ratio requirements of U.S. banking
                organizations and the Federal Home Loan Banks. The U.S. banking
                framework's leverage ratio requirement requires banking organizations
                maintain tier 1 capital no less than 4.0 percent of total assets.
                Insured depository institutions subsidiaries of certain large U.S. bank
                holding companies also must maintain tier 1 capital no less than 6.0
                percent of total assets to be ``well capitalized.'' \49\ Using data for
                the 18 bank holding companies subject to the Federal Reserve Board's
                supervisory stress testing program in 2018, FHFA determined that the
                average risk weight on the assets of these banks was 61 percent in the
                fourth quarter of 2018. Under the U.S. banking framework, the
                Enterprises' mortgage assets generally would be assigned a 50 percent
                risk weight under the standardized approach. This suggests that the
                average risk weight on the assets of the Enterprises would have been
                approximately 81 percent (50 percent divided by 61 percent) of that of
                these large bank holding companies. That in turn implies a risk-
                adjusted analogous leverage ratio requirement for the Enterprises of
                3.3 percent (81 percent of the 4.0 percent leverage ratio requirement
                for U.S. banking organizations).\50\
                ---------------------------------------------------------------------------
                 \49\ See, e.g., 12 CFR 6.4(b)(1)(i)(D).
                 \50\ That U.S. banking framework's 3 percent supplemental
                leverage ratio requirement is an inappropriate comparable for sizing
                the Enterprises' leverage ratio requirements. Approximately 95
                percent of the Enterprises' adjusted total assets are GAAP total
                assets that are subject to the U.S. banking framework's 4 percent
                leverage ratio requirement. The primary exception is off-balance
                sheet guarantees on loans and securities, principally Freddie Mac's
                K-deals, but these amounts are small relative to the Enterprises'
                total assets under GAAP.
                ---------------------------------------------------------------------------
                 While the interest rate and funding risks of the Enterprises and
                U.S. banking organizations are different, the Basel and U.S. banking
                frameworks generally do not contemplate an explicit capital requirement
                for interest rate risk on banking book exposures given the absence of a
                consensus as to how to quantify that capital requirement, instead
                leaving interest rate risk capital requirements to bank-specific
                tailoring through the supervisory process.\51\ The differences in the
                interest rate and funding risk profiles therefore should not preclude
                comparisons to the U.S. banking framework's leverage ratio
                requirements, subject to adjustments for the different credit risk
                profiles of the Enterprises and U.S. banking organizations (as
                described above). Further, the monoline nature of the Enterprises'
                mortgage-focused businesses suggests that the concentration risk of an
                Enterprise is greater than that of a diversified banking organization
                with a similar amount of mortgage credit risk, perhaps meriting a
                higher leverage ratio requirement, all else equal.
                ---------------------------------------------------------------------------
                 \51\ See BCBS, Interest Rate Risk in the Banking Book, paragraph
                1, (April 2016), available at https://www.bis.org/bcbs/publ/d368.pdf; (``Interest rate risk in the banking book (IRRBB) is part
                of the Basel capital framework's Pillar 2 (Supervisory Review
                Process) and subject to the Committee's guidance set out in the 2004
                Principles for the management and supervision of interest rate risk
                (henceforth, the IRR Principles).'').
                ---------------------------------------------------------------------------
                 The Federal Home Loan Banks also must maintain total capital no
                less than 4.0 percent of total assets. That 4.0 percent leverage ratio
                requirement should be considered in the context of the safety and
                soundness benefits of the statutory requirement that each Federal Home
                Loan Bank advance be fully secured. Related to that, the safety and
                soundness benefits of that collateral might be furthered by law, as any
                security interest granted to a Federal Home Loan Bank by a member (or
                affiliate of a member) is, with some exceptions, entitled by statute to
                priority over the claims and rights of any other party, including any
                receiver, conservator, trustee, or similar party having rights of a
                lien creditor.
                 Second, the proposed leverage ratio requirements are broadly
                consistent with the Enterprises' historical loss experiences. As
                discussed in Sections II.D.3 and III.B.1, the Enterprises' crisis-era
                cumulative capital losses peaked at the end of 2011 at $265 billion,
                approximately 4.8 percent of their adjusted total assets as of December
                31, 2007. Setting aside the valuation allowances on their DTAs, which
                are subject to deductions and other adjustments to CET1 capital (and
                therefore tier 1 and adjusted total capital) under the proposed rule,
                the Enterprises' crisis-era peak cumulative capital losses were $167
                billion, approximately 3.0 percent of their total assets as of December
                31, 2007. Notably even these DTA-adjusted capital losses exceeded by
                $36 billion the tier 1 capital that would have been required under the
                2.5 percent leverage ratio requirement as of December 31, 2007.
                 FHFA recognizes that a portion of the crisis-era losses arose from
                single-family loans that are no longer eligible for acquisition by the
                Enterprises. However, the sizing of regulatory capital requirements
                must take into account the modeling risk posed by the attribution of
                such losses to specific product characteristics, as discussed in
                Section IV.B.2. The sizing of the regulatory capital requirements also
                must guard against potential future relaxation of underwriting
                standards and regulatory oversight over those underwriting standards.
                 The Enterprises' historical loss experiences actually might tend to
                understate the regulatory capital that would be necessary to remain a
                viable going concern to creditors and other counterparties. As
                discussed in Section III.B.1, the Enterprises' crisis-era losses likely
                were mitigated to at least some extent by the unprecedented support by
                the federal government of the housing market and the economy and also
                by the declining interest rate environment of the period. The
                calibration of the leverage ratio requirement and other required
                capital requirements cannot assume a repeat of those loss mitigants.
                Also, as discussed in Section IV.B.2, there are some material risks to
                the Enterprises that are not assigned a risk-based capital
                requirement--for example, risks relating to uninsured or underinsured
                losses from flooding, earthquakes, or other natural disasters or
                radiological or biological hazards. There also is no risk-based capital
                requirement for the risks that climate change could pose to property
                values in some localities.
                 Third, certain risks and limitations associated with the underlying
                [[Page 39295]]
                historical data and models used to calibrate the credit risk capital
                requirements reinforce the importance of leverage ratio requirements
                that safeguard against model risk and measurement error. There is
                inevitably a trade-off between, on the one hand, preserving the
                mortgage risk-sensitive framework of the 2018 proposal and, on the
                other hand, managing the model and related risks associated with any
                methodology for developing a granular assessment of credit risk
                specific to different mortgage loan categories. As discussed in Section
                IV.B.2, a disproportionate share of the Enterprises' crisis-era losses
                arose from certain single-family mortgage exposures that are no longer
                eligible for acquisition by the Enterprises. The calibration of the
                credit risk capital requirements attributed a significant portion of
                the Enterprises' crisis-era losses (approximately $108 billion) to
                these products. The statistical methods used to allocate losses between
                borrower-related risk attributes and product-related risk attributes
                pose significant model risk. It is possible that the calibration
                understates the credit losses that would be incurred in an economic
                downturn with national housing price declines of similar magnitude,
                even assuming a repeat of crisis-era Federal support of the economy and
                the declining interest rate environment. To this point, as discussed in
                Section VIII.A.7, had the proposed rule been in effect on December 31,
                2007, the credit risk capital requirements still would not have been
                sufficient to absorb the projected lifetime credit losses on Freddie
                Mac's single-family book. Under a dynamic framework, the aggregate
                credit risk capital requirements would have increased in subsequent
                years as losses were incurred, while there also would have been
                material uncertainty as to an Enterprise's ability to raise sufficient
                quantities of new capital during a period of financial stress and
                significant losses.
                 The risk-based capital requirements should, as a general rule,
                exceed the regulatory capital required under the leverage ratio
                requirements. At the same time, if the tier 1 leverage ratio
                requirement is to be an independently meaningful and credible backstop,
                there will inevitably be some exceptions in which the tier 1 leverage
                ratio requirement requires more regulatory capital than the risk-based
                capital requirements. In FHFA's view, the measurement period of
                September 30, 2019 is, in fact, consistent with the circumstances under
                which a credible leverage ratio would be binding, given the exceptional
                single-family house price appreciation since 2012, the strong credit
                performance of both single-family and multifamily mortgage exposures,
                the significant progress by the Enterprises to materially reduce legacy
                exposure to NPLs and re-performing loans, robust CRT market access
                enabling substantial risk transfer, and the generally strong condition
                of key counterparties, such as mortgage insurers.
                 Question 4. Is the tier 1 leverage ratio requirement appropriately
                sized to serve as a credible backstop to the risk-based capital
                requirements?
                 Question 5. Should the Enterprise's leverage ratio requirements be
                based on total assets, as defined by GAAP, the Enterprise's adjusted
                total assets, or some other basis?
                C. Enforcement
                 FHFA may draw upon several authorities to address potential
                Enterprise failures to meet the proposed rule's capital requirements
                set forth in VI.A and VI.B. A failure to maintain regulatory capital in
                excess of each of these capital requirements may result in one or more
                enforcement consequences. In all cases, the FHFA Director retains the
                authority to determine the appropriate enforcement consequence.
                 The Safety and Soundness Act authorizes FHFA to establish capital
                levels for an Enterprise by regulation.\52\ An Enterprise failure to
                meet a capital threshold that is required by regulation may be
                addressed through enforcement mechanisms for regulatory violations
                including procedures for cease and desist and consent orders.\53\
                Through a cease and desist or consent order, FHFA could require an
                Enterprise to develop and implement a capital restoration plan,
                restrict asset growth or activities, and take other appropriate action
                to remediate the violation of law.
                ---------------------------------------------------------------------------
                 \52\ 12 U.S.C. 4526, 4611, 4612(c).
                 \53\ 12 U.S.C. 4581, 12 CFR part 1209.
                ---------------------------------------------------------------------------
                 FHFA may also use the enforcement tools available under its
                authority to prescribe and enforce prudential management and operations
                standards (PMOS).\54\ The proposed rule, other than the PCCBA, the
                PLBA, and the associated payout restrictions, would be prescribed as a
                PMOS guideline that may be enforced under these PMOS authorities. The
                PMOS statute and rule include enforcement remedies similar, although
                not identical, to those under the Prompt Corrective Action (PCA)
                framework discussed below, focusing on a remediation plan and such
                other measures as the Director deems appropriate, but not
                conservatorship or receivership. The FHFA Director may require as part
                of a remediation plan (which is to be developed within a timeline in
                the PMOS regulation) restrictions on capital distributions,
                restrictions on asset growth, activities, and acquisitions, a
                requirement for new capital-raising, and other restrictions as
                appropriate.
                ---------------------------------------------------------------------------
                 \54\ 12 U.S.C. 4513b; 12 CFR part 1236.
                ---------------------------------------------------------------------------
                 The PCA framework set out in the Safety and Soundness Act \55\ also
                provides for enforcement tools when a shortfall occurs in capital
                requirements that are set forth in the statute, using the statute's
                prescribed capital concepts. The PCA establishes four capital
                categories with associated increasingly severe enforcement tools:
                ``adequately capitalized,'' ``undercapitalized,'' ``significantly
                undercapitalized,'' and ``critically undercapitalized.'' Under the PCA
                framework, the principal remedial tool is a recapitalization plan, and
                other tools include restrictions on capital distributions and asset
                growth, prior approval of acquisitions and new activities, improvement
                of management, and restriction on compensation. In serious enough
                conditions, such as critical undercapitalization, the PCA provides that
                an Enterprise can be placed in conservatorship or receivership. In
                addition, the PCA provisions provide for an Enterprise to be downgraded
                if alternative specified conditions are met. One of those conditions is
                that an Enterprise is in ``an unsafe or unsound condition,'' as
                determined by FHFA after notice and opportunity for a hearing.
                ---------------------------------------------------------------------------
                 \55\ 12 U.S.C. 4614 et seq.
                ---------------------------------------------------------------------------
                 The proposed rule would include a leverage requirement and a risk-
                based capital requirement using the concepts of total capital and core
                capital as defined in the Safety and Soundness Act. The PCA enforcement
                framework applies to an Enterprise's failure to meet either of these
                statutorily based capital requirements. In addition, FHFA could enforce
                the core capital and total capital requirements under its authority to
                issue an order to cease and desist from a violation of law or under its
                PMOS authority.
                 FHFA recognizes that there may be very particular economic
                circumstances during which an Enterprise may meet its risk-based
                capital requirement to maintain total capital in excess of 8.0 percent
                of risk-weighted assets, but fails to meet the leverage ratio
                requirement of core capital in excess of 2.5 percent of adjusted total
                assets. This situation falls outside of the PCA capital classifications
                and enforcement
                [[Page 39296]]
                framework, but FHFA could address a shortfall through its PMOS or other
                regulatory enforcement authorities. If appropriate to provide greater
                clarity to the Enterprises and other market participants, FHFA may
                issue supervisory guidance regarding progressive application of its
                enforcement authorities as the capital position of an Enterprise
                declines.
                 Question 6. Should FHFA consider any changes to its contemplated
                enforcement framework? What supervisory guidance would be helpful to
                promote market understanding of how FHFA expects to apply its
                enforcement authorities?
                 Question 7. Should any of the risk-based capital requirements or
                leverage ratio requirements be phased-in over a transition period?
                 Question 8. Alternatively, should the enforcement of the risk-based
                capital requirements during the implementation of a capital restoration
                plan be tailored through a consent order or other similar regulatory
                arrangement, and if so how?
                VII. Capital Buffers
                A. Prescribed Capital Conservation Buffer Amount (PCCBA)
                 FHFA is proposing to supplement certain of the risk-based capital
                requirements with a PCCBA. To avoid limits on capital distributions and
                discretionary bonus payments, an Enterprise would have to maintain
                regulatory capital that exceeds each of its adjusted total capital,
                tier 1 capital, and CET1 capital requirements by at least the amount of
                its PCCBA. That PCCBA would consist of three separate component
                buffers--a stress capital buffer, a countercyclical capital buffer, and
                a stability capital buffer.
                 The PCCBA would be determined as a percent of an Enterprise's
                adjusted total assets.\56\ Fixing the PCCBA at a specified percent of
                an Enterprise's adjusted total assets, instead of risk-weighted assets,
                is a notable departure from the Basel framework. FHFA intends a fixed-
                percent PCCBA, among other things, to reduce the impact that the PCCBA
                potentially could have on higher risk exposures, avoid amplifying the
                secondary effects of any model or similar risks inherent to the
                calibration of granular risk weights for single-family and multifamily
                mortgage exposures, and further mitigate the pro-cyclicality of the
                aggregate risk-based capital requirements.
                ---------------------------------------------------------------------------
                 \56\ The stress capital buffer and the countercyclical capital
                buffer amount could vary, which would then result in a change in the
                Enterprise's PCCBA when expressed as a percent of the Enterprise's
                adjusted total assets.
                ---------------------------------------------------------------------------
                1. Stress Capital Buffer
                 An Enterprise's stress capital buffer would equal 0.75 percent of
                the Enterprise's adjusted total assets. The proposed stress capital
                buffer is similar in amount and rationale to the 0.75 percent going-
                concern buffer contemplated by the 2018 proposal. The 2018 proposal
                acknowledged that each Enterprise is required by charter to provide
                stability and ongoing assistance to the secondary mortgage market
                during and after a period of severe financial stress. The 2018 proposal
                also observed that ``[r]aising new capital during a period of severe
                housing market stress . . . would be very expensive, if not impossible;
                therefore, the [2018 proposal] would require the Enterprises to hold
                additional capital on an on-going basis (`going-concern buffer') in
                order to continue purchasing exposures and to maintain market
                confidence during a period of severe distress.''
                 An important difference is that the 2018 proposal's going-concern
                buffer would have been a component of the risk-based capital
                requirement, such that failure to maintain the regulatory capital
                required by the going-concern buffer could have triggered significant
                regulatory sanctions. In contrast, the proposed rule converts the 2018
                proposal's going-concern buffer into a component of the capital
                conservation buffer that FHFA intends to be available for an Enterprise
                to draw down during a period of financial stress. As discussed in
                Section II.D, the potential for less punitive sanctions for drawing
                down the capital conservation buffer should position each Enterprise to
                play a countercyclical role in the market, and would have the further
                benefit of reducing the managerial capital cushion that an Enterprise
                might be expected to maintain above the regulatory capital
                requirements.
                 For the reasons given in Section III.B.2, and as contemplated for
                banking organizations by the Basel and U.S. banking frameworks,\57\
                each Enterprise should be capitalized to remain a viable going concern
                both during and after a severe economic downturn. While the proposed
                regulatory capital requirements are sized to ensure an Enterprise would
                be regarded as a viable going concern by creditors and other
                counterparties, the stress capital buffer is sized to ensure that the
                Enterprise would, in ordinary times, maintain regulatory capital that
                could be drawn down during a financial stress and still be regarded as
                a viable going concern after that stress.
                ---------------------------------------------------------------------------
                 \57\ 78 FR at 51105 (``In calibrating the revised risk-based
                capital framework, the BCBS identified those elements of regulatory
                capital that would be available to absorb unexpected losses on a
                going-concern basis. The BCBS agreed that an appropriate regulatory
                minimum level for the risk-based capital requirements should force
                banking organizations to hold enough loss-absorbing capital to
                provide market participants a high level of confidence in their
                viability. The BCBS also determined that a buffer above the minimum
                risk-based capital requirements would enhance stability, and that
                such a buffer should be calibrated to allow banking organizations to
                absorb a severe level of loss, while still remaining above the
                regulatory minimum requirements.'').
                ---------------------------------------------------------------------------
                 To a similar end, FHFA sized the 2018 proposal's going-concern
                buffer based on the Enterprises' Dodd Frank Act Stress Test (DFAST)
                results for the severely adverse scenario. Specifically, ``FHFA
                calculated the amount of capital necessary for the Enterprises to meet
                a 2.5 percent leverage requirement at the end of each quarter of the
                simulation of the severely adverse DFAST scenario (without DTA
                valuation allowance) and compared that amount to the aggregate risk-
                based capital requirement. The difference between these two measures
                provided an indicator for the size of the going-concern buffer.''
                 As further validation of the sizing of the stress capital buffer,
                FHFA's 2018 proposal compared the regulatory capital obtained by
                applying the going-concern buffer to the 2017 single-family book of
                business with the regulatory capital required to fund each Enterprise's
                2017 new acquisitions. FHFA found the proposed going-concern buffer
                would provide sufficient capital for each Enterprise to fund an
                additional one to two years of new acquisitions comparable to their
                2017 new acquisitions. FHFA continues to believe that 2018 proposal's
                approach provides a strong indicator for the appropriate size of the
                stress capital buffer that replaces the going-concern buffer.
                 FHFA has also looked to the sizing of analogous buffers under the
                Basel and U.S. banking frameworks. As recently amended by the Federal
                Reserve Board, the U.S. banking framework requires each U.S. banking
                organization to maintain a stress capital buffer that exceeds its
                regulatory capital requirements by at least 2.5 percent of its risk-
                weighted assets, potentially more depending on its peak cumulative
                capital exhaustion under its supervisory stress test. Under the current
                average risk weight for the Enterprises' exposures of 28 percent, the
                proposed stress capital buffer is equivalent to 2.68
                [[Page 39297]]
                percent of the Enterprises' risk-weighted assets.
                 While the proposed rule contemplates a stress capital buffer sized
                as a fixed- percent of an Enterprise's adjusted total assets, FHFA is
                also seeking comment on an alternative under which FHFA would implement
                an approach similar to that of the Federal Reserve Board and
                periodically re-size the stress capital buffer to the extent that
                FHFA's eventual program for supervisory stress tests determines that an
                Enterprise's peak capital exhaustion under a severely adverse stress
                would exceed 0.75 percent of adjusted total assets. Under this
                approach, the stress capital buffer would still be determined as a
                percent of adjusted total assets, not risk-weighted assets. A
                dynamically re-sized stress capital buffer would be more risk-sensitive
                than a fixed-percent stress capital buffer, varying in amount across
                the economic cycle and also varying with the riskiness of the
                Enterprise's mortgage exposures. An approach that leverages a
                supervisory stress test could also incorporate assumptions as to the
                continued availability of CRT during a period of financial stress.
                 Related to this, FHFA's proposal to incorporate into each
                Enterprise's PCCBA a stress capital buffer should not be construed to
                imply or otherwise suggest that a similar buffer would necessarily be
                appropriate for other market participants in the housing finance
                system. Some of the Enterprises' counterparties, and some other market
                participants in the housing finance system, need not necessarily be
                capitalized to remain a viable going concern both during and after a
                severe economic downturn. For these market participants, calibrating
                capital adequacy based on ``claims paying capacity'' or an insurance-
                like or similar standard might be appropriate in light of their size
                and role in the housing finance system.
                 Question 9. Is the stress capital buffer appropriately formulated
                and calibrated?
                 Question 10. Should an Enterprise's stress capital buffer be
                periodically re-sized to the extent that FHFA's eventual program for
                supervisory stress tests determines that an Enterprise's peak capital
                exhaustion under a severely adverse stress would exceed 0.75 percent of
                adjusted total assets?
                 Question 11. Should an Enterprise's stress capital buffer be
                adjusted as the average risk weight of its mortgage exposures and other
                exposures changes?
                 Question 12. Should an Enterprise's stress capital buffer be based
                on the Enterprise's adjusted total assets or risk-weighted assets?
                2. Countercyclical Capital Buffer
                 The U.S. banking regulators adopted a countercyclical capital
                buffer for certain large U.S. banking organizations in June 2013, which
                has been and remains set at 0 percent of risk-weighted assets. The
                countercyclical capital buffer aims to ensure that banking sector
                capital requirements take into account the macro-financial environment
                in which banks operate.\58\ The buffer is to be deployed when excess
                aggregate credit growth is judged to be associated with a build-up of
                system-wide risk to ensure the banking system has a buffer of capital
                to protect it against future potential losses. This focus on excess
                aggregate credit growth means that the buffer is likely to be deployed
                on an infrequent basis.
                ---------------------------------------------------------------------------
                 \58\ BCBS, Basel: A Global Regulatory Framework for More
                Resilient Banks and Banking Systems, paragraph 137 (Dec. 2010;
                revised June 2011), available at http://www.bis.org/publ/bcbs189.htm.
                ---------------------------------------------------------------------------
                 As is currently the case under the U.S. banking framework, the
                countercyclical capital buffer for the Enterprises would initially be
                set at 0 percent of adjusted total assets. FHFA does not expect to
                adjust this buffer in the place of, or to supplement, the
                countercyclical adjustment to the risk-based capital requirements for
                single-family mortgage exposures discussed in Section VIII.A.4.
                Instead, as under the Basel and U.S. banking frameworks, FHFA would
                adjust the countercyclical capital buffer taking into account the
                macro-financial environment in which the Enterprises operate, such that
                it would be deployed only when excess aggregate credit growth is judged
                to be associated with a build-up of system-wide risk. This focus on
                excess aggregate credit growth means the countercyclical buffer likely
                would be deployed on an infrequent basis, and generally only when
                similar buffers are deployed by the U.S. banking regulators. Any
                adjustment to the countercyclical capital buffer would be made in
                accordance with applicable law and after appropriate notice to the
                Enterprises.
                 Question 13. Is the countercyclical capital buffer appropriately
                formulated?
                 Question 14. What administrative or other process should govern
                FHFA's adjustments to the countercyclical capital buffer?
                 Question 15. Should FHFA more explicitly base its determination to
                adjust the countercyclical capital buffer to the determination of the
                U.S. banking regulators to adjust their similar buffer?
                3. Stability Capital Buffer
                a. Comments on the 2018 Proposal
                 FHFA received several comment letters on the 2018 proposal that
                argued that FHFA did not adequately address the risk posed by the size
                and importance of the Enterprises, particularly in light of the fact
                that during the 2008 financial crisis, the Enterprises proved to be
                ``too-big-to-fail.'' Multiple commenters recommended FHFA consider
                adding a capital buffer due to the size of the Enterprises' footprints.
                Other commenters suggested FHFA address the Enterprises' size and
                importance in different ways, such as through the leverage ratio,
                through the credit risk capital grids, or with an asset-level surcharge
                that differed by the riskiness of the activity.
                b. U.S. Banking Framework
                 The Dodd-Frank Wall Street Reform and Consumer Protection Act
                (Dodd-Frank Act) mandates that the Federal Reserve Board adopt, among
                other prudential measures, enhanced capital standards to mitigate the
                risk posed to financial stability by systemically important financial
                institutions. The Federal Reserve Board has implemented a number of
                measures designed to strengthen firms' capital positions in a manner
                consistent with the Dodd-Frank Act's requirement that such measures
                increase in stringency based on the systemic importance of the firm.
                 The Federal Reserve Board has also finalized capital surcharges for
                the U.S. banking organizations of the greatest systemic importance that
                have been deemed global systemically important bank holding companies
                (GSIBs). These GSIB capital surcharges are calibrated based on the
                Federal Reserve Board's measures of each GSIB's systemic footprint
                under an ``expected impact'' framework that considers the harm that the
                GSIB's failure would cause to the financial system as adjusted by the
                likelihood that the GSIB will fail. Because the failure of a GSIB might
                undermine financial stability and thus cause greater negative
                externalities than might the failure of a firm that is not a GSIB, a
                probability of default that would be acceptable for a non-GSIB might be
                unacceptably high for a GSIB. Lowering the probability of a GSIB's
                default reduces the risk to financial stability. The most
                straightforward means of lowering the probability of a GSIB's default
                is to require it to hold more regulatory capital relative to its risk-
                weighted assets than non-GSIBs are required to hold.
                [[Page 39298]]
                c. Rationale and Sizing
                 As discussed in Section III.B.4, the lessons of the 2008 financial
                crisis have established that the failure of an Enterprise could do
                significant harm to the national housing finance markets, as well as
                the U.S. economy more generally. The Enterprises remain the dominant
                participants in the housing finance system, owning or guaranteeing 44
                percent of residential mortgage debt outstanding as of September 30,
                2019. The Enterprises also continue to control critical infrastructure
                for securitizing and administering $5.5 trillion of single-family and
                multifamily MBS. The Enterprises' imprudent risk-taking and inadequate
                capitalization led to their near collapse and were among the proximate
                causes of the 2008 financial crisis. The precipitous financial decline
                of the Enterprises was also among the most destabilizing events of the
                2008 financial crisis, leading to their taxpayer-backed rescue in
                September 2008. Even today, a perception continues to persist that the
                Enterprises are ``too big to fail.'' This perception reduces the
                incentives of creditors and other counterparties to discipline risk-
                taking by the Enterprises. This perception also produces competitive
                distortions to the extent that the Enterprises can fund themselves at a
                lower cost than other market participants.
                 Pursuant to the Safety and Soundness Act, as amended by HERA, the
                FHFA Director's principal duties are, among other duties, to ensure
                that each Enterprise operates in a safe and sound manner and that the
                operations and activities of each Enterprise foster liquid, efficient,
                competitive, and resilient national housing finance markets.\59\ For
                the reasons below, FHFA is proposing to incorporate into each
                Enterprise's PCCBA an Enterprise-specific stability capital buffer that
                is tailored to the risk that the Enterprise's default or other
                financial distress could have on the liquidity, efficiency,
                competitiveness, or resiliency of the national housing finance markets
                (housing finance market stability risk).\60\
                ---------------------------------------------------------------------------
                 \59\ 12 U.S.C. 4513(a)(1).
                 \60\ FHFA's proposed stability capital buffer should not be
                construed to imply or otherwise suggest that a similar capital
                surcharge would necessarily be appropriate for the Enterprises'
                counterparties or other market participants in the housing finance
                system. Some of these market participants do not pose much, if any,
                risk to the liquidity, efficiency, competitiveness, or resiliency of
                national housing finance markets.
                ---------------------------------------------------------------------------
                 First, an Enterprise-specific stability capital buffer would foster
                liquid, efficient, competitive, and resilient national housing finance
                markets by reducing the expected impact of the Enterprise's failure on
                the national housing finance markets. Under a regulatory capital
                framework in which each Enterprise is subject to the same capital
                requirements and has the same probability of default, a larger
                Enterprise's default would nonetheless still pose a greater expected
                impact due to the greater magnitude of the effects of its default on
                the national housing finance markets. As a result, a probability of
                default that might be acceptable for a smaller Enterprise might be
                unacceptably high for a larger Enterprise. By subjecting a larger
                Enterprise to a larger capital surcharge, an Enterprise-specific
                stability capital buffer would reduce the probability of a larger
                Enterprise's default, aligning the expected impact of its default with
                that of a smaller Enterprise.
                 Second, an Enterprise-specific stability capital buffer also would
                foster liquid, efficient, competitive, and resilient national housing
                finance markets by creating incentives for each Enterprise to reduce
                its housing finance market stability risk by curbing its market share
                and growth in ordinary times, preserving room for a larger role during
                a period of financial stress.
                 Third, an Enterprise-specific stability capital buffer could offset
                any funding advantage that an Enterprise might have on account of being
                perceived as ``too big to fail.'' That, in turn, would remove the
                incentive for counterparties to shift risk to the Enterprise, where
                that incentive not only increases the housing finance market stability
                risk posed by the Enterprise but also undermines the competitiveness of
                the national housing finance markets.
                 Fourth, a larger capital cushion at an Enterprise could afford the
                Enterprise and FHFA more time to address emerging weaknesses at the
                Enterprise that could adversely impact the national housing finance
                markets. In addition to mitigating national housing finance market
                risk, the additional time afforded by a larger capital cushion could
                help FHFA ensure that each Enterprise operates in a safe and sound
                manner.
                 Finally, again with respect to safety and soundness, any perception
                that an Enterprise is ``too big to fail'' leads to moral hazard that
                undermines market discipline by creditors and other counterparties over
                the risk taking at an Enterprise. By increasing the regulatory capital
                at an Enterprise, the stability capital buffer would shift more tail
                risk back to the Enterprise's shareholders, which should have the added
                benefit of offsetting any ``too big to fail'' funding advantage arising
                from unpriced tail risk. The resulting enhanced market discipline
                should enhance safety and soundness by increasing the likelihood that
                the Enterprise's risks are appropriately managed.
                 FHFA is proposing a stability capital buffer based on a market
                share approach. Alternatively, FHFA is seeking comment on an additional
                approach that would have the Enterprises compute their stability
                capital buffer in a manner analogous to the U.S. banking approach for
                determining the GSIB surcharge.
                d. Market Share Approach
                 Under FHFA's market share approach, an Enterprise's stability
                capital buffer would depend on an Enterprise's share of total
                residential mortgage debt outstanding that exceeds a threshold of 5.0
                percent market share. The stability capital buffer, expressed as a
                percent of adjusted total assets, would increase by 5 basis points for
                each percentage point of market share exceeding that threshold. For
                purposes of determining the stability capital buffer, the Enterprise's
                mortgage assets would mean the sum of:
                 The unpaid principal balance of its single-family mortgage
                exposures, including any single-family loans that secure MBS guaranteed
                by the Enterprise;
                 The unpaid principal balance of its multifamily mortgage
                exposures, including any multifamily loans that secure MBS guaranteed
                by the Enterprise;
                 The carrying value of its Enterprise MBS or Ginnie Mae
                MBS, PLS, and other securitization exposures (other than its retained
                CRT exposures); and
                 The exposure amount of any other mortgage assets.
                 Residential mortgage debt outstanding would mean the amount of
                mortgage debt outstanding secured by single-family or multifamily
                residences that are located in the United States (excluding any
                mortgage debt outstanding secured by non-farm, non-residential, or farm
                properties). FHFA would publish the residential mortgage debt
                outstanding as of the end of each calendar year, potentially using
                similar data published by the Federal Reserve Board.
                 Among other considerations, FHFA developed this market share-based
                calibration of the stability capital buffer based on a linear
                interpolation between two points. First, FHFA began with an assumption
                that an Enterprise that has a share of total residential mortgage debt
                outstanding equal to 5.0 percent--as of September 30, 2019, roughly
                $632 billion in single-family and multifamily mortgage exposures owned
                or
                [[Page 39299]]
                guaranteed--would not merit a stability capital buffer to mitigate its
                national housing finance stability risk. An Enterprise with that 5.0
                percent market share would have more assets than U.S. Bancorp ($487.6
                billion in total assets, as of September 30, 2019), which is not a
                GSIB, but less assets than the next largest U.S. banking organization,
                Morgan Stanley ($902.6 billion in total assets as of September 30,
                2019), which is a GSIB.
                 At the other extreme, the largest GSIB surcharge for a U.S. GSIB is
                that of JPMorgan Chase, at 3.5 percent of risk-weighted assets as of
                September 30, 2019. An Enterprise would roughly approximate an
                equivalent stability capital buffer if it had a 25 percent share of
                total residential mortgage debt outstanding. At that market share, the
                Enterprise's stability capital buffer would be 1.00 percent of its
                adjusted total assets, approximately equivalent to the 3.5 percent
                surcharge expressed as a percent of risk-weighted assets under the
                September 30, 2019 average net credit risk weight on the Enterprises'
                mortgage exposures of 28 percent.
                 Under this market share approach, as of September 30, 2019, Fannie
                Mae and Freddie Mac would have had stability capital buffers of,
                respectively, 1.05 and 0.64 percent of adjusted total assets. Under the
                September 30, 2019 28 percent average risk weight on their exposures,
                Fannie Mae and Freddie Mac's stability capital buffers would have been
                3.8 and 2.3 percent of risk-weighted assets, respectively, roughly in
                line with U.S. GSIBs of similar size.
                 The following Table 7 details the calculation of the proposed
                stability capital buffer as of December 31, 2007, September 30, 2017,
                and September 30, 2019.
                [[Page 39300]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.006
                 Question 16. Is the market share approach appropriately formulated
                and calibrated to mitigate the national housing finance market
                stability risk posed by an Enterprise? If not, what modifications
                should FHFA consider to ensure an appropriate calibration?
                 Question 17. Is the market share approach appropriately formulated
                and calibrated to ensure each Enterprise operates in a safe and sound
                manner? If not, what modifications should FHFA consider to ensure an
                appropriate calibration?
                e. Alternative Approach
                 FHFA is soliciting comment on whether to replace or supplement the
                market share approach discussed in Section VII.A.3.d with another
                approach that considers other indicators of the housing finance market
                stability risk posed by an Enterprise. Other such indicators could
                include the ownership of the Enterprise's MBS and debt by other
                financial institutions, the degree of control by the Enterprise over
                key securitization infrastructure, the extent of the Enterprise's role
                in aggregating and distributing credit risk through CRT, the
                Enterprise's reliance on short-term debt funding, or the Enterprise's
                expected debt issuances during a financial stress to fund purchases of
                mortgage exposures out of securitization pools.
                 One specific alternative approach under consideration by FHFA is to
                replace or supplement the market share approach with a modified version
                of the U.S. banking framework's two methods for determining a GSIB's
                capital
                [[Page 39301]]
                surcharge.\61\ Under method 1, a U.S. GSIB determines its capital
                surcharge using the sum of weighted indicator scores that span five
                categories correlated with systemic importance--size,
                interconnectedness, cross-jurisdictional activity, substitutability,
                and complexity. For each indicator, the U.S. GSIB's indicator score is
                its own measure of the indicator divided by the aggregate global
                measure of that indicator, which is based on other GSIBs' measures.
                Method 2 uses similar inputs but replaces the substitutability
                indicators with metrics for the U.S. GSIB's reliance on short-term
                wholesale funding. Method 2 is also calibrated in a manner that
                generally will result in GSIB capital surcharges that are higher than
                those calculated under method 1.
                ---------------------------------------------------------------------------
                 \61\ 12 CFR part 217, subpart. H (Federal Reserve Board).
                ---------------------------------------------------------------------------
                 FHFA is soliciting comment on whether to calibrate the stability
                capital buffer based on some subset of the U.S. banking framework's
                five categories--for example, size, interconnectedness, and
                substitutability--and exclude the indicators for cross-jurisdictional
                activity or complexity. In particular, cross-jurisdictional activity
                might not be an important driver of the national housing finance market
                stability risk posed by an Enterprise.
                 FHFA is also soliciting comment on whether modifications to the
                definitions or calculations of the U.S. banking framework's specific
                GSIB surcharge indicators would be appropriate to ensure the resulting
                score or scores are correlated with an Enterprise's national housing
                finance market stability risk. For example, the Enterprises play an
                integral role in the national housing finance market, and there are
                few, if any, natural substitutes for that role, but an Enterprise's
                amount of underwritten transactions in debt and equity markets, one of
                the substitutability indicators under the U.S. banking framework, might
                not be strongly correlated with that risk.
                 Another approach might be to adopt a modified version of the U.S.
                banking framework's method and then use a similar measure of an
                Enterprise's reliance on short-term debt funding (perhaps with
                adjustments for the expected debt issuances during a financial stress
                to fund purchases of NPLs out of securitization pools) as the basis for
                a replacement for the U.S. banking framework's method 2.
                 Question 18. Should the Enterprise-specific stability capital
                buffer be determined using the U.S. banking framework's approach to
                calculating capital surcharges for GSIBs?
                 Question 19. What, if any, modifications to the U.S. banking
                framework's approach to calculating capital surcharges for GSIBs are
                appropriate for determining the Enterprise-specific stability capital
                buffer?
                 Question 20. Should the Enterprise-specific stability capital
                buffer be determined based on a sum of the weighted indicators for
                size, interconnectedness, and substitutability under the U.S. banking
                framework?
                 Question 21. Which, if any, indicators of the housing finance
                market stability risk posed by an Enterprise, other than its market
                share, should be used to size the Enterprise's stability capital
                buffer? How should those other indicators be measured and weighted to
                produce a score of the housing finance market stability risk posed by
                an Enterprise?
                 Question 22. What, if any, measure of the Enterprise's short-term
                debt funding or expected debt issuances during a financial stress to
                fund purchases of NPLs out of securitization pools should be used to
                size the Enterprise's stability capital buffer?
                B. Leverage Buffer
                 In addition to the payout restrictions posed by the PCCBA, to avoid
                limits on capital distributions and discretionary bonus payments, an
                Enterprise also would be required to maintain tier 1 capital in excess
                of the amount required under the tier 1 leverage ratio requirement by
                at least the amount of a PLBA equal to 1.5 percent of the Enterprise's
                adjusted total assets. The primary purpose of the PLBA would be to
                serve as a non-risk-based supplementary measure that provides a
                credible backstop to the combined PCCBA and risk-based capital
                requirements. From a safety-and-soundness perspective, each of the
                risk-based and leverage ratio requirements offsets potential weaknesses
                of the other. Taken together, well-calibrated risk-based capital
                requirements working with a credible leverage ratio requirement are
                more effective than either would be in isolation. FHFA deems it
                important that the buffer-adjusted risk-based and leverage requirements
                are also closely calibrated to each other so that they have an
                effective complementary relationship.
                 To size the PLBA, FHFA looked first to the PCCBA of each
                Enterprise. At 1.5 percent of adjusted total assets, the PLBA for
                Fannie Mae and Freddie Mac would be, respectively, $53 billion and $38
                billion as of September 30, 2019. For Fannie Mae, the PLBA would be
                less than its PCCBA, while for Freddie Mac the reverse is true. These
                results suggest that 1.5 percent PLBA is calibrated to ensure that the
                PCCBA and PLBA have an effective complementary relationship such that
                each is independently meaningful.
                 FHFA also looked to the sizing of similar leverage buffer
                requirements under the U.S. banking framework. Some large U.S. banking
                organizations are required to maintain a supplementary leverage ratio
                requirement of 3.0 percent of their total leverage exposure and, to
                avoid restrictions on distributions and discretionary bonuses, a
                leverage buffer requirement of 2.0 percent of their total leverage
                exposure. That 2.0 percent total leverage buffer requirement is 40
                percent of the 5.0 percent buffer-adjusted leverage ratio requirement
                to avoid payout restrictions. Similarly, a 1.5 percent PLBA for the
                Enterprises would be 37.5 percent of the 4.0 percent buffer-adjusted
                leverage ratio requirement to avoid payout restrictions.
                 Question 23. Is the PLBA appropriately sized to backstop the PCCBA-
                adjusted risked-based capital requirements?
                 Question 24. Should the PLBA for an Enterprise be sized as a
                fraction or other function of the PCCBA of the Enterprise? If so, how
                should the PLBA of an Enterprise be calibrated based on the
                Enterprise's PCCBA?
                C. Payout Restrictions
                 An Enterprise would be subject to limits on its capital
                distributions and discretionary bonus payments if either its capital
                conservation buffer is less than its PCCBA, as discussed in Section
                VII.A, or its leverage buffer is less than its PLBA, as discussed in
                Section VII.B. An Enterprise also may not make distributions or
                discretionary bonus payments during the current calendar quarter if, as
                of the end of the previous calendar quarter: (i) The eligible retained
                income of the Enterprise was negative; and (ii) either (A) the capital
                conservation buffer of the Enterprise was less than its stress capital
                buffer, or (B) the leverage buffer of the Enterprise was less than its
                PLBA.
                 The capital conservation buffer is composed solely of CET1 capital.
                An Enterprise's capital conservation buffer is equal to the lowest of
                the following, calculated as of the last day of the previous calendar
                quarter:
                 The Enterprise's adjusted total capital minus the minimum
                amount of adjusted total capital required under the proposed rule;
                 The Enterprise's tier 1 capital minus the minimum amount
                of tier 1
                [[Page 39302]]
                capital required under the proposed rule; or
                 The Enterprise's CET1 capital minus the minimum amount of
                CET1 capital required under the proposed rule.
                 An Enterprise's maximum payout ratio determines the extent to which
                it is subject to limits on capital distributions and discretionary
                bonuses. The maximum payout ratio is the percent of eligible retained
                income that an Enterprise can pay out in the form of distributions and
                discretionary bonus payments during the current calendar quarter. The
                eligible retained income of an Enterprise is the greater of: (i) The
                Enterprise's net income for the four calendar quarters preceding the
                current calendar quarter, net of any distributions and associated tax
                effects not already reflected in net income; and (ii) the average of
                the Enterprise's net income, as applicable, for the four calendar
                quarters preceding the current calendar quarter. The maximum payout
                ratio is itself a function of the extent to which the applicable
                capital buffer is less than the applicable prescribed buffer amount, as
                set forth on Table 8.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.007
                 If an Enterprise is subject to a maximum payout ratio, the payout
                restrictions would apply to all capital distributions, which generally
                extends to dividends or payments on, or repurchases of, CET1, tier 1,
                or tier 2 capital instruments (except, with respect to a payment on a
                tier 2 capital instrument, if the Enterprise does not have full
                discretion to permanently or temporarily suspend such payments without
                triggering an event of default). The payout restrictions would also
                extend to discretionary bonuses, broadly defined to include any payment
                made to an executive officer of an Enterprise where the Enterprise
                retains discretion as to whether to make, and the amount of, the
                payment, the amount paid is determined by the Enterprise without prior
                promise to, or agreement with, the executive officer, and the executive
                officer has no contractual right to the payment.
                ---------------------------------------------------------------------------
                 \62\ An Enterprise's ``capital buffer'' means, as applicable,
                its capital conservation buffer or its leverage buffer.
                 \63\ An Enterprise's ``prescribed buffer amount'' means, as
                applicable, its PCCBA or its PLBA.
                ---------------------------------------------------------------------------
                 FHFA expects that each Enterprise generally will seek to avoid any
                payout restriction by maintaining regulatory capital in excess of its
                buffer-adjusted risk-based and leverage ratio requirements during
                ordinary times. FHFA also expects that, consistent with its statutory
                mission to provide stability and ongoing assistance to the secondary
                mortgage market across the economic cycle, each Enterprise might draw
                down its buffers during a period of financial stress. However, it would
                not be consistent with the safe and sound operation of an Enterprise
                for the Enterprise to maintain regulatory capital less than its buffer-
                adjusted requirements in the ordinary course except for some reasonable
                period after a financial stress, pending the Enterprise's efforts to
                raise and retain regulatory capital.
                 Nothing in this proposed rule limits the authority of FHFA to take
                action to address unsafe or unsound practices or violations of law,
                including actions inconsistent with an Enterprise's charter. FHFA
                could, depending on the facts and circumstances, determine that it is
                an unsafe or unsound practice, or that it is inconsistent with the
                Enterprise's statutory mission, for an Enterprise to maintain
                regulatory capital that is less than its buffer-adjusted requirements
                during ordinary times. If FHFA were to make that determination, FHFA
                would have all of its enforcement and other authorities, including its
                authority to issue a cease-and-desist order, to require the Enterprise
                to remediate that unsafe or unsound practice--for example, by
                developing and implementing a plan to raise additional regulatory
                capital.
                 FHFA is soliciting comments on whether some or all of the payout
                restrictions should be phased-in over a transition period. In
                anticipation of the potential development and implementation of a
                capital restoration plan by each Enterprise, tailored exceptions to the
                payout restrictions might be appropriate to facilitate an Enterprise's
                issuances of equity to new investors, particularly to the extent that
                any tailored exception would shorten the time required for an
                Enterprise to achieve the regulatory capital amounts contemplated by
                the proposed rule or otherwise enhance its safety and soundness. For
                example, a tailored exception to allow for some distributions on an
                Enterprise's newly issued preferred stock might increase investor
                demand for the offerings of those shares. Similarly, a tailored
                exception for some limited regular dividends on an Enterprise's common
                stock might increase investor demand for those shares.
                 Question 25. Are the payout restrictions appropriately formulated
                and calibrated?
                 Question 26. Should there be any sanction or consequence other than
                payout restrictions triggered by an Enterprise not maintaining a
                capital conservation buffer or leverage buffer in
                [[Page 39303]]
                excess of the applicable PCCBA or PLBA?
                 Question 27. Should the payout restrictions be phased-in over an
                appropriate transition period? If so, what is an appropriate transition
                period?
                 Question 28. Should the payout restrictions provide exceptions for
                dividends on newly issued preferred stock, perhaps with any exceptions
                limited to some transition period following conservatorship?
                 Question 29. Should the payout restrictions provide an exception
                for some limited dividends on common stock over some transition period?
                VIII. Credit Risk Capital: Standardized Approach
                A. Single-Family Mortgage Exposures
                 The standardized credit risk-weighted assets for each single-family
                mortgage exposure would be determined using grids and risk multipliers
                that together would assign an exposure-specific risk weight based on
                the risk characteristics of the single-family mortgage exposure. The
                resulting exposure-specific credit risk capital requirements generally
                would be similar to those of the 2018 proposal, subject to some
                simplifications and refinements. As discussed in Section VIII.A.3, the
                base risk weight would be a function of the single-family mortgage
                exposure's MTMLTV, among other things. The MTMLTV would be subject to a
                countercyclical adjustment to the extent that national house prices are
                5.0 percent greater or less than an inflation-adjusted long-term trend,
                as discussed in Section VIII.A.4. This base risk weight would then be
                adjusted based on other risk attributes, including any mortgage
                insurance or other loan-level credit enhancement and the counterparty
                strength on that enhancement, as discussed in Sections VIII.A.5 and
                VIII.A.6. Finally, as discussed in Section VIII.A.7, this adjusted risk
                weight would be subject to a floor of 15 percent.
                1. Single-Family Business Models
                 The core of an Enterprise's single-family guarantee business is
                acquiring single-family mortgage loans from mortgage companies,
                commercial banks, credit unions, and other mortgage lenders, packaging
                those loans into MBS, and selling the MBS either back to the original
                lenders or to other private investors in exchange for a fee that
                represents a guarantee of timely principal and interest payments on
                those MBS.
                 The Enterprises engage in the acquisition and securitization of
                single-family mortgage exposures primarily through two types of
                transactions: Lender swap transactions; and cash window transactions.
                In a lender swap transaction, lenders pool eligible single-family loans
                together and deliver the pool of loans to an Enterprise in exchange for
                an MBS backed by those single-family mortgage loans, which the lenders
                generally then sell in order to use the proceeds to fund more mortgage
                loans. In a cash window transaction, an Enterprise purchases single-
                family loans from a large, diverse group of lenders and then, at a
                later date, securitizes the acquired loans into an MBS. For MBS issued
                as a result of either lender swap transactions or cash window
                transactions, the Enterprises provide investors with a guarantee of the
                payment of principal and interest payments in exchange for a guarantee
                fee. Single-family loans that have been purchased but have not yet been
                securitized are held in the Enterprises' whole loan portfolios. In
                addition, the Enterprises also repurchase some delinquent loans from
                their guaranteed MBS subject to certain requirements and restrictions.
                 Except to the extent that they transfer the risk to private
                investors, the Enterprises are exposed to credit risk through their
                ownership of single-family mortgage exposures and their guarantees of
                MBS. Consequently, the Enterprises attempt to mitigate the likelihood
                of incurring credit losses in a variety of ways. One way to reduce
                potential credit losses is through loan-level credit enhancements such
                as mortgage insurance. Another way of reducing potential credit losses
                is through the transfer of risk at the pool level through
                securitization or synthetic securitization transactions.
                2. Calibration Framework
                 In general, FHFA calibrated the base risk weights and risk
                multipliers for single-family mortgage exposures to require credit risk
                capital sufficient to absorb the lifetime unexpected losses incurred on
                single-family mortgage exposures experiencing a shock to house prices
                similar to that observed during the 2008 financial crisis. Lifetime
                unexpected losses are the difference between lifetime credit losses in
                such conditions (also known as stress losses) and expected losses.
                 As adverse economic conditions are not explicitly defined, the loss
                projections that underpin the credit risk capital requirements in the
                proposed rule are based on several different economic scenarios. Each
                Enterprise used economic scenarios that it defined to project loan-
                level credit risk capital. In addition, FHFA used the baseline and
                severely adverse scenario defined in DFAST to project unexpected
                losses. FHFA used these pre-existing scenarios as a starting point for
                its estimations in order to provide economic scenarios consistent with
                those of the U.S. banking framework for stress tests required under
                DFAST. FHFA also used these scenarios to ensure a straightforward,
                transparent approach to the proposed rule's capital requirements. The
                DFAST scenarios include forecasts for macroeconomic variables,
                including house prices, interest rates, and unemployment rates.
                 House prices are used to define the MTMLTV ratio, where the
                likelihood of a loss occurring upon default increases as the proportion
                of equity to loan value decreases. Therefore, the projected house price
                path is the predominant macroeconomic driver of single-family stress
                scenarios.
                 The Enterprises used similar house price paths to project stress
                losses. In the stress scenarios used by FHFA and the Enterprises,
                nationally averaged house prices declined by 25 percent from peak to
                trough (the period of time between the shock and the recovery), which
                is consistent with the decline in house prices observed during the 2008
                financial crisis. The 25 percent house price decline is also broadly
                consistent with assumptions used in the DFAST severely adverse scenario
                over the past several years, although the 2020 DFAST cycle assumes a 28
                percent house price decline in its severely adverse scenario. However,
                the trough and recovery assumptions used by FHFA and the Enterprises
                are somewhat more conservative than the observed house price recoveries
                post crisis.
                 Using these stress scenarios, the single-family grids were, as a
                general rule, calibrated based on estimates of unexpected losses from
                the Enterprises' internal models and FHFA's publicly available
                model.\64\ The Enterprises and FHFA ran synthetic and actual loans with
                a baseline risk profile through their own credit models using these
                stress scenarios. Each single-family segment has its own baseline risk
                profile, which is discussed segment-by-segment in VIII.A.3.
                Consequently, each cell of each single-family grid represents projected
                unexpected losses, converted to a risk weight, for a baseline loan with
                a
                [[Page 39304]]
                particular combination of primary risk factors.
                ---------------------------------------------------------------------------
                 \64\ FHFA's single-family loss model is available on its website
                at fhfa.gov. For performing loans, all three models were used to
                construct the single-family grid. For single-family mortgage
                exposures other than performing loans, FHFA relied primarily on the
                Enterprises' estimates of unexpected losses.
                ---------------------------------------------------------------------------
                 The risk multipliers were similarly calibrated based on estimates
                of unexpected losses from the Enterprises' internal models and FHFA's
                publicly available model. The Enterprises varied the secondary risk
                factors, specific to each single-family segment, to estimate each risk
                factor's multiplicative effects on estimates of unexpected losses for
                the baseline loan in each single-family segment. FHFA considered the
                risk multipliers estimated by the Enterprises, which were generally
                consistent in magnitude and direction, in conjunction with its own
                estimated values in determining the proposed single-family risk
                multipliers.
                 Question 30. Is the methodology used to calibrate the credit risk
                capital requirements for single-family mortgage exposures appropriate
                to ensure that the exposure is backed by capital sufficient to absorb
                the lifetime unexpected losses incurred on single-family mortgage
                exposures experiencing a shock to house prices similar to that observed
                during the 2008 financial crisis?
                 Question 31. What, if any, changes should FHFA consider to the
                methodology for calibrating credit risk capital requirements for
                single-family mortgage exposures?
                3. Base Risk Weights
                 The proposed rule would require an Enterprise to determine a base
                risk weight for each single-family mortgage exposure using one of four
                grids, one for each single-family segment. These segments are based on
                payment performance because as a risk factor it is a material
                determinant of projected unexpected loss. Additional risk factors
                affect unexpected losses differently depending on where a single-family
                mortgage exposure is in its life cycle. The base risk weight for a
                single-family mortgage exposure would therefore change over the life
                cycle of the single-family mortgage exposure, generally decreasing when
                the single-family mortgage exposure is seasoned and performing, and
                increasing when the single-family mortgage exposure is delinquent or
                recently delinquent.
                 The four single-family segments would be:
                 Non-performing loan (NPL): A single-family mortgage
                exposure that is 60 days or more past due.
                 Modified re-performing loan (modified RPL): A single-
                family mortgage exposure that is not an NPL and has previously been
                modified or entered a repayment plan.
                 Non-modified re-performing loan (non-modified RPL): A
                single-family mortgage exposure that is not an NPL, has not been
                previously modified or entered a repayment plan, and has been an NPL at
                any time in the last 48 calendar months.
                 Performing loan: A single-family mortgage exposure that is
                not an NPL, a modified RPL, or a non-modified RPL. A non-modified RPL
                generally transitions to a performing loan after not being an NPL at
                any time in the prior 48 calendar months.
                 Each single-family segment would have a unique, two-dimensional
                risk weight grid (single-family grid) that an Enterprise would use to
                determine its base risk weight before subsequently applying risk
                multipliers. The dimensions of the single-family grids would vary by
                single-family segment to allow the single-family grids to
                differentially incorporate key risk drivers into the base risk weights
                on a segment-by-segment basis.
                 The single-family grids reflect several notable differences from
                the single-family grids in the 2018 proposal. First, FHFA combined the
                ``New Originations'' and ``Performing Seasoned'' base grids into one
                single-family grid for performing loans. Commenters recommended that
                the single-family segmentation could be simplified in this way without
                a meaningful loss of accuracy.
                 Second, for purposes of the definition of NPL, the proposed rule
                would define delinquency as 60 days or more past due, while the 2018
                proposal defined delinquency as 30 days past due. Commenters
                recommended this change in order to mitigate variations in regulatory
                capital requirements, and because a significant portion of 30-day past
                due loans become current in the following month or do not become more
                delinquent. The practical effect of this change is that the projected
                unexpected losses on 30-day past due loans has been reallocated from
                the single-family grid for NPLs to the single-family grid for
                performing loans, increasing the base credit risk capital requirements
                for performing loans above where they were in the 2018 proposal. In
                addition, following the redefinition of delinquency, the proposed rule
                does not contemplate a return to performing loan status for a non-
                modified RPL with 36 consecutive timely payments and no more than 1
                missed payment in the 12 months preceding that 36-month period.
                 Third, the single-family grids would reflect credit risk capital
                that was allocated using the ``number of borrowers'' and ``loan
                balance'' single-family risk multipliers of the 2018 proposal. As
                discussed in Section VIII.A.5, these risk multipliers are not included
                in the proposed rule. In order to ensure the risk-based capital
                requirements do not decrease by the amount of capital that would have
                otherwise been required due to these risk factors, FHFA has
                redistributed the capital requirements across cells of the single-
                family grids.
                 Fourth, the MTMLTVs used to assign base risk weights in the
                proposed single-family grids would be subject to a countercyclical
                adjustment as described in VIII.A.4.
                Performing Loans
                 The primary risk factors for performing loans are credit score and
                MTMLTV (after factoring in the loan-level countercyclical adjustment).
                Credit score correlates strongly with the likelihood of a borrower
                default, while MTMLTV relates to both the likelihood of default and the
                severity of a potential loss should a borrower default (loss given
                default).\65\ For the first five scheduled payment dates, an Enterprise
                would use the credit score at origination to determine the base risk
                weight. After that time, an Enterprise would use the refreshed or
                updated credit score. As discussed in Section VIII.A.4, an Enterprise
                would use the adjusted or unadjusted MTMLTV, depending on whether the
                loan-level countercyclical adjustment is non-zero (except that for the
                first five scheduled payment dates after the origination of a single-
                family mortgage exposure, an Enterprise would use OLTV rather than
                MTMLTV). The single-family grid for performing loans is presented below
                in Table 9. For purposes of this table, credit score means the original
                credit score of the single-family mortgage exposure if the loan age is
                less than 6, or the refreshed credit score otherwise.
                ---------------------------------------------------------------------------
                 \65\ As in the 2018 proposal, FHFA notes that the Enterprises
                currently rely on Classic FICO for product eligibility, loan
                pricing, and financial disclosure purposes, and therefore the
                single-family grid for performing loans was estimated using Classic
                FICO credit scores. Throughout the proposed rule, the use of term
                ``credit score'' should be interpreted to mean Classic FICO credit
                scores. If the Enterprises were to begin using a different credit
                score for these purposes, or multiple scores, the single-family
                grids and multipliers might need to be recalibrated. Related to
                that, in February 2020, the Enterprises published a Joint Credit
                Score Solicitation that describes the process for credit score model
                developers to submit applications to the Enterprises. The validation
                and approval of credit score models will be a multi-year effort by
                the Enterprises under requirements established by FHFA's final rule
                on the process for validation and approval of credit score models.
                84 FR 41886 (Aug. 16, 2019).
                ---------------------------------------------------------------------------
                [[Page 39305]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.008
                 Credit scores have values ranging from 300 to 850, and OLTVs
                typically range from 10 percent to 97 percent. MTMLTVs typically range
                from 10 percent to upwards of 120 percent. The Enterprises conduct most
                of their new single-family businesses within an OLTV range of 70
                percent to 95 percent. FHFA included MTMLTV buckets beyond 95 percent
                to account for adverse changes in home prices subsequent to
                origination, as well as to account for the inclusion of streamlined
                refinance loans in the single-family segment.
                 In the 2018 proposal, the single-family grid for new originations
                had a distinct treatment for loans with an 80 percent OLTV to account
                for the high volume and distinct features of these particular loans.
                FHFA determined that including 80 percent OLTV loans with other single-
                family mortgage exposures with LTVs between 75 percent and 80 percent
                did not result in a meaningful loss of accuracy, so the single-family
                grid for performing loans has combined their treatment. As previously
                discussed, the base risk weights for performing loans include projected
                unexpected losses for single-family mortgage exposures that are between
                30 and 60 days past due.
                 The base risk weights for performing loans do not reflect credit
                enhancements such as mortgage insurance, which would generally lower an
                Enterprise's risk-based capital requirement for a single-family
                mortgage exposure with an LTV greater than 80 percent. Risk weight
                adjustments for credit enhancements are discussed in Section VIII.A.6.
                 Aside from the primary risk factors represented in the dimensions
                of the single-family grid for performing loans, there are several
                secondary risk factors accounted for in the risk profile of the
                synthetic loan used in the calibration of the base risk weights. Those
                secondary risk factors, along with the values that determine the
                baseline risk profile for performing loans, are: Loan age less than 24
                months; 30-year fixed-rate; purchase; owner-occupied; single-unit;
                retail channel sourced; debt-to-income ratio between 25 percent and 40
                percent; no second lien; full documentation; non-interest-only; not
                streamlined refinance loans; and zero cohort burnout (described
                below).\66\ Unlike the 2018 proposal, neither loan size (greater than
                $100,000) nor the number of borrowers (multiple) is a secondary risk
                factor. Variations in the credit risk capital requirements due to these
                secondary risk factors are captured using risk multipliers, as
                discussed in Section VIII.A.5.
                ---------------------------------------------------------------------------
                 \66\ The CFPB's ability-to-repay rule generally prohibits
                interest-only and low-documentation loans. However, these risk
                factors may be present on single-family mortgage exposures
                originated prior to the 2008 financial crisis.
                ---------------------------------------------------------------------------
                Non-Modified RPLs
                 The primary risk factors for non-modified RPLs are MTMLTV (after
                factoring in the loan-level countercyclical adjustment) and the re-
                performing duration. The re-performing duration is the number of
                scheduled payment dates since the non-modified RPL was last an NPL (60
                days or more past due), and is a strong predictor of the likelihood of
                a subsequent default. MTMLTV is a strong predictor of the likelihood of
                default and loss given default for single-family mortgage exposures in
                this segment. The proposed single-family grid for non-modified RPLs is
                presented below in Table 10. For purposes of this table, non-modified
                re-performing duration means the number of scheduled payment dates
                since the non-modified RPL was last an NPL.
                [[Page 39306]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.009
                 Re-performing duration is divided into four categories such that
                the base risk weights would generally decrease as re-performing
                duration increases. When the re-performing duration is greater than
                three years, the base risk weight for the non-modified RPL would begin
                to approximate the base risk weight for a performing loan. A single-
                family mortgage exposure that re-performs for greater than four years,
                and has not been modified, would revert to being classified as a
                performing loan.
                 Aside from the primary risk factors represented in the single-
                family grid for non-modified RPLs, there are many secondary risk
                factors accounted for in the risk profile of the synthetic loan used in
                the calibration of the base risk weights. These secondary risk factors,
                along with the values that determine the baseline risk profile for non-
                modified RPLs, are the same as those for performing loans with the
                inclusion of two additional features--refreshed credit scores between
                660 and 700, and a maximum previous delinquency of less than 60 days--
                and the exclusion of loan age and cohort burnout. Variations in the
                credit risk capital requirements due to these secondary risk factors
                would be captured using risk multipliers, as discussed in Section
                VIII.A.5.
                Modified RPLs
                 The primary risk factors for modified RPLs are similar to non-
                modified RPLs. However, along with MTMLTV (after factoring in the loan-
                level countercyclical adjustment), the second primary risk factor in
                the segment would be either the re-performing duration or the
                performing duration, whichever is less. The re-performing duration is
                the number of scheduled payment dates since the modified RPL was last
                an NPL (60 days or more past due), while the performing duration
                measures the number of scheduled payment dates since the last
                modification of a modified RPL. The proposed single-family grid for
                modified RPLs is presented below in Table 11. For purposes of this
                table, modified re-performing duration means the lesser of: (i) The
                number of scheduled payment dates since the modified RPL was last
                modified; and (ii) the number of scheduled payments dates the modified
                RPL was last an NPL.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.010
                 Aside from the primary risk factors represented in the dimensions
                of the single-family grid for modified RPLs, there are many secondary
                risk factors accounted for in the risk profile of the synthetic loan
                used in the calibration of the base risk weights. These secondary risk
                factors, along with the values that determine the baseline risk profile
                for modified RPLs, are the same as those for non-modified RPLs with one
                addition; a payment change from modification greater than or equal to -
                20 percent and less than 0 percent. Variations in the credit risk
                capital requirements due to these secondary risk factors would be
                captured using risk multipliers, as discussed in Section VIII.A.5.
                 Unlike non-modified RPLs, modified RPLs never revert to being
                classified as performing loans, even after four or more years of re-
                performance.
                NPLs
                 The primary risk factors for NPLs are the days past due and MTMLTV
                (after factoring in the loan-level countercyclical adjustment). Days
                past due is the number of days a single-family mortgage exposure is
                past due and is a strong predictor of the likelihood of default for
                NPLs. MTMLTV is a strong predictor of loss given default for exposures
                in this segment. The proposed single-family grid for NPLs is presented
                below in Table 12.
                [[Page 39307]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.011
                 The base risk weights detailed in the single-family grid for NPLs
                are noticeably non-monotonic as the number of days past due increases,
                particularly in the highest (right-most) MTMLTV column. This is because
                as the number of days past due increases for an NPL with higher LTV, so
                does the expected loss. Because the credit risk capital requirement has
                been calibrated as the difference between stress loss and expected
                loss, when expected loss increases and grows closer to stress loss, the
                projected unexpected loss (reflected by the base risk weight)
                decreases. The increase in expected loss should be reflected in
                commensurately higher ALLL.
                 Aside from the primary risk factors represented in the single-
                family grid for NPLs, there are several secondary risk factors
                accounted for in the risk profile of the synthetic loan used in the
                calibration of the base risk weights. These secondary risk factors,
                along with the values that determine the baseline risk profile for
                NPLs, are: 30-year fixed-rate; owner-occupied; single-unit; retail
                channel sourced; and a refreshed credit score between 640 (inclusive)
                and 700. Variations in the credit risk capital requirements due to
                these secondary risk factors would be captured using risk multipliers,
                as discussed in Section VIII.A.5.
                 Question 32. Are the base risk weights for single-family mortgage
                exposures appropriately formulated and calibrated to require credit
                risk capital sufficient to ensure each Enterprise operates in a safe
                and sound manner and is positioned to fulfill its statutory mission
                across the economic cycle?
                 Question 33. Are there any adjustments, simplifications, or other
                refinements that FHFA should consider for the base risk weights for
                single-family mortgage exposures?
                 Question 34. Should the base risk weight for a single-family
                mortgage exposure be assigned based on OLTV or MTMLTV of the single-
                family mortgage exposure, or perhaps on the LTV of the single-family
                mortgage exposure based on the original purchase price and after
                adjusting for any paydowns of the original principal balance?
                 Question 35. Should the base risk weight for a single-family
                mortgage exposure be assigned based on the original credit score of the
                borrower or the refreshed credit score of the borrower?
                 Question 36. What steps, including any process for soliciting
                public comment on an ongoing basis, should FHFA take to ensure that the
                single-family grids and the real house price trend are updated from
                time to time as market conditions evolve?
                 Question 37. Should a delinquency associated with a COVID-19-
                related forbearance cause a single-family mortgage exposure to become
                an NPL?
                 Question 38. Which, if any, types of forbearances, payment plans,
                or modifications should be excluded from those that cause a single-
                family mortgage exposure to become a modified RPL? Should a
                forbearance, payment plan, or modification arising out of a COVID-19-
                related forbearance request cause a single-family mortgage exposure to
                become a modified RPL?
                4. Countercyclical Adjustment
                 The MTMLTVs used to assign base risk weights to single-family
                mortgage exposures in the single-family grids would be subject to a
                countercyclical adjustment an Enterprise would be required to make when
                national house prices increase or decrease by more than 5.0 percent
                from an estimated inflation-adjusted long-term trend. Many commenters
                noted the pro-cyclical nature of the aggregate risk-based capital
                requirements of the 2018 proposal. Certain commenters recommended FHFA
                replace MTMLTV and refreshed credit scores with OLTV and original
                credit scores to reduce pro-cyclicality. Other commenters recommended
                FHFA continue to use MTMLTV and refreshed credit scores in order to
                provide a more accurate view of risk and achieve rational pricing and
                proper incentives. Additional commenters recommended FHFA base capital
                requirements on fundamental house values, while still other commenters
                suggested FHFA introduce a countercyclical requirement either through a
                countercyclical capital buffer or a countercyclical risk-based capital
                requirement.
                 The proposed formulaic countercyclical adjustment to loan-level
                single-family MTMLTVs would be based on FHFA's U.S. all-transactions
                house price index (HPI). The adjustment would restrict decreases in
                MTMLTV during periods of rising vulnerabilities in house prices and
                limits increases in MTMLTV when vulnerabilities recede. The adjustment
                is designed to increase the resilience of the Enterprises when there is
                an elevated risk of above-normal losses and to reduce the need for
                additional capital during a period of financial stress.
                 An Enterprise would calculate the MTMLTV adjustment by first
                estimating a long-term trend of FHFA's quarterly, not-seasonally-
                adjusted HPI using a prescribed trough-to-trough methodology, deflated
                by the Consumer Price Index for All Urban Consumers, All Items Less
                Shelter in U.S. City Average. If the deflated all-transactions HPI
                exceeds the estimated long-term trend by more than 5 percentage points,
                the Enterprise would adjust upward the MTMLTV of every single-family
                mortgage exposure by the difference between the deflated all-
                transactions HPI and 5.0 percent. Otherwise, the Enterprise would use
                the unadjusted MTMLTV. On the other hand, if the deflated all-
                transactions HPI falls below the estimated long-term trend by more than
                5 percentage points, the Enterprise would adjust downward the MTMLTV of
                every single-family mortgage exposure by the difference between the
                deflated all-transactions HPI and 5.0 percent. Otherwise, the
                Enterprise would use the unadjusted MTMLTV.
                 In other words, if the HPI exceeds its long-term trend by more than
                5 percentage points, the Enterprise would adjust upward the MTMLTV by
                the ratio of the HPI index actual value to the HPI index if it were at
                5.0 percent over long-term trend. This adjustment, in effect, would
                reduce the house price used to calculate MTMLTV to the level expected
                if all house prices nationally adjusted downward by the percent the
                index exceeds 5.0 percent above trend.
                 FHFA chose collars of 5.0 percent above and below the long-term
                trend in house prices because it would allow for MTMLTVs to reflect the
                best estimate of
                [[Page 39308]]
                market value most of the time, while restricting excessive MTMLTV
                increases or decreases during periods where house prices appear to
                deviate more materially from their long-term trend. The figure below
                presents the historical deflated all-transactions HPI series with both
                an estimated long-term trend and 5.0 percent collars above and below
                the trendline. When the HPI series is above or below the collars, the
                MTMLTV adjustment would be non-zero.
                 The following Figure 1 and Table 13 provide an illustration of the
                historical data used to calculate the long-term trend in HPI, along
                with the plus/minus 5.0 percent collars, as well as examples of how
                single-family MTMLTVs would be adjusted under the proposed
                framework.\67\
                ---------------------------------------------------------------------------
                 \67\ The parameters of the long-run trend are estimated using
                linear regression on the natural logarithm of real HPI from the Q3
                1975 trough to the Q2 2012 trough. Figure 1 shows the fitted values
                from the estimated long-run trend from Q1 1975 to Q3 2019. FHFA
                might need to revisit the calibration of the parameters in the event
                of future troughs.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.012
                [GRAPHIC] [TIFF OMITTED] TP30JN20.013
                [[Page 39309]]
                 Table 13 illustrates three scenarios. Under the first scenario,
                2006, Real HPI exceeds the long-term trend by more than 5.0 percent, so
                single-family house prices would be adjusted downward such that
                adjusted MTMLTV would be greater than MTMLTV. A single-family mortgage
                exposure with a 60 percent MTMLTV would be assigned a base risk weight
                using its adjusted MTMLTV of 71 percent. Similarly, an 80 percent
                MTMLTV would correspond to a 95 percent adjusted MTMLTV, while a 95
                percent MTMLTV would correspond to a 113 percent adjusted MTMLTV. Under
                the second scenario, 2012, Real HPI is less than the long-term trend by
                more than 5.0 percent, so single-family house prices would be adjusted
                upward such that adjusted MTMLTV would be less than MTMLTV. For
                example, a single-family mortgage exposure with an 80 percent MTMLTV
                would be assigned a base risk weight using its adjusted MTMLTV of 69
                percent. In the final scenario, September 30, 2019, Real HPI exceeds
                the long-term trend by 3.0 percent. In this case, because 3.0 percent
                is less than 5.0 percent, single-family house prices would not be
                adjusted, and adjusted MTMLTV would equal MTMLTV for all values of
                MTMLTV.
                 Question 39. Is the MTMLTV adjustment appropriately formulated and
                calibrated to require credit risk capital sufficient to ensure each
                Enterprise operates in a safe and sound manner and is positioned to
                fulfill its statutory mission across the economic cycle? If not, what
                modifications should FHFA consider to ensure an appropriate formulation
                and calibration?
                 Question 40. Does the MTMLTV adjustment strike an appropriate
                balance in mitigating the pro-cyclicality of the aggregate risk-based
                capital requirements while preserving a mortgage risk-sensitive
                framework? Are the collars set appropriately at 5.0 percent above or
                below the long-term index trend?
                 Question 41. How should the long-term house price trend be
                determined for the purpose of any countercyclical adjustment to a
                single-family mortgage exposure's credit risk capital requirement?
                5. Risk Multipliers
                 The proposed rule would require an Enterprise to adjust the base
                risk weight for a single-family mortgage exposure to account for
                additional loan characteristics using a set of single-family-specific
                risk multipliers. The risk multipliers would refine the base risk
                weights to account for risk factors beyond the primary risk factors
                reflected in the single-family grids, and for variations in secondary
                risk factors not captured in the risk profiles of the synthetic loans
                used to calibrate the single-family grids. The adjusted risk weight for
                a single-family mortgage exposure would be the product of the base risk
                weight, the combined risk multiplier, and any credit enhancement
                multiplier, which is discussed in Section VIII.A.6.
                 The risk multipliers correspond to common characteristics that
                increase or decrease the projected unexpected losses of a single-family
                mortgage exposure. Although the specified risk characteristics are not
                exhaustive, they capture key real estate loan performance drivers, and
                are commonly used in mortgage pricing and underwriting.
                 The risk multipliers are substantially the same as those of the
                2018 proposal, with some simplifications and refinements. In
                particular, FHFA eliminated the single-family risk multipliers for
                ``number of borrowers'' and ``loan balance,'' and reallocated the
                associated unexpected losses across the single-family grids. The
                practical effect of this change is that the base risk weights in the
                single-family grids are greater than they otherwise would have been if
                the two risk multipliers had not been eliminated.
                 Table 14--Risk Multipliers
                ----------------------------------------------------------------------------------------------------------------
                 Single-family segment
                 ---------------------------------------------------------------
                 Risk factor Value or range Performing Non-modified
                 loan RPL Modified RPL NPL
                ----------------------------------------------------------------------------------------------------------------
                Loan Purpose.................. Purchase........ 1 1 1 ..............
                 Cashout 1.4 1.4 1.4 ..............
                 Refinance.
                 Rate/Term 1.3 1.2 1.3 ..............
                 Refinance.
                Occupancy Type................ Owner Occupied 1 1 1 1
                 or Second Home.
                 Investment...... 1.2 1.5 1.3 1.2
                Property Type................. 1 Unit.......... 1 1 1 1
                 2-4 Unit........ 1.4 1.4 1.3 1.1
                 Condominium..... 1.1 1 1 1
                 Manufactured 1.3 1.8 1.6 1.2
                 Home.
                Origination Channel........... Retail.......... 1 1 1 1
                 TPO............. 1.1 1.1 1.1 1
                DTI........................... DTI 40%........ 1.2 1.2 1.1 ..............
                Product Type.................. FRM30........... 1 1 1 1
                 ARM1/1.......... 1.7 1.1 1 1.1
                 FRM15........... 0.3 0.3 0.5 0.5
                 FRM20........... 0.6 0.6 0.5 0.8
                Subordination................. No subordination 1 1 1 ..............
                 30% 5%.
                 OLTV >60% and 0% 1.1 1.2 1.1 ..............
                 60% and 1.4 1.5 1.3 ..............
                 subordination
                 >5%.
                Loan Age...................... Loan age 60 0.75 .............. .............. ..............
                 months.
                [[Page 39310]]
                
                Cohort Burnout................ No Burnout...... 1 .............. .............. ..............
                 Low............. 1.2 .............. .............. ..............
                 Medium.......... 1.3 .............. .............. ..............
                 High............ 1.4 .............. .............. ..............
                Interest-only................. No IO........... 1 1 1 ..............
                 Yes IO.......... 1.6 1.4 1.1 ..............
                Loan Documentation............ Full............ 1 1 1 ..............
                 None or low..... 1.3 1.3 1.2 ..............
                Streamlined Refi.............. No.............. 1 1 1 ..............
                 Yes............. 1 1.2 1.1 ..............
                Refreshed Credit Score for Refreshed credit .............. 1.6 1.4 ..............
                 Modified. score =780.
                Payment Change from Payment change .............. .............. 1.1 ..............
                 Modification. >=0%.
                 -20% =780.
                ----------------------------------------------------------------------------------------------------------------
                 Table 14 is structured in the following way: the first column
                represents secondary risk factors, the second column represents the
                values or ranges each secondary risk factor can take, and the third
                through sixth columns represent risk multipliers for performing loans,
                non-modified RPLs, modified RPLs, and NPLs, respectively. Thus, there
                would be a different set of risk multipliers for each of the four
                single-family segments.
                 Each secondary risk factor could take multiple values, and each
                value or range of values would have a risk multiplier associated with
                it. For any particular single-family mortgage exposure, each risk
                multiplier could take a value of 1.0, above 1.0, or below 1.0. A risk
                multiplier of 1.0 would imply that the risk factor value for a single-
                family mortgage exposure is similar to, or in a certain range of, the
                particular risk characteristic found in the single-family segment's
                synthetic loan. A risk multiplier value above 1.0 would be assigned to
                a risk factor value that represents a riskier characteristic than the
                one found in the single-family segment's synthetic loan, while a risk
                multiplier value below 1.0 would be assigned to a risk factor value
                that represents a less risky characteristic than the one found in the
                single-family segment's synthetic loan. Finally, the risk multipliers
                would be multiplicative, so each single-family mortgage exposure in a
                single-family segment would receive a risk multiplier for every risk
                factor pertinent to that segment, even if the risk multiplier is 1.0
                (implying no change to the base risk weight for that risk factor). The
                total combined risk multiplier for a single-family mortgage exposure
                would be, in general, the product of all individual risk multipliers
                pertinent to the single-family segment in which the exposure is
                classified.
                 There are two general types of single-family risk factors for which
                risk multipliers are applied: Risk factors determined at origination
                and risk factors that change as a loan seasons or ages.
                 Risk factors determined at origination include common
                characteristics such as loan purpose, occupancy type, and property
                type. The impacts of this type of risk factor on single-family mortgage
                performance and credit losses are generally well understood and
                commonly used in mortgage pricing and underwriting. Many of these risk
                factors can be quantified and applied in a straightforward manner using
                the proposed risk multipliers. The full set of single-family risk
                factors determined at origination for which the proposed rule would
                require risk multipliers is:
                 Loan purpose. Loan purpose reflects the purpose of the
                single-family mortgage exposure at origination. The risk multiplier
                would be at least 1.0 for any purpose other than ``purchase.''
                 Occupancy type. Occupancy type reflects the borrower's
                intended use of the property, with an owner-occupied property
                representing a baseline level of risk across all single-family segments
                (a risk multiplier of 1.0), and an investment property being higher
                risk (a risk multiplier greater than 1.0).
                 Property type. Property type describes the physical
                structure of the property, with a 1-unit property representing a
                baseline level of risk (a
                [[Page 39311]]
                risk multiplier of 1.0), and other property types such as 2-4 unit
                properties or manufactured homes being higher risk (a risk multiplier
                greater than 1.0).
                 Origination channel. Origination channel is the type of
                institution that originated the single-family mortgage exposure, and
                whether or not it originated from a third-party, including a broker or
                correspondent. Single-family mortgage exposures that did not originate
                from a third-party represent a baseline level of risk (a risk
                multiplier of 1.0).
                 Product type. Product type reflects the contractual terms
                of the single-family mortgage exposure as of the origination date, with
                a 30-year fixed-rate mortgage and select adjustable-rate mortgages
                (including, for example, ARM 5/1 and ARM 7/1) representing a baseline
                level of risk (a risk multiplier of 1.0). Adjustable-rate loans with an
                initial one-year fixed-rate period followed by a rate that adjusts
                annually (ARM 1/1) are considered higher risk (a risk multiplier
                greater than 1.0), while shorter-term fixed-rate loans are considered
                lower risk (a risk multiplier less than 1.0).
                 Interest-only. Interest-only reflects whether or not a
                loan has an interest-only payment feature during all or part of the
                loan term. Interest-only loans are generally considered higher risk (a
                risk multiplier greater than 1.0) than non interest-only loans due to
                their slower principal accumulation and an increased risk of default
                driven by the potential increase in principal payments at the
                expiration of the interest-only period.
                 Loan documentation. Loan documentation refers to the
                completeness of the documentation used to underwrite the single-family
                mortgage exposure, as determined under the Guide of the Enterprise.
                Loans with low or no documentation have a high degree of uncertainty
                around a borrower's ability to pay, and are considered higher risk (a
                risk multiplier greater than 1.0) than loans with full documentation
                where a lender is able to verify the income, assets, and employment of
                a borrower.
                 Streamlined refinance. Streamlined refinance is an
                indicator for a single-family mortgage exposure that was refinanced
                through a streamlined refinance program of an Enterprise, including
                HARP. These loans generally cannot be refinanced under normal
                circumstances due to high MTMLTV, and therefore would be considered
                higher risk (a risk multiplier greater than 1.0).
                 Risk factors that change dynamically and are updated as a single-
                family mortgage exposure seasons include characteristics such as loan
                age, current credit score, and delinquency or modification history.
                These risk factors are correlated with probability of default and/or
                loss given default, and are therefore important in projecting
                unexpected losses. The full set of dynamic single-family risk factors
                for which the proposed rule would require risk multipliers is:
                 DTI. DTI is the ratio of the borrower's total monthly
                obligations (including housing expense) divided by the borrower's
                monthly income, as calculated under the Guide of the Enterprise. DTI
                affects and reflects a borrower's ability to make payments on a single-
                family mortgage exposure. A DTI between 25 percent and 40 percent would
                reflect a baseline level of risk (a risk multiplier of 1.0), and as a
                borrower's income rises relative to the borrower's debt obligations (a
                lower DTI), the single-family mortgage exposure would be considered
                lower risk (a risk multiplier less than 1.0). If a borrower's income
                falls relative to the borrower's debt obligations (a higher DTI), the
                single-family mortgage exposure would be considered higher risk (a risk
                multiplier greater than 1.0).
                 Subordination. Subordination is the amount equal to the
                original unpaid principal balance of any second lien single-family
                mortgage exposure divided by the lesser of the appraised value or sale
                price of the property that secures the single-family mortgage exposure.
                Single-family mortgage exposures with no subordination would represent
                a baseline level of risk (a risk multiplier of 1.0), whereas single-
                family mortgage exposures with varying combinations of OLTV and
                subordination percentage would be generally considered higher risk (a
                risk multiplier greater than 1.0).
                 Loan age. Loan age is the number of scheduled payment
                dates since the single-family mortgage exposure was originated. Older
                single-family mortgage exposures are considered less risky because in
                general as loans age the likelihood of events occurring that would
                trigger mortgage default decreases.
                 Cohort burnout. Cohort burnout reflects the number of
                refinance opportunities since the single-family mortgage exposure's
                sixth scheduled payment date. A refinance opportunity is any calendar
                month in which the Primary Mortgage Market Survey (PMMS) rate for the
                month and year of the origination of the single-family mortgage
                exposure exceeds the PMMS rate for that calendar month by more than 50
                basis points. Cohort burnout is an indicator that a borrower is less
                likely to refinance in the future given the opportunity to do so.
                Borrowers that demonstrate a lower propensity to refinance have higher
                credit risk, and a single-family mortgage exposure with a cohort
                burnout greater than zero would receive a risk multiplier greater than
                1.0.
                 Refreshed credit score for RPLs and NPLs. Refreshed credit
                scores refer to the most recently available credit scores as of the
                capital calculation date. In general, a credit score reflects the
                credit worthiness of a borrower, and a higher credit score implies
                lower risk and a lower risk multiplier. For RPLs, a refreshed credit
                score between 660 and 700 reflects a baseline level of risk (a risk
                multiplier of 1.0). For NPLs, a refreshed credit score between 640 and
                700 represents a baseline level of risk (a risk multiplier of 1.0).
                 Payment change from modification. For modified RPLs, the
                payment change from modification reflects the change in the monthly
                payment, as a percent of the original monthly payment, resulting from a
                modification. In general, higher payment reductions tend to reduce the
                likelihood of future default, so single-family mortgage exposures with
                higher payment reductions from modifications would have a lower capital
                requirement (a risk multiplier less than 1.0).
                 Previous maximum days past due. For RPLs, previous maximum
                number of days past due reflects the maximum number of days a single-
                family mortgage exposure has been past due in the last 36 months. Days
                past due is positively correlated with the likelihood of future
                default. Therefore, a single-family mortgage exposure with a previous
                maximum delinquency between 0 and 59 days represent a baseline level of
                risk (a risk multiplier of 1.0), and a single-family mortgage exposure
                with a maximum delinquency greater than 59 days month would be
                considered higher risk (a risk multiplier greater than 1.0).
                 Not all risk multipliers would apply to every single-family
                segment, because the risk multipliers were estimated separately for
                each single-family segment. In cases where a risk factor did not
                influence the projected unexpected loss of single-family mortgage
                exposures in a single-family segment, or a risk factor did not apply at
                all (payment change from modification, in the performing loan segment,
                for example), there would be no risk multiplier for that risk factor in
                that single-family segment.
                 Question 42. Are the risk multipliers for single-family mortgage
                exposures appropriately formulated and calibrated
                [[Page 39312]]
                to require credit risk capital sufficient to ensure each Enterprise
                operates in a safe and sound manner and is positioned to fulfill its
                statutory mission across the economic cycle?
                 Question 43. Are there any adjustments, simplifications, or other
                refinements that FHFA should consider for the risk multipliers for
                single-family mortgage exposures?
                 Question 44. Should the combined risk multiplier for a single-
                family mortgage exposure be subject to a cap (e.g., 3.0, as
                contemplated by the 2018 proposal)?
                6. Credit Enhancement Multipliers
                 The Enterprises' charter acts generally require single-family
                mortgage exposures with an unpaid principal balance exceeding 80
                percent of the value of the property to have one of three forms of
                loan-level credit enhancement at the time of acquisition. This
                requirement can be satisfied through:
                 The seller retaining a participation of at least 10
                percent in the single-family loan (participation agreement);
                 The seller agreeing to repurchase or replace the single-
                family mortgage exposure, or reimburse losses, in the event of default
                (a recourse agreement); or
                 A guarantee or insurance on the unpaid principal balance
                which is in excess of 80 percent LTV (mortgage insurance or MI).
                Mortgage insurance is the most common form of loan-level credit
                enhancement.
                 Loan-level credit enhancements sometimes provide credit enhancement
                beyond that required by the charter acts.
                 To account for the decrease in an Enterprise's exposure to
                unexpected loss on a single-family mortgage exposure subject to loan-
                level credit enhancement, an Enterprise would adjust the base risk
                weight using an adjusted credit enhancement multiplier. That adjusted
                credit enhancement multiplier would be based on a credit enhancement
                multiplier (CE multiplier) for the single-family mortgage exposure and
                then adjusted for the strength of the counterparty providing the loan-
                level credit enhancement. A smaller CE multiplier (and therefore a
                smaller adjusted credit enhancement multiplier) would correspond to a
                loan-level credit enhancement that transfers more of the projected
                unexpected loss to the counterparty and thus requires less credit risk
                capital of the Enterprise for the single-family mortgage exposure. For
                example, before any adjustment for counterparty strength, a CE
                multiplier of 0.65 for a single-family mortgage exposure subject to
                loan-level credit enhancement means that an Enterprise is exposed to 65
                percent of the projected unexpected loss of the single-family mortgage
                exposure and that the counterparty providing the loan-level credit
                enhancement is projected to absorb, assuming it is an effective
                counterparty, the remaining 35 percent of the projected unexpected
                loss.
                 Participation agreements are rarely utilized by the Enterprises,
                and for reasons of simplicity, the proposed rule would not assign any
                benefit for these agreements (i.e., a CE multiplier of 1.0).
                 Recourse agreements may be unlimited or limited. Full recourse
                agreements provide full coverage for the life of the loan, while
                partial recourse agreements provide partial coverage or have a limited
                duration. Because a counterparty would be responsible for all credit
                risk pursuant to a full recourse agreement, the single-family mortgage
                exposure would be assigned a CE multiplier of zero, subject to a
                counterparty haircut. For partial recourse agreements, the proposed
                rule would require an Enterprise to take into account the percent
                coverage, adjusted for the term of coverage, to determine the
                appropriate benefit.
                 The CE multiplier for a single-family mortgage exposure subject to
                mortgage insurance would vary based on the mortgage insurance coverage
                and loan characteristics, including (i) whether the mortgage insurance
                is cancellable or non-cancellable, (ii) whether the mortgage insurance
                coverage is charter-level or guide-level, and (iii) the loan
                characteristics, including OLTV, loan age, amortization term, and
                single-family segment.
                 Cancellation option. Non-cancellable mortgage insurance
                (non-cancellable MI) provides coverage for the life of the single-
                family mortgage exposure. Cancellable mortgage insurance (cancellable
                MI) allows for the cancellation of coverage upon a borrower's request
                when the unpaid principal balance falls to 80 percent or less of the
                original property value, or automatic cancellation when either the loan
                balance falls below 78 percent of the original property value or the
                loan reaches the midpoint of the loan's amortization schedule, if the
                loan is current. Due to the longer period of coverage, non-cancellable
                MI provides more credit risk protection than cancellable MI. CE
                multipliers for non-cancellable MI therefore would be lower than CE
                multipliers for cancellable MI.
                 Coverage. Charter-level coverage provides mortgage
                insurance that satisfies the minimum requirements of the Enterprises'
                charter acts. Guide-level coverage provides deeper coverage, roughly
                double the coverage provided by charter-level coverage. Therefore, the
                CE multipliers for guide-level coverage would be lower than the CE
                multipliers for charter-level coverage.
                 Original LTV. Single-family mortgage exposures with higher
                OLTV generally have greater coverage levels than loans with lower OLTV.
                Higher coverage levels imply greater credit risk protection. Therefore,
                single-family mortgage exposures with higher OLTVs would have lower CE
                multipliers.
                 Amortization term. For cancellable MI, single-family
                mortgage exposures with a 15- to 20-year amortization period might have
                cancellation triggered earlier than loans with a 30-year amortization
                period. Therefore, single-family mortgage exposures with longer
                amortization terms have a longer period of credit risk protection from
                mortgage insurance. Single-family mortgage exposures with a 30-year
                amortization period therefore have a lower CE multiplier than single-
                family mortgage exposures with a 15- to 20-year amortization period
                with cancellable mortgage insurance.
                 Single-family segment. Mortgage insurance coverage on
                delinquent loans cannot be cancelled. Cancellation of mortgage
                insurance coverage on modified RPLs is based on the modified LTV and
                the modified amortization term, which are typically higher than the
                OLTV and the original amortization term. In both of these cases, the
                mortgage insurance coverage is extended for a longer period, resulting
                in greater credit risk protection, relative to mortgage insurance
                coverage on performing loans. Therefore, in the proposed rule,
                delinquent and modified loans would have a lower CE multiplier than
                performing loans.
                 Loan age. Mortgage insurance cancellation is often
                triggered sooner for older loans than for younger loans. Therefore,
                older loans with cancellable MI generally have a shorter period of
                remaining mortgage insurance coverage and thus have less credit risk
                protection from mortgage insurance. Older single-family mortgage
                exposures with cancellable MI therefore have higher CE multipliers than
                younger single-family mortgage exposures.
                 The following Tables 15 through 19 present the CE multipliers for
                single-family mortgage exposures subject to mortgage insurance.
                 Table 15 contains CE multipliers for all single-family mortgage
                exposures subject to non-cancellable MI, except NPLs. The table
                differentiates CE multipliers by type of coverage (charter-level and
                guide-level), OLTV,
                [[Page 39313]]
                amortization term, and coverage percent.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.014
                 The proposed rule would have three sets of multipliers for
                cancellable MI. Table 16 contains CE multipliers for performing loans
                and non-modified RPLs subject to cancellable MI. The table
                differentiates CE multipliers by type of coverage (charter-level and
                guide-level), OLTV, coverage percent, amortization term, and loan age.
                [[Page 39314]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.015
                 Table 17 contains CE multipliers for the modified RPLs with 30-year
                post-modification amortization and subject to cancellable MI. The table
                differentiates risk multipliers by type of coverage (charter-level and
                guide-level), OLTV, coverage percent, amortization term, and loan age.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.016
                 Table 18 contains CE multipliers for modified RPLs with 40-year
                post-modification amortization and subject to cancellable MI. Here, CE
                multipliers are differentiated by type of coverage (charter-level and
                guide-level), OLTV, coverage percent, and loan age.
                [[Page 39315]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.017
                 Table 19, contains proposed CE multipliers for NPLs. Mortgage
                insurance on delinquent loans cannot be cancelled; therefore, there is
                no differentiation between cancellable MI and non-cancellable MI for
                the NPL segment. The table differentiates CE multipliers by type of
                coverage (charter-level and guide-level), OLTV, amortization term, and
                coverage percent.
                [[Page 39316]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.018
                Counterparty Credit Risk Adjustments
                 Sharing losses with counterparties through loan-level credit
                enhancement exposes an Enterprise to counterparty credit risk. To
                account for this exposure, the proposed rule would reduce the
                recognized benefits from loan-level credit enhancement to incorporate
                the risk that a counterparty is unable to perform its claim
                obligations. To accomplish this, the proposed rule would implement a
                counterparty haircut risk multiplier (CP haircut multiplier) to be
                applied to the CE multiplier. The CP haircut multiplier would take
                values from zero to one. A value of zero, the smallest haircut, would
                mean a counterparty is expected to fully perform its claim obligations,
                while a value of one, the largest haircut, would mean a counterparty is
                not expected to perform its claim obligations. A value between zero and
                one would mean a counterparty is expected to perform a portion of its
                claim obligations.
                 The CP haircut multiplier would depend on a number of factors that
                reflect counterparty risk. The three main factors are the
                creditworthiness of the counterparty, the counterparty's level of
                concentration in mortgage credit risk, and the counterparty's status as
                an approved insurer under an Enterprise's counterparty standards for
                private mortgage insurers.
                 The proposed rule would require an Enterprise to assign
                counterparty financial strength ratings using a provided rating
                framework. In assigning a rating, an Enterprise would assign the
                counterparty financial strength rating that most closely aligns to the
                assessment of the counterparty from the Enterprise's internal
                counterparty risk framework. Descriptions of the 8 different
                counterparty financial strength ratings are presented below in Table
                20.
                [[Page 39317]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.019
                 Similarly, the proposed rule would require an Enterprise to utilize
                its counterparty risk management framework to assign each counterparty
                a rating of ``not high'' or ``high'' to reflect the counterparty's
                concentration in mortgage credit risk. During the 2008 financial
                crisis, three out of the seven mortgage insurance companies were placed
                in run-off by their state regulators, and payments on the Enterprises'
                claims were deferred by the state regulators. This exposed the
                Enterprises to counterparty risk and potential financial losses. More
                generally, the 2008 financial crisis highlighted that counterparty risk
                can be amplified when the counterparty's credit exposure is highly
                correlated with an Enterprise's credit exposure.
                 Counterparties whose primary lines of business are more
                concentrated in mortgage credit risk have a higher probability to
                default on payment obligations when the mortgage default rate is high.
                The proposed rule would assign larger haircuts to counterparties with
                higher levels of mortgage credit risk concentration relative to
                diversified counterparties. An Enterprise would assess the level of
                mortgage credit risk concentration for each individual counterparty to
                determine whether the insurer is well diversified or whether it has a
                high concentration risk.
                 Finally, an Enterprise would determine whether a mortgage insurance
                counterparty is in compliance with its own private mortgage eligibility
                standards. If the counterparty satisfies the set of requirements to be
                approved to insure loans acquired by an Enterprise, the insurer would
                be assigned a smaller counterparty haircut.
                 To calculate the CP haircut, the proposed rule would use a modified
                version of the Basel framework's IRB approach. The modified version
                leverages the IRB approach to account for the creditworthiness of the
                counterparty, but makes changes to reflect the level of mortgage credit
                risk concentration and the counterparty's status as an approved
                insurer. The Basel IRB framework provides the ability to differentiate
                haircuts between counterparties with different levels of risk. The
                proposed rule would augment the IRB approach to capture risk across
                counterparties. In this way, the proposed adjustment would help capture
                wrong-way risk between the Enterprises and their counterparties.
                 In particular, the proposed approach would calculate the
                counterparty haircut by multiplying stress loss given default by the
                probability of default and a maturity adjustment for the asset. The
                following Figure 2 details the counterparty haircut calculation, as
                well as the parameterization of the proposed approach:
                BILLING CODE 8070-01-P
                [[Page 39318]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.020
                 As shown, stress loss given default (LGD) is calibrated to 45
                percent according to the historic average stress severity rates. The
                maturity adjustment is calibrated to 5 years for 30-year products and
                to 3.5 years for 15- to 20-year single-family mortgage exposures to
                approximately reflect the average life of the assets. The expected
                probability of default (PD) is calculated using a historical 1-year PD
                matrix for all financial institutions.
                 As discussed above, counterparties with a lower concentration of
                mortgage credit risk and therefore a lower potential for wrong-way risk
                would be afforded a lower haircut relative to the counterparties with
                higher concentrations of mortgage credit risk. Similarly, approved
                insurers would be afforded a lower haircut relative to counterparties
                that do not satisfy an Enterprise's eligibility requirements. These
                differences would be captured through the asset valuation correlation
                risk multiplier, AVCM. An AVCM of 1.75 would be assigned those
                counterparties which are not an approved insurer and have high exposure
                to mortgage credit risk, an AVCM of 1.50 would be assigned those
                counterparties which are an approved insurer and have high exposure to
                mortgage credit risk, and an AVCM of 1.25 would be assigned to
                diversified counterparties which do not have a high exposure to
                mortgage credit risk. The parameters of the Basel IRB formula,
                including the AVCM, were augmented to best fit the internal
                counterparty credit risk haircuts developed by the Enterprises.
                 The proposed counterparty haircut would also differ by product type
                and segment. Performing loans, modified RPLs, and non-modified RPLs
                would be treated differently than NPLs, and within 30-year performing
                loans, modified RPLs, and non-modified RPLs would receive a larger
                haircut than 15- or 20-year single-family mortgage exposures.
                 The NPL segment represents a different level of counterparty risk
                relative to the performing and re-performing segments. Unlike
                performing loans, modified RPLs, and non-modified RPLs, an Enterprise
                would expect to submit claims for NPLs in the near future. The proposed
                rule would reduce the Basel framework's effective maturity from 5 (or
                3.5 for 15/20Yr) to 1.5 for all loans in the NPL segment. The reduced
                effective maturity would lower counterparty haircuts on loans in the
                NPL segment.
                [[Page 39319]]
                 The proposed rule would utilize the following CP haircut
                multipliers in Table 21.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.021
                BILLING CODE 8070-01-C
                 Finally, FHFA notes that the proposed rule's approach generally
                assigns more credit risk mitigation benefit to mortgage insurance and
                other loan-level credit enhancement than would be assigned under the
                U.S. banking framework, in particular with respect to those
                counterparties eligible to provide guarantees or insurance. FHFA is
                soliciting comment on the appropriateness of the differences between
                the proposed rule and the regulatory capital treatment of loan-level
                credit enhancement (including with respect to the U.S. banking
                regulators' stress test assumptions).
                 Question 45. Are the CE multipliers and CP haircut multipliers for
                single-family mortgage exposures appropriately formulated and
                calibrated to require credit risk capital sufficient to ensure each
                Enterprise operates in a safe and sound manner and is positioned to
                fulfill its statutory mission across the economic cycle?
                 Question 46. Are there any adjustments, simplifications, or other
                refinements that FHFA should consider for the CE multipliers and the CP
                haircut multipliers for single-family mortgage exposures?
                 Question 47. Are the differences between the proposed rule and the
                U.S. banking framework with respect to the credit risk mitigation
                benefit assigned to loan-level credit enhancement appropriate? Which,
                if any, specific aspects should be aligned?
                7. Minimum Adjusted Risk Weight
                 The proposed rule would establish a floor on the adjusted risk
                weight for a single-family mortgage exposure equal to 15 percent. FHFA
                has determined that a minimum risk weight is necessary to ensure the
                safety and soundness of each Enterprise and that each Enterprise is
                positioned to fulfill its statutory mission across the economic cycle,
                including during a period of financial stress.
                 First, absent this 15 percent risk weight floor, the proposed
                rule's credit risk capital requirements as of the end of 2007 would not
                have been sufficient to absorb each Enterprise's crisis-era cumulative
                capital losses on its single-family book. Absent the 15 percent risk
                weight floor, Freddie Mac's estimated single-family credit risk capital
                requirement of $61 billion as of December 31, 2007 under the proposed
                rule would have been less than its crisis-era single-family cumulative
                capital losses. With the addition of the 15 percent risk weight floor,
                Freddie Mac's estimated single-family credit risk capital requirement
                would have exceeded its crisis-era single-family cumulative capital
                losses. Absent the 15 percent risk weight floor, Fannie Mae's estimated
                single-family credit risk capital requirement would have exceeded its
                crisis-era single-family cumulative capital losses, but by a relatively
                small amount. The addition of the 15 percent risk weight floor would
                have added approximately $8 billion to Fannie Mae's single-family
                credit risk capital requirement, clearing cumulative capital losses by
                a more comfortable margin.
                 Second, as discussed in Section IV.B, a risk weight floor is
                appropriate to mitigate certain risks and limitations associated with
                the underlying historical data and models used to calibrate the credit
                risk capital requirements. These risks and limitations are perhaps
                inherent to any methodology for calibrating granular credit risk
                capital requirements. In particular:
                 A disproportionate share of the Enterprises' crisis-era
                credit losses arose from certain single-family mortgage exposures that
                are no longer eligible for acquisition by the Enterprises. The
                calibration of the credit risk capital requirements attributed a
                significant portion of the Enterprises' crisis-era losses to these
                products. The statistical methods used to allocate losses between
                borrower-related risk attributes and product-related risk attributes
                pose significant model risk. The sizing of the regulatory capital
                requirements also
                [[Page 39320]]
                must guard against potential future relaxation of underwriting
                standards and regulatory oversight over those underwriting standards.
                 The Enterprises' crisis-era losses likely were mitigated
                to at least some extent by the unprecedented support by the federal
                government of the housing market and the economy and also by the
                declining interest rate environment of the period. There is therefore
                some risk that the risk-based capital requirements are not specifically
                calibrated to ensure each Enterprise would be regarded as a viable
                going concern following a future severe economic downturn that
                potentially entails more unexpected losses, whether because there is
                less or no Federal support of the economy, because there is less or no
                reduction in interest rates, or because of other causes.
                 There are some potentially material risks to the
                Enterprises that are not assigned a risk-based capital requirement--for
                example, risks relating to uninsured or underinsured losses from
                flooding, earthquakes, or other natural disasters or radiological or
                biological hazards. There also is no risk-based capital requirement for
                the risks that climate change could pose to property values in some
                localities.
                 Third, comparison to the Basel and U.S. banking framework's credit
                risk capital requirements for similar exposures reinforces FHFA's view
                that a risk weight floor is appropriate to mitigate certain risks and
                limitations associated with the underlying historical data and models
                used to calibrate the credit risk capital requirements.\68\ Absent this
                risk weight floor, as of September 30, 2019, the average pre-CRT net
                credit risk capital requirement on the Enterprises' single-family
                mortgage exposures (which reflects the benefit of private mortgage
                insurance but no adjustments for CRT) would have been 1.7 percent of
                unpaid principal balance, implying an average risk weight of 21
                percent. With the 15 percent risk weight floor, the average requirement
                would have increased by approximately 0.5 percent of unpaid principal
                balance to an average risk weight of 26 percent. The U.S. banking
                framework generally assigns a 50 percent risk weight to these exposures
                to determine the credit risk capital requirement (equivalent to a 4.0
                percent adjusted total capital requirement), while the current Basel
                framework generally assigns a 35 percent risk weight (equivalent to a
                2.8 percent adjusted total capital requirement). Before the risk weight
                floor, before adjusting for CRT, and before adjusting for the capital
                buffers under the proposed rule and the Basel and U.S. banking
                frameworks, the Enterprises' credit risk capital requirements for
                single-family mortgage exposures would have been roughly 40 percent
                that of U.S. banking organizations and roughly 60 percent that of non-
                U.S. banking organizations.
                ---------------------------------------------------------------------------
                 \68\ As discussed in Section IV.B.2, while the interest rate and
                funding risk profiles of the Enterprises and large banking
                organizations are different, that difference should not preclude
                comparisons of the credit risk capital requirements of the U.S.
                banking framework to the credit risk capital requirements of the
                Enterprises.
                ---------------------------------------------------------------------------
                 The BCBS has finalized a more risk-sensitive set of risk weights
                for residential mortgage exposures, which are to be implemented by
                January 1, 2022. With those changes, the lowest standardized risk
                weight would be 20 percent for single-family residential mortgage loans
                with OLTVs less than 50 percent. The 21 percent average risk weight
                would have been about the same as this 20 percent minimum,
                notwithstanding the Enterprises having an average single-family OLTV of
                approximately 75 percent as of September 30, 2019.
                 These comparisons are complicated by the fact that the 21 percent
                and 26 percent average risk weights reflect loan-level credit
                enhancement and adjustments for MTMLTV. In particular, some meaningful
                portion of the gap currently between the credit risk capital
                requirements of the Enterprises and banking organizations under the
                proposed rule is due to the proposed rule's use of MTMLTV instead of
                OLTV, as under the U.S. banking framework, to assign credit risk
                capital requirements for mortgage exposures. On the one hand, the
                comparison illustrates how low risk-based capital requirements can
                become in a mark-to-market framework without prudential floors. On the
                other hand, in a different house price environment, perhaps after
                several years of declining house prices, the mark-to-market framework
                could have resulted in higher credit risk capital requirements than the
                Basel and U.S. banking frameworks.\69\ Some of this gap might be
                expected to narrow were real property prices to move toward their long-
                term trend.
                ---------------------------------------------------------------------------
                 \69\ In consideration that the U.S. banking and Basel frameworks
                utilize OLTVs, a comparison of the credit risk capital requirements
                for newly acquired single-family mortgage exposures under the 2018
                proposal and the proposed rule provides the most direct comparison
                of credit risk capital requirements for new originations. Under the
                proposed rule, gross credit risk capital (prior to adjustments for
                credit enhancements and CRT) on newly originated (i.e., loan age
                less than six months) single-family mortgage exposures as of
                September 30, 2019, with an average OLTV of 77 percent, would have
                been 3.8 percent of unpaid principal balance, implying an average
                risk weight of 47 percent. This compares to the 50 percent risk
                weight under the U.S. banking framework and 30 percent under the
                newest BCBS framework for loans with OLTV of 60 to 80 percent. After
                consideration of charter-required credit enhancements, the average
                net credit risk capital requirement on the Enterprises' newly
                originated single-family mortgage exposures as of September 30, 2019
                would have been 2.8 percent of unpaid principal balance, implying an
                average risk weight of 36 percent. These risk weights would then
                decline to the extent house prices appreciate or increase to the
                extent house prices depreciate.
                ---------------------------------------------------------------------------
                 However, the current sizing of that gap between the credit risk
                capital requirements of banking organizations and the Enterprises under
                the proposed rule is an important consideration informing the
                enhancements to the 2018 proposal.
                 Reinforcing that point, the 21 percent average risk weight would
                have been about the same as the Basel framework's 20 percent risk
                weight assigned to exposures to sovereigns and central banks with
                ratings A+ to A- and claims on banks and corporates with ratings AAA to
                AA-.\70\ The 21 percent average risk weight also would have been about
                the same as the 20 percent risk weight assigned under the U.S. banking
                framework to Enterprise-guaranteed MBS.
                ---------------------------------------------------------------------------
                 \70\ See BCBS, The Basel Framework, paragraphs 20.4 and 20.14 at
                181 and 185 (Dec. 15, 2019), available at https://www.bis.org/basel_framework/index.htm?export=pdf.
                ---------------------------------------------------------------------------
                 In light of these considerations, FHFA has determined that a
                minimum risk weight is necessary to ensure the safety and soundness of
                each Enterprise and that each Enterprise is positioned to fulfill its
                statutory mission during a period of financial stress. FHFA sized the
                15 percent risk weight floor taking into consideration the 20 percent
                minimum risk weight contemplated by the amendments to the Basel
                framework for similar exposures, while also seeking to preserve the
                mortgage risk-sensitive framework by avoiding a risk weight floor that
                was, in effect, the binding constraint for a substantial portion of
                single-family mortgage exposures. FHFA is soliciting comment on the
                sizing of the risk weight floor, including whether to perhaps align the
                floor with the more risk-sensitive standardized risk weights assigned
                to similar exposures under the Basel framework.
                 Question 48. Is the minimum floor on the adjusted risk weight for a
                single-family mortgage exposure appropriately calibrated to mitigate
                model and related risks associated with the calibration of the
                underlying base risk weights and risk multipliers and to otherwise
                ensure each Enterprise operates in a safe and sound manner and is
                positioned to
                [[Page 39321]]
                fulfill its statutory mission across the economic cycle?
                 Question 49. Should the minimum floor on the adjusted risk weight
                for a single-family mortgage exposure be decreased or increased,
                perhaps to align the minimum floor with the more risk-sensitive
                standardized risk weights assigned to similar exposures under the Basel
                framework (e.g., 20 percent for a single-family residential mortgage
                loan with LTV at origination less than 50 percent)?
                 Question 50. Should the floor or other limit used to determine a
                single-family mortgage exposure's credit risk capital requirement be
                assessed against the base risk weight, the risk weight adjusted for the
                combined risk multipliers, or some other input used to determine that
                credit risk capital requirement?
                B. Multifamily Mortgage Exposures
                 The standardized credit risk-weighted assets for each multifamily
                mortgage exposure would be determined using grids and risk multipliers
                that together would assign an exposure-specific risk weight based on
                the risk characteristics of the multifamily mortgage exposure. The
                resulting exposure-specific credit risk capital requirements generally
                would be similar to those in the 2018 proposal, subject to some
                simplifications and refinements. As discussed in Section VIII.B.3, the
                base risk weight generally would be a function of the multifamily
                mortgage exposure's MTMLTV, among other things. This base risk weight
                would then be adjusted based on other risk attributes, as discussed in
                Section VIII.B.5. Finally, as discussed in Section VIII.B.6, this
                adjusted risk weight would be subject to a minimum floor of 15 percent.
                1. Multifamily Business Models
                 The proposed rule would apply to both Enterprises. However, when
                appropriate, the proposed rule would account for differences in the
                Enterprises' multifamily business models. These differences are
                evident, for example, when considering certain elements of the proposed
                rule related to credit risk transfer.
                 Multifamily mortgage exposures finance the acquisition and
                operation of commercial property collateral, typically apartment
                buildings. This section discusses multifamily mortgage exposures that
                take the form of whole loans and guarantees. Multifamily whole loans
                are those that an Enterprise keeps in its portfolio after acquisition.
                Multifamily guarantees are guarantees provided by an Enterprise of the
                payment of principal and interest payments to investors in MBS that
                have been issued by an Enterprise or another security issuer and are
                backed by previously acquired multifamily whole loans. Except to the
                extent an Enterprise transfers credit risk to third-party private
                investors, the credit risk from multifamily mortgage exposures is
                retained.
                 Fannie Mae's multifamily business historically has generally relied
                on the Delegated Underwriting and Servicing (DUS) program. The DUS
                program is a loss-sharing program that seeks to facilitate the
                implementation of common underwriting and servicing guidelines across a
                defined group of multifamily lenders. The number of multifamily lenders
                in the DUS program has historically ranged between 25 and 30 since the
                program's inception in the late 1980s. Fannie Mae typically transfers
                about one-third of the credit risk to those lenders, while retaining
                the remaining two-thirds of the credit risk and the counterparty risk
                associated with the DUS lender business relationship. The proportion of
                risk transferred to the lender may be more or less than one-third under
                a modified version of the typical DUS loss-sharing agreement. Fannie
                Mae has also reduced its exposure to the credit risk retained on DUS
                loans through programmatic ``back-end'' risk transfer activities,
                including reinsurance transactions (MCIRT) on multifamily mortgages
                with unpaid principal balances (UPBs) generally smaller than $30
                million and note offerings (MCAS) on multifamily mortgages with UPBs
                generally greater than or equal to $30 million.
                 In contrast, Freddie Mac's multifamily model has focused on
                structured, multi-class securitizations. While Freddie Mac has a number
                of securitization programs for multifamily loans, the largest is the K-
                Deal program. Under the K-Deal program, which started in 2009, Freddie
                Mac sells a portion of unguaranteed bonds (mezzanine and subordinate),
                generally 10 to 15 percent, to private market participants. These sales
                typically result in a transfer of a high percentage of the credit risk.
                Freddie Mac generally assumes credit and market risk during the period
                between loan acquisition and securitization. After securitization,
                Freddie Mac generally retains a portion of the credit risk through
                ownership or guarantee of senior K-Deal tranches.
                 As of 2019, the differences between the two business models have
                become somewhat less pronounced. The proposed rule is tailored to each
                Enterprise's current lending practices, and would not preclude either
                from evolving its business model in the future.
                 Commenters on the 2018 proposal supported the inclusion of
                multifamily-specific credit risk capital requirements in order to
                capture the unique nature of each Enterprise's multifamily business and
                its particular risk drivers. In addition, commenters generally
                supported the structure and methodology of those proposed requirements.
                However, commenters also provided FHFA with critical feedback. Foremost
                among commenters' concerns was a perceived imbalance of the 2018
                proposal as related to the Enterprises' different multifamily business
                models.
                 Commenters on the 2018 proposal stressed the importance of having a
                multifamily market with multiple viable and competing execution
                methods. To this end, some commenters raised concerns that the
                multifamily capital requirements in the 2018 proposal would
                disadvantage the loss sharing business model relative to the
                securitization business model, potentially to the point where the loss
                sharing model would no longer be viable. Commenters suggested that the
                2018 proposal did not sufficiently account for certain benefits or risk
                mitigants of the loss sharing business model, particularly relative to
                the historical loss experience of Fannie Mae's DUS loans. Commenters
                also suggested that the 2018 proposal's different market risk treatment
                of multifamily mortgage exposures compared to Enterprise- or Ginnie
                Mae-backed MBS provided a further disadvantage to using a loss sharing
                model relative to a securitization model.
                 FHFA has considered the commenters' feedback and believes that the
                framework for calculating multifamily credit risk capital requirements
                under the 2018 proposal was generally appropriately tailored to
                accommodate both Enterprises' historical business practices.
                 However, FHFA has addressed the commenters' concerns in two ways.
                First, FHFA has revised the capital treatment for contractual claims to
                at-risk servicing rights and clarified the capital treatment for
                restricted liquidity in Fannie Mae's loss sharing model. The 2018
                proposal would have afforded capital relief in multifamily loss sharing
                transactions by including restricted liquidity as collateral, and by
                reducing uncollateralized exposure to a counterparty by 50 percent if
                the Enterprise had a contractual claim to at-risk servicing rights. The
                proposed rule would retain this treatment of restricted liquidity, but
                would implement an
                [[Page 39322]]
                updated treatment of servicing rights such that in the counterparty
                haircut calculation, an Enterprise may reduce uncollateralized exposure
                by 1 year of estimated servicing revenue if the Enterprise has a
                contractual claim to the at-risk servicing rights.
                 Second, the proposed rule would introduce a prudential floor of 10
                percent for the risk weight assigned to each tranche in a CRT. Such a
                floor would mitigate potential risks associated with CRT, including the
                structuring, recourse, and other risks associated with these
                securitizations.
                2. Calibration Framework
                 As with single-family mortgage exposures, FHFA generally calibrated
                the base risk weights and risk multipliers for multifamily mortgage
                exposures to require credit risk capital sufficient to absorb the
                lifetime unexpected losses incurred on multifamily mortgage exposures
                experiencing a shock to property values similar to that observed during
                the 2008 financial crisis. The multifamily-specific stress scenarios
                used to generate the base risk weights and risk multipliers involve two
                parameters: (i) Net operating income (NOI), where NOI represents gross
                potential income (gross rents) net of vacancy and operating expenses,
                and (ii) property values.
                 Adverse economic conditions are generally accompanied by either a
                decrease in expected property revenue or an increase in perceived risk
                in the multifamily asset class, or both. A decrease in expected
                occupancy would lead to a decline in income generated by the property,
                or a lower NOI, while an increase in perceived risk would lead to an
                increase in the capitalization rate used to discount the NOI when
                assessing property value. A capitalization rate is defined as NOI
                divided by property value, so if NOI is held constant, an increase in
                the capitalization rate is directly related to a decrease in property
                values. For the purpose of the proposed rule, the multifamily-specific
                stress scenario assumes an NOI decline of 15 percent and a property
                value decline of 35 percent. This stress scenario is consistent with
                market conditions observed during the recent financial crisis, views
                from third-party market participants and data vendors, and assumptions
                behind the DFAST severely adverse scenario. Using this stress scenario,
                the multifamily grids and multipliers were calibrated based on
                estimates of unexpected losses from the Enterprises' internal models.
                 Question 51. Is the methodology used to calibrate the credit risk
                capital requirements for multifamily mortgage exposures appropriate to
                ensure that the exposure is backed by capital sufficient to absorb the
                lifetime unexpected losses incurred on multifamily mortgage exposures
                experiencing a shock to house prices similar to that observed during
                the 2008 financial crisis?
                 Question 52. What, if any, changes should FHFA consider to the
                methodology for calibrating credit risk capital requirements for
                multifamily mortgage exposures?
                3. Base Risk Weights
                 The proposed rule would require an Enterprise to determine a base
                risk weight for each multifamily mortgage exposure using a set of two
                multifamily grids--one for multifamily mortgage exposures with fixed
                rates (multifamily FRMs), and one for multifamily mortgage exposures
                with adjustable rates (multifamily ARMs). A multifamily mortgage
                exposure that has both a fixed-rate period and an adjustable-rate
                period (hybrid loans) would be deemed a multifamily FRM during the
                fixed-rate period and a multifamily ARM during the adjustable-rate
                period.
                 The multifamily grids reflect two important multifamily mortgage
                exposure characteristics: Debt-service-coverage-ratio (DSCR) and
                MTMLTV. These two risk factors are key drivers of the future
                performance of multifamily mortgage exposures. DSCR is the ratio of
                property NOI to the loan payment. A DSCR greater than 1.0 indicates
                that the property generates funds sufficient to cover the loan
                obligation, while the opposite is true for a DSCR less than 1.0.
                 The multifamily grids are quantitatively identical to the
                multifamily grids in the 2018 proposal, except the credit risk capital
                requirements are presented as base risk weights relative to the 8.0
                percent adjusted total capital requirement rather than as a percent of
                UPB. The multifamily FRM grid was populated using projected unexpected
                losses for a multifamily FRM with varying DSCR and MTMLTV combinations
                and the following risk characteristics: $10 million loan amount, 10-
                year balloon with a 30-year amortization period, non-interest-only, not
                a special product, and never been delinquent or modified. Similarly,
                the multifamily ARM grid was populated using projected unexpected
                losses for a multifamily ARM with varying DSCR and MTMLTV combinations
                and the following risk characteristics: 3.0 percent origination
                interest rate, $10 million loan amount, 10-year balloon with a 30-year
                amortization period, non-interest-only, not a special product, and
                never been delinquent or modified. Thus, each cell of the multifamily
                grid represents the average estimated difference, in basis points,
                between stress losses and expected losses for these synthetic loans
                with a DSCR and LTV in the tabulated ranges, converted to a risk
                weight.
                 For the first five scheduled payment dates after a multifamily
                mortgage exposure is acquired, an Enterprise would use the multifamily
                mortgage exposure's LTV at acquisition or origination to determine the
                base risk weight. After that point, an Enterprise would use the
                multifamily mortgage exposure's MTMLTV, which would be calculated by
                adjusting the acquisition LTV using a multifamily property value index
                or property value estimate based on net operating income and
                capitalization rate indices. Unlike single-family mortgage exposures,
                an Enterprise would not make a countercyclicality adjustment to a
                multifamily mortgage exposure's MTMLTV. For the purposes of the
                multifamily grids, LTV means either MTMLTV or LTV at acquisition or
                origination, and DSCR means either MTMDSCR or DSCR at acquisition,
                depending on the age of the multifamily mortgage exposure.
                 The multifamily grids for the multifamily FRM and multifamily ARM
                segments are presented in the following Table 22 and Table 23,
                respectively.
                BILLING CODE 8070-01-P
                [[Page 39323]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.022
                [GRAPHIC] [TIFF OMITTED] TP30JN20.023
                 In both the multifamily FRM and multifamily ARM grids, the base
                risk weight would increase as DSCR decreases (moving toward the top of
                a grid) and as MTMLTV increases (moving toward the right of the grid).
                Thus, an Enterprise would generally be required to hold more credit
                risk capital for a higher-risk multifamily mortgage exposure with a low
                DSCR and a high MTMLTV (the upper-right corner of each grid) than for a
                lower-risk multifamily mortgage exposure with a high DSCR and a low
                MTMLTV (the lower-left corner of each grid). The DSCR and MTMLTV
                breakpoints and ranges represented along the dimensions of the
                multifamily grids combine to form granular buckets without sacrificing
                simplicity or mortgage risk sensitivity.
                 An Enterprise also would use the multifamily grids to calculate the
                base risk weight for interest-only loans. Interest-only loans allow for
                payment of interest without any principal amortization during all or
                part of the loan term, potentially creating increased amortization risk
                and additional leveraging incentives for the borrower. To partially
                capture these increased risks, the proposed rule would require an
                Enterprise to use an interest-only loan's fully amortized payment to
                calculate DSCR during the interest-only period in order to calculate
                the multifamily mortgage exposure's base risk weight. That is, an
                Enterprise would assign each multifamily interest-only mortgage
                exposure into a multifamily segment, either multifamily FRM or
                multifamily ARM, and calculate the base risk capital requirement using
                the corresponding segment-specific multifamily grid, where the DSCR is
                based on the interest-only loan's fully amortized payment.
                 FHFA received a number of comments on the multifamily grids in the
                2018 proposal. Some commenters stated that the multifamily credit risk
                capital requirements in the 2018 proposal were too high given the
                Enterprises' historical multifamily losses. Similarly, some commenters
                suggested that the credit risk capital required under the 2018
                proposal's multifamily grids might be appropriate if FHFA included
                revenue as a source of
                [[Page 39324]]
                loss-absorbing capital, or if FHFA benchmarked its credit risk capital
                requirements to those published by the National Association of
                Insurance Commissioners (NAIC), which include revenue offsets.
                 After consideration of the commenters' suggestions, FHFA believes
                the calibration of the multifamily grids is appropriate. The base risk
                weights in the multifamily grids represent estimates of lifetime losses
                (net of expected losses), so one should expect the base risk weights in
                the multifamily grids to be larger than observed losses experienced
                during the recent financial crisis. As discussed in Section V.B.1,
                consistent with the 2018 proposal, neither the statutory definitions
                nor the supplemental definitions of regulatory capital include a
                measure of future guarantee fees or other future revenues.
                 One commenter recommended FHFA add granularity to the multifamily
                grids, particularly in the high MTMLTV ranges. FHFA notes that the
                multifamily grids were constructed using synthetic loans at
                acquisition, so data in the high MTMLTV range is limited due to the
                Enterprises' acquisition history. Adding granularity to the outer
                ranges of the multifamily grids would necessitate further assumptions
                and extrapolations.
                 Question 53. Are the base risk weights for multifamily mortgage
                exposures appropriately formulated and calibrated to require credit
                risk capital sufficient to ensure each Enterprise operates in a safe
                and sound manner and is positioned to fulfill its statutory mission
                across the economic cycle?
                 Question 54. Are there any adjustments, simplifications, or other
                refinements that FHFA should consider for the base risk weights for
                multifamily mortgage exposures?
                 Question 55. Should the base risk weight for a multifamily mortgage
                exposure be assigned based on OLTV or MTMLTV of the multifamily
                mortgage exposure, or perhaps on the LTV of the multifamily mortgage
                exposure based on the original purchase price and after adjusting for
                any paydowns of the original principal balance?
                 Question 56. What steps, including any process for soliciting
                public comment on an ongoing basis, should FHFA take to ensure that the
                multifamily grids are updated from time to time as market conditions
                evolve?
                4. Countercyclical Adjustment
                 In contrast to the single-family framework, the proposed
                multifamily credit risk capital framework does not include an
                adjustment to mitigate the pro-cyclicality of the aggregate risk-based
                capital requirements, although FHFA believes such an adjustment could
                be merited. The proposed single-family countercyclical adjustment is
                based on an estimated long-term trend in FHFA's inflation-adjusted all-
                transactions HPI. FHFA does not currently produce a comparable
                multifamily series, and it is unclear whether there is sufficient data
                from which to develop a reliable long-term trend in multifamily
                property values. FHFA is aware of the pro-cyclicality that would be
                introduced by its multifamily credit risk capital framework, and FHFA
                could see considerable merit to a countercyclical or similar
                adjustment. FHFA is soliciting comments on options and available data
                for a countercyclical adjustment to the credit risk capital
                requirements for multifamily mortgage exposures.
                 Question 57. What approach, if any, should FHFA consider to
                mitigate the pro-cyclicality of the credit risk capital requirements
                for multifamily mortgage exposures?
                5. Risk Multipliers
                 As with single-family mortgage exposures, the proposed rule would
                require an Enterprise to adjust the base risk weight for each
                multifamily mortgage exposure to account for additional loan
                characteristics using a set of multifamily-specific risk multipliers.
                The risk multipliers would refine the base risk weights to account for
                risk factors beyond the primary risk factors reflected in the
                multifamily grids, and for variations in secondary risk factors not
                captured in the risk profiles of the synthetic loans used to calibrate
                the multifamily grids. The adjusted risk weight for a multifamily
                mortgage exposure would be the product of the base risk weight and the
                combined risk multiplier.
                 The risk multipliers represent common loan characteristics that
                increase or decrease the projected unexpected losses of a multifamily
                mortgage exposure. Although the specified risk characteristics are not
                exhaustive, they capture key commercial real estate loan performance
                drivers, and are commonly used in commercial real estate loan
                underwriting and rating.
                 The risk multipliers are substantially the same as those of the
                2018 proposal, with some simplifications and refinements. In
                particular, FHFA enhanced the risk multiplier for loan size to
                simultaneously make it more granular and less prone to large jumps in
                credit risk capital from moving from one bracket to the next. FHFA also
                removed the risk multiplier for multifamily loans with a government
                subsidy. The multifamily risk multipliers are presented below in Table
                24.
                [[Page 39325]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.024
                BILLING CODE 8070-01-C
                 As with the single-family risk multipliers, each risk factor could
                take multiple values, and each value or range of values would have a
                risk multiplier associated with it. For any particular multifamily
                mortgage exposure, each risk multiplier could take a value of 1.0,
                above 1.0, or below 1.0. A risk multiplier of 1.0 would imply that the
                [[Page 39326]]
                risk factor value for a multifamily mortgage exposure is similar to, or
                in a certain range of, the particular risk characteristic found in the
                multifamily segment's synthetic loan. A risk multiplier value above 1.0
                would be assigned to a risk factor value that represents a riskier
                characteristic than the one found in the multifamily segment's
                synthetic loan, while a risk multiplier value below 1.0 would be
                assigned to a risk factor value that represents a less risky
                characteristic than the one found in the multifamily segment's
                synthetic loan. Finally, the risk multipliers would be multiplicative,
                so each multifamily mortgage exposure in a multifamily segment would
                receive a risk multiplier for every risk factor pertinent to that
                multifamily segment, even if the risk multiplier is 1.0 (implying no
                change to the base risk weight for that risk factor). The total
                combined risk multiplier for a multifamily mortgage exposure would be,
                in general, the product of all individual risk multipliers pertinent to
                the multifamily segment in which the exposure is classified. The
                proposed multifamily risk multipliers are:
                 Payment performance. The payment performance risk
                multiplier would capture risks associated with historical payment
                performance. Multifamily mortgage exposures would be assigned one of
                four values: Performing, delinquent, re-performing (without
                modification), and modified. A performing loan would be one that has
                never been delinquent in its payments; a delinquent loan would be one
                that is 60 days or more past due; a re-performing loan would be one
                that is current in its payments, but has been delinquent in its
                payments at least once since origination and has cured without
                modification; and a modified loan would be one that is current in its
                payments, but has been modified at least once since origination or has
                gone through a workout plan. An Enterprise would be required to hold
                more credit risk capital for multifamily mortgage exposures that have a
                delinquency and/or modification history than for those that do not.
                Specifically, performing multifamily mortgage exposures would receive a
                risk multiplier of 1.0, while delinquent, re-performing, and modified
                exposures would receive a risk multiplier greater than 1.0.
                 Interest-only. The interest-only risk multiplier would
                capture risks associated with interest-only exposures during the
                interest-only period. Interest-only loans are generally riskier than
                non-interest-only loans, all else equal, and the proposed rule would
                partially account for this increased amortization and leveraging risk
                by requiring an Enterprise to use its fully amortized payments to
                calculate DSCR. Using amortized payment would lower the DSCR, resulting
                in a higher credit risk capital requirement all else equal. In
                addition, the proposed rule would further account for interest-only
                risk with a risk multiplier. Specifically, non-interest-only exposures
                would receive a risk multiplier of 1.0, while interest-only exposures
                would receive a risk multiplier of 1.1 during the interest-only period.
                 Loan term. The loan term risk multiplier would capture
                risks associated with the remaining term of a multifamily mortgage
                exposure. The majority of the Enterprises' multifamily mortgage
                exposures have a loan term of five years or longer, and in general,
                multifamily mortgage exposures with a shorter term are less risky than
                those with a longer term. Multifamily mortgage exposures with shorter
                loan terms carry relatively less uncertainty about eventual changes in
                property performance and future refinancing opportunities, while
                multifamily mortgage exposures with longer loan terms carry relatively
                higher uncertainty about the borrower's ability to refinance in the
                future. In the proposed rule, a 10-year loan term would be considered a
                baseline risk, so exposures with a remaining loan term between 7 years
                and 10 years would receive a risk multiplier of 1.0. The 7- to-10-year
                range represents a conservative range FHFA believes is appropriate.
                Multifamily mortgage exposures with remaining loan terms shorter than 7
                years would receive risk multipliers less than 1.0, and multifamily
                mortgage exposures with remaining loan terms longer than 10 years would
                receive a risk multiplier greater than 1.0. At origination, the
                remaining loan term would equal the original loan term.
                 Original amortization term. The amortization term risk
                multiplier would capture risks associated with the amortization term of
                a multifamily mortgage exposure. In general, a multifamily mortgage
                exposure with a shorter repayment period faces less risk of a borrower
                defaulting on its payments than does a multifamily mortgage exposure
                with a longer repayment period. The most common amortization term for
                multifamily mortgage exposures is 30 years, even though most have an
                original loan term with a balloon payment due earlier, often in 10
                years. While amortization terms can potentially take any value, FHFA
                believes that given the high number of multifamily mortgage exposures
                with an amortization term between 25 and 30 years, the values
                represented in the risk multiplier table would sufficiently account for
                the differences in risk associated with amortization term. In the
                proposed rule, a 30-year amortization term would represent a baseline
                level of risk, and a multifamily mortgage exposure with a 30-year
                amortization term would receive a risk multiplier of 1.0. A multifamily
                mortgage exposure with an amortization term less than 25 years would
                receive a risk multiplier less than 1.0, while a multifamily mortgage
                exposure with an amortization term greater than 30 years would receive
                a risk multiplier of 1.1.
                 Original loan size. Multifamily mortgage exposures with
                larger original loan balances are generally considered less risky than
                those with smaller balances, because larger balances are commonly
                associated with larger investors with more access to capital and
                experience. In addition, the collateral securing a large loan is often
                a larger, more established, and/or newer property. Alternatively,
                multifamily mortgage exposures with smaller original balances are often
                associated with investors with limited funding and smaller, less
                competitive properties. An original loan size of $10 million would
                represent a baseline level of risk, and multifamily mortgage exposures
                meeting that criterion would receive a risk multiplier of 1.0. In a
                change from the 2018 proposal, and in response to commenters that
                recommended FHFA add granularity to the loan size risk multiplier in
                part to avoid large jumps in the credit risk capital requirement when
                moving from one risk multiplier bucket to the next, multifamily
                mortgage exposures above or below $10 million would receive a loan size
                risk multiplier that changes in $1 million increments between $3
                million and $25 million. The loan size risk multipliers in the proposed
                rule were calculated by extrapolating between the loan size risk
                multiplier breakpoints in the 2018 proposal. Multifamily mortgage
                exposures with an original loan balance greater than $10 million would
                receive a risk multiplier less than 1.0, and multifamily mortgage
                exposures with an original loan balance less than $10 million would
                receive a risk multiplier greater than 1.0.
                 Special products. The multifamily special products that
                would receive a multifamily risk multiplier were selected for their
                importance based on FHFA staff analysis and expertise, pursuant to
                discussions with the Enterprises and their collective multifamily
                business experiences, and in recognition of commenter feedback on the
                2018 proposal. The special
                [[Page 39327]]
                products, discussed individually below, are student housing and rehab/
                value-add/lease-up loans.
                 Student housing loans provide financing for the operation of
                apartment buildings for college students. The rental periods for units
                in these properties often correspond to the institution's academic
                calendar, so the properties have a high annual turnover of occupants.
                Student renters, by and large, might not be as careful with the use and
                maintenance of the rental units as more mature households. As a result,
                apartment buildings focusing on student housing customarily have more
                volatile occupancy and less predictable maintenance expenses. In the
                proposed rule, this would imply higher risk, which leads to a risk
                multiplier greater than 1.0 for student housing exposures.
                 The second type of special product includes loans issued to finance
                rehab/value-add/lease-up projects. Rehab and value-add projects refer
                to types of renovations, where a rehab project is a like-for-like
                renovation and a value-add project is one that increases a property's
                value by adding a new feature to an existing property or converts one
                component of a property into a more marketable feature, such as
                converting unused storage units into a fitness center. A lease-up
                property is one that is recently constructed and still in the process
                of securing tenants for occupancy. Recently built properties, and those
                subject to improvements, typically require more intense marketing
                efforts in the early stages of property operation. It often takes
                longer for these properties to reach and stabilize at reasonable
                occupancy levels. These factors elevate the property's risk, which in
                the proposed rule would lead to a risk multiplier greater than 1.0 for
                exposures backing these properties.
                 Although not requiring a risk multiplier, a special type of
                multifamily mortgage exposure contemplated by the proposed rule is a
                supplemental loan. Supplemental loans refer to multifamily loans issued
                to a borrower for a property against which the borrower has previously
                received a loan. There can be more than one supplemental loan for any
                borrower/property combination. These loans, by definition, increase
                loan balances, which lead to higher LTVs and could lead to lower DSCRs,
                which could lead to higher risk. Therefore, the proposed rule would
                require an Enterprise to account for this potentially higher risk by
                recalculating DSCRs and LTVs for the original and supplemental loans
                using combined loan balances and income/payment information. The
                Enterprise would calculate risk weights for the original and
                supplemental loans using the aggregate LTV and DSCR and the separate
                loan characteristics of each loan, with the exception of the loan size
                risk multiplier which would be determined using the aggregate UPB of
                the original loan and all supplemental loans.
                 In a change from the 2018 proposal, the proposed rule would not
                include a risk multiplier for multifamily mortgage exposures with a
                government subsidy. FHFA sought feedback on the government subsidy risk
                multiplier in the 2018 proposal, and commenters recommended FHFA
                consider implementing the risk multiplier based on the level of
                subsidy. FHFA analyzed the available performance data for government-
                subsidized multifamily mortgage exposures, due to the relatively low
                instances of loss across multifamily loan programs that include a
                government subsidy, FHFA determined it was not feasible to accurately
                calibrate thresholds at which the level of government subsidy impacted
                the probability of loss occurring or the severity of that loss. As a
                result of that analysis, FHFA has determined to take the approach of
                eliminating the government subsidy risk multiplier from the proposed
                rule to avoid instances where a loan with a limited subsidy would
                qualify for the risk multiplier.
                 FHFA received several additional comments on the multifamily risk
                multipliers in the 2018 proposal. Two commenters recommended FHFA add
                granularity to the interest-only risk multiplier, with one commenter
                suggesting gradations be added to the risk multiplier for the length of
                the interest-only term, or at least a differentiation for a partial
                interest-only versus a full interest-only. FHFA is proposing the
                interest-only risk multiplier as in the 2018 proposal because FHFA
                continues to believe in the validity of the analysis supporting the
                interest-only risk multiplier. In that analysis, historical data with
                which to calibrate an interest-only risk multiplier by interest-only
                term length was limited, and feedback from the industry participants
                with whom FHFA consulted disagreed as to the nature of a more granular
                risk multiplier. Another commenter recommended FHFA add risk
                multipliers for additional product types such as construction and mod-
                rehab loans, for loan features such as cross-collateralization, and for
                non-financial structural terms such as borrower covenants. While FHFA
                acknowledges different product types and features may represent
                differential levels of risk, the risk multipliers were selected in part
                due to data availability, and in part because FHFA concluded that the
                risk multipliers would represent a simple and transparent way to adjust
                the base capital requirements for the most important multifamily risks
                faced by an Enterprise in a regulatory capital framework.
                 Question 58. Are the risk multipliers for multifamily mortgage
                exposures appropriately formulated and calibrated to require credit
                risk capital sufficient to ensure each Enterprise operates in a safe
                and sound manner and is positioned to fulfill its statutory mission
                across the economic cycle?
                 Question 59. Are there any adjustments, simplifications, or other
                refinements that FHFA should consider for the risk multipliers for
                multifamily exposures?
                 Question 60. Should the combined risk multiplier for a multifamily
                mortgage exposure be subject to a floor or a cap?
                6. Minimum Adjusted Risk Weight
                 The 2018 proposal acknowledged that combinations of overlapping
                characteristics could potentially result in unduly low credit risk
                capital requirements for certain multifamily mortgage exposures. Under
                the 2018 proposal, the Enterprises were required to impose a floor of
                0.5 to any combined multifamily risk multiplier. FHFA has taken a
                somewhat different approach in the proposed rule. As for single-family
                mortgage exposures, the proposed rule would establish a floor on the
                adjusted risk weight for a multifamily mortgage exposure equal to 15
                percent.
                 First, as discussed in Section IV.B, a risk weight floor is
                appropriate to mitigate certain risks and limitations associated with
                the underlying historical data and models. These risks include the
                potential that crisis-era losses were mitigated by the unprecedented
                federal government support of the economy and the impact of lower
                interest rates. In addition, they include potentially material risks
                that are not assigned a risk-based requirement, for example those that
                might arise from natural or other disasters.
                 Second, comparison to the U.S. banking framework's credit risk
                capital requirements for similar exposures contributed to FHFA's view
                that a risk weight floor is appropriate, while also raising important
                questions as to the sizing of that risk weight floor. As of September
                30, 2019, with the proposed 15 percent risk weight floor, the average
                pre-CRT net credit risk capital requirement on the Enterprises'
                multifamily mortgage exposures would have been 4.1 percent of unpaid
                [[Page 39328]]
                principal balance, implying an average risk weight of 51 percent. That
                51 percent average risk weight is only modestly greater than the 50
                percent average risk weight without the floor. The U.S. banking
                framework generally assigns a 100 percent risk weight to multifamily
                mortgage exposures to determine the credit risk capital requirement
                (equivalent to an 8.0 percent adjusted total capital requirement),
                although some multifamily mortgage exposures are eligible for a 50
                percent risk weight. Before adjusting for the capital buffers under the
                proposed rule and the U.S. banking framework, the Enterprises' credit
                risk capital requirements for multifamily mortgage exposures would have
                been roughly half that of the default risk weight under the U.S.
                banking framework.
                 This comparison is complicated by the fact that the 51 percent
                average risk weight reflects adjustments for MTMLTV. In particular,
                some meaningful portion of the gap currently between the credit risk
                capital requirements of the Enterprises and U.S. banking organizations
                under the proposed rule is due to the proposed rule's use of MTMLTV
                instead of OLTV, as under the U.S. banking framework, to assign credit
                risk capital requirements for mortgage exposures. In a different
                economic environment, perhaps after several years of declining
                multifamily property prices, the mark-to-market framework could have
                resulted in higher credit risk capital requirements than the U.S.
                banking framework.\71\
                ---------------------------------------------------------------------------
                 \71\ In consideration that the U.S. banking framework utilizes
                OLTVs, a comparison of the credit risk capital requirements for
                newly acquired multifamily mortgage exposures under the 2018
                proposal and the proposed rule provides the most direct comparison
                of credit risk capital requirements for new originations. Under the
                proposed rule, gross credit risk capital (prior to adjustments for
                CRT) on newly acquired multifamily mortgage exposures as of
                September 30, 2019, with an average MTMLTV of approximately 67
                percent, would have been approximately 5.3 percent of unpaid
                principal balance, implying an average risk weight of 67 percent.
                This compares to the 100 percent default risk weight generally
                applicable under the U.S. banking framework. These risk weights
                would then decline to the extent multifamily property prices
                appreciate or increase to the extent multifamily property prices
                depreciate.
                ---------------------------------------------------------------------------
                 However, the current gap between the credit risk capital
                requirements of U.S. banking organizations and the Enterprises under
                the proposed rule is still informative to the calibration of an
                appropriate risk weight floor. FHFA sized the 15 percent risk weight
                floor to mirror the risk weight floor for single-family mortgage
                exposures. FHFA is soliciting comment on that sizing, in particular
                whether a multifamily-specific risk-weight floor might be more
                appropriate.
                 Question 61. Is the minimum floor on the adjusted risk weight for a
                multifamily mortgage exposure appropriately calibrated to mitigate
                model and related risks associated with the calibration of the
                underlying base risk weights and risk multipliers and to otherwise
                ensure each Enterprise operates in a safe and sound manner and is
                positioned to fulfill its statutory mission across the economic cycle?
                 Question 62. Should the minimum floor on the adjusted risk weight
                for a multifamily mortgage exposure be decreased or increased, perhaps
                to align the minimum floor with the more risk-sensitive standardized
                risk weights assigned to similar exposures under the Basel or U.S.
                banking framework?
                 Question 63. Should the risk weight floor for a multifamily
                mortgage exposure be different from the risk weight floor for a single-
                family mortgage exposure?
                 Question 64. Should the floor or other limit used to determine a
                multifamily mortgage exposure's credit risk capital requirement be
                assessed against the base risk weight, the risk weight adjusted for the
                risk multipliers, or some other input used to determine that credit
                risk capital requirement?
                C. CRT and Other Securitization Exposures
                1. Background
                a. PLS and CMBS Investments
                 The Enterprises have exposure to PLS and commercial mortgage-backed
                securities (CMBS) to the extent that they invest in PLS or CMBS or
                guarantee PLS or CMBS that have been re-securitized by an Enterprise.
                In the lead up to the 2008 financial crisis, each Enterprise
                substantially increased its investments in PLS, and those PLS
                investments were a source of a meaningful portion of each Enterprise's
                initial crisis-era capital exhaustion. The Enterprises have not
                acquired material amounts of PLS since 2008. However, the Enterprises
                do retain some relatively small amount of legacy PLS, and each
                Enterprise might acquire PLS in the future, subject to any regulations
                that FHFA may prescribe. The proposed rule therefore contemplates
                regulatory capital requirements for the credit, spread, and operational
                risk posed by these PLS and CMBS exposures.
                b. Single-Family CRT
                 CRT transactions provide credit protection beyond that provided by
                loan-level credit enhancements. CRT can be viewed as an Enterprise
                paying a portion of its guarantee fee as a cost of transferring credit
                risk to private sector investors. To date, single-family CRT have
                included transferring expected and unexpected losses. The Enterprises
                have developed a variety of single-family CRT product types, including
                structured debt issuances (known as Structured Agency Credit Risk
                (STACR) for Freddie Mac and Connecticut Avenue Securities (CAS) for
                Fannie Mae), insurance/reinsurance transactions (known as Agency Credit
                Insurance Structure (ACIS) for Freddie Mac and Credit Insurance Risk
                Transfer (CIRT) for Fannie Mae), and senior-subordinate securities.
                 The STACR and CAS securities account for the majority of single-
                family CRT to date. These securities are issued as notes from a trust
                and do not constitute the sale of mortgage loans or their cash flows.
                Instead, STACR and CAS are considered to be synthetic notes because
                their cash flows are determined by the credit risk performance of a
                notional reference pool of mortgage loans. For the STACR and CAS
                transactions, the Enterprises receive the proceeds of the note issuance
                at the time of sale to investors. The Enterprises pay interest to
                investors on a monthly basis and allocate principal to investors based
                on the repayment and credit performance of the single-family mortgage
                exposures in the underlying reference pool. Investors ultimately
                receive a return of their principal, less any covered credit losses.
                The transactions are fully collateralized since investors pay for the
                notes in full. Thus, the Enterprises do not bear any counterparty
                credit risk on debt transactions.
                 Pool-level reinsurance transactions such as CIRT and ACIS, which
                generally cover hundreds or thousands of single-family mortgage loans,
                are considered CRT. Pool insurance transactions are typically
                structured with an aggregated loss amount. The Enterprises, as policy
                holders, typically retain some portion (or all) of the first loss. The
                cost of pool-level insurance is generally paid by the Enterprise, not
                the lender or borrower. In general, an Enterprise may bear counterparty
                credit risk because insurance transactions are not fully
                collateralized. This counterparty credit risk may be somewhat
                mitigated, however, by conducting transactions with diversified
                reinsurers that have books of business that may be less correlated with
                the Enterprises or with insurers in compliance with an Enterprise's
                insurer eligibility standards.
                 In a senior-subordinate (senior-sub) securitization, the Enterprise
                sells a
                [[Page 39329]]
                pool of single-family mortgage exposures to a trust that securitizes
                cash flows from the pool into several tranches of bonds, similar to PLS
                transactions. The subordinated bonds, also called mezzanine and first-
                loss bonds, provide the credit protection for the senior bond. Unlike
                STACR and CAS, the bonds created in a senior-sub transaction are MBS,
                not synthetic securities. In addition, unlike typical MBS issued by the
                Enterprises, generally only the senior tranche is guaranteed by the
                Enterprise.
                 Historically the Enterprises have also engaged in front-end (or
                upfront) lender risk sharing transactions similar to CRT, but the
                single-family lender risk sharing programs will be discontinued by
                year-end 2020.
                c. Multifamily CRT
                 The Enterprises also reduce the credit risk on their multifamily
                guarantee books of business by transferring and sharing risk through
                multifamily CRT. As discussed in Section VIII.B.1, the Enterprises have
                historically operated different multifamily business models, which has
                led to the utilization of two broad types of multifamily CRT: Loss
                sharing and securitizations. Within each type, individual CRT
                transactions can have unique structures. The proposed rule's approach
                would be general enough to accommodate the full range of multifamily
                CRT currently utilized by the Enterprises.
                 The loss sharing CRT structure is a front-end risk transfer, which
                is defined as a CRT an Enterprise enters into with a lender before the
                lender delivers the loan to the Enterprise. The Enterprise and lender
                share future losses according to a specified arrangement, commonly from
                the first dollar of loss, and in exchange the lender is compensated for
                taking on credit risk. Because these transactions are not always fully
                collateralized, a loss sharing CRT generally exposes the Enterprise to
                counterparty credit risk.
                 In the multiclass securitization CRT structure, an Enterprise sells
                a pool of multifamily mortgage exposures to a trust that securitizes
                cash flows from the pool into several tranches of bonds. The
                subordinated bonds, also called mezzanine and first-loss bonds, are
                sold to market participants. These subordinated bonds provide credit
                protection for the senior bond, which is the only tranche that is
                guaranteed by the Enterprise. These sales typically result in a
                significant transfer of the credit risk on the underlying multifamily
                mortgage exposures.
                 In addition to, and often on top of, loss sharing and
                securitization CRT structures, the Enterprises also transfer
                multifamily credit risk using reinsurance CRT transactions. In these
                back-end transactions, such as Fannie Mae's CIRT program, an Enterprise
                enters into agreements with third parties to cover losses on a pool of
                multifamily mortgage exposures up to a certain percentage. The
                Enterprise, as policy holder, typically retains some portion (or all)
                of the first losses on the pool and compensates the third parties,
                generally reinsurers, for bearing subsequent losses up to a detachment
                point. To the extent that these deals are not fully collateralized, the
                proposed rule would increase an Enterprise's post-deal exposure to
                reflect counterparty risk.
                2. PLS and Other Non-CRT Securitization Exposures
                 As contemplated by the 2018 proposal, an Enterprise would determine
                its credit risk capital requirement for PLS and other securitization
                exposures under a securitization framework that would be substantially
                the same as that of the U.S. banking framework. As discussed in Section
                VIII.C.3, an Enterprise may elect to determine its credit risk capital
                requirement for a retained CRT exposure under a somewhat different
                framework, even if that retained CRT exposure might be similar to an
                exposure to a traditional or synthetic securitization under the
                securitization framework.
                 The exposure amount of an Enterprise's on-balance sheet
                securitization exposure generally would be the carrying value of the
                exposure, while the exposure amount of an off-balance sheet
                securitization exposure generally would be the notional amount of the
                exposure.\72\
                ---------------------------------------------------------------------------
                 \72\ For both on- and off-balance sheet securitization
                exposures, there would be special rules for determining the exposure
                amount and risk weights for repo-style transactions, eligible margin
                loans, OTC derivative contracts, and derivatives that are cleared
                transactions (other than credit derivatives).
                ---------------------------------------------------------------------------
                 An Enterprise generally would assign a risk weight for a PLS or
                other securitization exposure using the simplified supervisory formula
                approach (SSFA). Pursuant to the SSFA, an Enterprise would determine
                the risk weight for a securitization exposure using a formula that is
                based, among other things, on the subordination level of the
                securitization exposure and the adjusted aggregate credit risk capital
                requirement of the underlying exposures. A 1,250 percent risk weight
                would be assigned to any securitization exposure that absorbs losses up
                to the adjusted aggregate credit risk capital requirement of the
                underlying exposures. After that point, the risk weight for a
                securitization exposure would be assigned pursuant to an exponential
                decay function that decreases as the detachment point or attachment
                point increases, subject to a minimum risk weight of 20 percent.
                 At the inception of a securitization, the SSFA's exponential decay
                function for risk weights, together with the 20 percent risk weight
                floor, would require more regulatory capital on a transaction-wide
                basis than would be required if the underlying exposures had not been
                securitized. That is, if the Enterprise held every tranche of a
                securitization, its overall regulatory capital requirement would be
                greater than if the Enterprise owned all of the underlying exposures.
                Like the U.S. banking regulators, FHFA believes this outcome is
                important to reduce regulatory capital arbitrage through
                securitizations and to manage the structural and other risks that might
                be posed by a securitization.\73\
                ---------------------------------------------------------------------------
                 \73\ See Regulatory Capital Rules: Regulatory Capital,
                Implementation of Basel III, Capital Adequacy, Transition
                Provisions, Prompt Corrective Action, Standardized Approach for
                Risk-weighted Assets, Market Discipline and Disclosure Requirements,
                Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
                Rule, 78 FR 62018, 62119 (Oct. 11, 2013) (hereinafter Joint Agency
                Regulatory Capital Final Rule) (``At the inception of a
                securitization, the SSFA requires more capital on a transaction-wide
                basis than would be required if the underlying assets had not been
                securitized. That is, if the banking organization held every tranche
                of a securitization, its overall capital requirement would be
                greater than if the banking organization held the underlying assets
                in portfolio. The agencies believe this overall outcome is important
                in reducing the likelihood of regulatory capital arbitrage through
                securitizations.'').
                ---------------------------------------------------------------------------
                3. Retained CRT Exposures
                a. Assessment Framework
                 As discussed in the 2018 proposal, FHFA has established certain
                core principles to guide the developments of the Enterprises' CRT
                programs. Each CRT must transfer a meaningful amount of credit risk to
                private investors to reduce risk to the Enterprises, and the cost of
                the CRT must be economically sensible. In addition, a CRT must not
                interfere with the Enterprise's core business, including the ability of
                borrowers to access credit. The CRT programs have been intended to
                attract a broad investor base, be scalable, and incorporate a regular
                program of issuances. In transactions where credit risk may not be
                fully collateralized, the CRT counterparties must be financially
                strong, post collateral for a portion of their exposure, and be
                expected to fulfill
                [[Page 39330]]
                their commitments in adverse market conditions.
                 FHFA has continued to refine the assessment framework based on its
                understanding of the safety and soundness risks and limits relating to
                the effectiveness of CRT in transferring credit risk on the underlying
                exposures. Commenters on the 2018 proposal argued that CRT has less
                loss-absorbing capacity than an equivalent amount of equity financing.
                FHFA agrees that CRT transfers credit risk only on a specified
                reference pool, while equity financing is available to ``cross cover''
                credit risk on other exposures of the Enterprise. FHFA also agrees that
                CRT transfers only credit risk, while equity financing can absorb
                losses arising from operational and market risks. Related to this, an
                Enterprise generally may pause distributions on equity financing during
                a financial stress but typically must continue debt service or other
                payments on CRT instruments. Therefore, equity financing provides more
                robust safety and soundness benefits across exposures and risks than a
                similar amount of credit exposure transferred through CRT.
                 One of the lessons of the 2008 financial crisis is that
                securitization structures, especially complex securitizations, might
                not perform as expected during a financial stress, with some large
                banking organizations even electing to reconsolidate some of their
                securitizations.\74\ Similarly, there might be unique legal risks posed
                by the contractual terms of CRT structures and by the practices
                associated with contractual enforcement. While the 2018 proposal
                already contemplated reductions to the capital relief provided by a CRT
                based on the counterparty risk and maturity-related risk of CRT, FHFA
                agrees that there are structural and other risks that were not
                reflected in those adjustments that could further limit the
                effectiveness of CRT in transferring credit risk. FHFA continues to
                look to opportunities to enhance its framework for assessing the
                Enterprises' CRT programs to mitigate these safety and soundness risks.
                ---------------------------------------------------------------------------
                 \74\ See Risk-Based Capital Guidelines; Capital Adequacy
                Guidelines; Capital Maintenance: Regulatory Capital; Impact of
                Modifications to Generally Accepted Accounting Principles;
                Consolidation of Asset-Backed Commercial Paper Programs; and Other
                Related Issues, 74 FR 47138, 47142 (Sept. 15, 2009) (``In the case
                of some structures that banking organizations were not required to
                consolidate prior to the 2009 GAAP modifications, the recent turmoil
                in the financial markets has demonstrated the extent to which the
                credit risk exposure of the sponsoring banking organization to such
                structures (and their related assets) has in fact been greater than
                the agencies estimated, and more associated with non-contractual
                considerations than the agencies had expected. For example, recent
                performance data on structures involving revolving assets show that
                banking organizations have often provided non-contractual (implicit)
                support to prevent senior securities of the structure from being
                downgraded, thereby mitigating reputational risk and the associated
                alienation of investors, and preserving access to cost-effective
                funding.''); see also FCIC Report at 246, available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (``When the
                mortgage securities market dried up and money market mutual funds
                became skittish about broad categories of ABCP, the banks would be
                required under these liquidity puts to stand behind the paper and
                bring the assets onto their balance sheets, transferring losses back
                into the commercial banking system. In some cases, to protect
                relationships with investors, banks would support programs they had
                sponsored even when they had made no prior commitment to do so.'');
                see also FCIC Report at 138-139 (``The events of 2007 would reveal
                the fallacy of those assumptions and catapult the entire $25 billion
                in commercial paper straight onto the bank's balance sheet,
                requiring it to come up with $25 billion in cash as well as more
                capital to satisfy bank regulators.'').
                ---------------------------------------------------------------------------
                 Besides safety and soundness, FHFA's assessment framework also
                considers the extent to which an Enterprise's CRT program could limit
                the Enterprise's ability to fulfill its statutory mission to provide
                stability and ongoing assistance to the secondary mortgage market
                across the economic cycle. As discussed in the 2018 proposal, a
                financial stress could reduce investor demand for, or increase the cost
                of, new CRT issuances or undermine the financial strength of some
                existing CRT counterparties. The pro-cyclicality of some CRT structures
                could adversely impact an Enterprise's ability to support the secondary
                mortgage market if an Enterprise were not to have sufficient equity
                financing to support new acquisitions of mortgage exposures. To fulfill
                its mission, an Enterprise should avoid overreliance on CRT and should
                maintain at least enough equity capital to support new originations
                during a period of financial stress, when new CRT issuances might not
                be available. For these and other reasons, capital relief for CRT under
                the 2018 proposal did not extend to the going- concern buffer, and the
                proposed rule also would not provide CRT capital relief for the capital
                conservation buffer.
                 FHFA's assessment framework also seeks to prevent each Enterprise's
                CRT program from undermining the liquidity, efficiency,
                competitiveness, or resiliency of the national housing finance markets.
                Some CRT structures might tend to increase the leverage in the housing
                finance system, especially to the extent some CRT investors themselves
                rely on short-term debt funding. The disruption in the CRT markets
                during the recent COVID-19-related financial stress might have been
                driven in part by leveraged market participants that had invested in
                CRT rapidly de-levering when confronted by margin calls on short-term
                financing.
                b. Enhancements to the 2018 Proposal
                 FHFA is proposing enhancements to the 2018 proposal's regulatory
                capital treatment of CRT to refine its balancing of the safety and
                soundness benefits of CRT against the potential safety and soundness,
                mission, and housing market stability risks that might be posed by CRT.
                 Consistent with the U.S. banking framework, FHFA is proposing
                operational criteria to mitigate the risk that the terms or structure
                of the CRT would not be effective in transferring credit risk. FHFA's
                proposed operational criteria would provide capital relief on a CRT
                only if certain conditions are satisfied, including:
                 The CRT is of a category of CRT structures that has been
                approved by FHFA as effective in transferring credit risk.
                 The terms and conditions in the CRT do not include
                provisions that might undermine the effectiveness of the transfer of
                the credit risk (e.g., by allowing for the termination of the CRT due
                to deterioration in the credit quality of the underlying exposures).
                 Clean-up calls relating to the CRT are limited to
                specified circumstances.
                 The Enterprise publicly discloses--
                 [cir] The material recourse or other risks that might reduce the
                effectiveness of the CRT in transferring credit risk; and
                 [cir] Each operational criterion for a traditional securitization
                or a synthetic securitization that is not satisfied by the CRT and the
                reasons that each such condition is not satisfied.
                 These operational criteria for CRT are less restrictive than those
                applicable to traditional or synthetic securitizations under the U.S.
                banking framework. For example, a senior/subordinated structure need
                not be off-balance sheet under GAAP, as required for traditional
                securitizations under the U.S. banking framework, while a financial
                guarantee need not be provided by a company that is not predominantly
                engaged in the business of providing credit protection, as required for
                an eligible guarantee under the U.S. banking framework. To partially
                mitigate the safety and soundness risks posed by this less restrictive
                approach, FHFA would require an Enterprise to publicly disclose
                material risks to the effectiveness of the CRT so as to foster market
                discipline and FHFA's supervision and regulation. FHFA is also seeking
                comment on other operational criteria it might adopt for CRT.
                [[Page 39331]]
                 FHFA is also proposing to prescribe the regulatory capital
                consequences of an Enterprise providing support to a CRT in excess of
                the Enterprise's pre-determined contractual obligations. As under the
                U.S. banking framework, if an Enterprise provides implicit support for
                a CRT, the Enterprise would be required to include in its risk-weighted
                assets all of the underlying exposures associated with the CRT as if
                the exposures were not covered by the CRT. The Enterprise also would be
                required to disclose publicly (i) that it has provided implicit support
                to the CRT and (ii) the risk-based capital impact to the Enterprise of
                providing that implicit support. These requirements are intended to
                discourage an Enterprise from providing implicit support during a
                financial stress or otherwise, for example by providing financing to
                CRT investors or by repurchasing CRT exposures during a financial
                stress.
                 Generally consistent with the U.S. banking framework, FHFA also is
                proposing a prudential floor of 10 percent on the risk weight assigned
                to any retained CRT exposure. Under the 2018 proposal, a retained CRT
                exposure with a detachment point less than the net credit risk capital
                requirement of the underlying mortgage exposures would, in effect, have
                had a risk weight of 1,250 percent, while a retained exposure with an
                attachment point only marginally greater than that net credit risk
                capital requirement would have had a risk weight of 0 percent. A
                retained CRT exposure with an attachment point just beyond that cut-off
                point likely still would pose some credit risk as a result of the model
                risks associated with the calibration of the credit risk capital
                requirement of the underlying exposures, and also the risk that a CRT
                will not perform as expected in transferring credit risk to third
                parties.\75\ The prudential floor for a retained CRT exposure avoids
                treating that exposure as posing no credit risk.
                ---------------------------------------------------------------------------
                 \75\ For these and other reasons, the Basel and U.S. banking
                frameworks impose a prudential floor on the risk weight for any
                securitization exposure. BCBS, Revisions to the Securitisation
                Framework Consultative Document at 17 (Dec. 2013; final July 2016),
                available at https://www.bis.org/publ/bcbs269.pdf. (``The objectives
                of a risk-weight floor are: [m]itigate concerns related to incorrect
                model specifications and error from banks' estimates of inputs to
                capital formulas ([i.e.] model risk); and [r]educe the variation in
                outcomes for similar risks.'').
                ---------------------------------------------------------------------------
                 The 10 percent minimum risk weight is less than the 20 percent
                minimum risk weight under the U.S. banking framework for securitization
                exposures. FHFA's sizing of the minimum risk weight seeks to strike an
                appropriate balance between permitting CRT while also mitigating the
                safety and soundness, mission, and housing stability risk that might be
                posed by some CRT. FHFA is soliciting comment on whether to align the
                risk weight floor for retained CRT exposures with the various different
                floors for securitizations exposures under the Basel and U.S. banking
                frameworks.
                 Finally, FHFA is proposing refinements to the adjustments to the
                regulatory capital treatment of CRT for the counterparty, loss-timing,
                and other risks that a CRT might not be effective in transferring
                credit risk to third parties. As discussed in Section VIII.C.3.c, FHFA
                is proposing to refine the 2018 proposal's adjustments for counterparty
                risk and loss-timing risk, and proposing to add a general adjustment
                for the differences between CRT and regulatory capital. These CRT-
                specific adjustments do introduce some complexity, and as discussed in
                Section VIII.C.3.d, FHFA is also soliciting comment on an alternative
                approach based on the U.S. banking framework's SSFA that is simpler but
                also less tailored.
                 Under either FHFA's proposed or alternative approach, at the
                inception of a CRT, FHFA generally would require more credit risk
                capital on a transaction-wide basis than would be required if the
                underlying mortgage exposures had not been made subject to a CRT. That
                is, if an Enterprise held every tranche of a CRT, its credit risk
                capital requirement on the retained CRT exposures generally would be
                greater than the credit risk capital requirement of the underlying
                mortgage exposures. As under the securitization framework, this
                departure from strict capital neutrality is important to manage the
                potential safety and soundness risks of CRT. This approach would help
                mitigate the model risk associated with the calibration of the credit
                risk capital requirements of the underlying exposures and also the
                model risk posed by the calibration of the adjustments for loss-timing
                and counterparty risks.\76\ Complex CRT also may pose structural risk
                and other risks that merit a departure from capital neutrality.\77\
                This departure from capital neutrality also is important to reducing
                the likelihood of regulatory capital arbitrage through CRT.\78\
                ---------------------------------------------------------------------------
                 \76\ BCBS, Revisions to the Securitisation Framework
                Consultative Document at 4 (Dec. 2013; final July 2016), available
                at https://www.bis.org/publ/bcbs269.pdf. (``Capital requirements
                should be calibrated to reasonably conservative standards. This
                requires the framework to account for the model risk of determining
                the risks of specific exposures. Models for securitisation tranche
                performance depend in turn on models for underlying pools. In
                addition, securitisations have a wide range of structural features
                that do not exist for banks holding the underlying pool outright and
                that are impossible to capture in models. This layering of models
                and simplifying assumptions can exacerbate model risk, justifying a
                rejection of a strict ``capital neutrality'' premise ([i.e.] the
                total capital required after securitisation should not be identical
                to the total capital before securitisation).'').
                 \77\ BCBS, Revisions to the Securitisation Framework at 6 (Dec.
                2014; rev. July 2016), available at https://www.bis.org/bcbs/publ/d374.pdf (``All other things being equal, a securitisation with
                lower structural risk needs a lower capital surcharge than a
                securitisation with higher structural risk; and a securitisation
                with less risky underlying assets requires a lower capital surcharge
                than a securitisation with riskier underlying assets.'').
                 \78\ See Joint Agency Regulatory Capital Final Rule, 78 FR at
                62119 (``At the inception of a securitization, the SSFA requires
                more capital on a transaction-wide basis than would be required if
                the underlying assets had not been securitized. That is, if the
                banking organization held every tranche of a securitization, its
                overall capital requirement would be greater than if the banking
                organization held the underlying assets in portfolio. The agencies
                believe this overall outcome is important in reducing the likelihood
                of regulatory capital arbitrage through securitizations.'').
                ---------------------------------------------------------------------------
                 One implication of departing from capital neutrality is that an
                Enterprise might have some existing CRT structures for which the
                aggregate credit risk capital requirement of the retained CRT exposures
                actually would be greater than the aggregate credit risk capital
                requirement of the underlying exposures. This outcome might be more
                likely, all else equal, where the underlying exposures have a lower
                average risk weight, for example, a CRT with respect to seasoned
                single-family mortgage exposures. As under the U.S. banking framework,
                an Enterprise may elect to not recognize a CRT for purposes of the
                credit risk capital requirements and instead hold risk-based capital
                against the underlying exposures. FHFA has assumed for purposes of the
                proposed rule that an Enterprise would make this election in those
                cases where the aggregate credit risk capital requirement of the
                underlying exposures is less than that of the retained CRT exposures.
                 Question 65. What changes, if any, should FHFA consider to the
                operational criteria for CRT?
                 Question 66. What changes, if any, should FHFA consider to the
                regulatory consequences of an Enterprise providing implicit support to
                a CRT?
                 Question 67. Is the 10 percent prudential floor on the risk weight
                for a retained CRT exposure appropriately calibrated?
                 Question 68. Should FHFA increase the prudential floor on the risk
                weight for a retained CRT exposure, for example so that it aligns with
                the 20
                [[Page 39332]]
                percent minimum risk weight under the U.S. banking framework?
                 Question 69. Should FHFA take a different approach to an
                Enterprise's existing CRT?
                c. Adjustments to CRT Capital Relief
                 The proposed rule would implement a framework through which an
                Enterprise would determine its credit risk-weighted assets for any
                retained CRT exposures and any other credit risk that might be retained
                on its CRT. An Enterprise would calculate credit risk-weighted assets
                for retained credit risk in a CRT using risk weights and exposure
                amounts for each CRT tranche. The exposure amount of the retained CRT
                exposures for each tranche would be increased by adjustments to reflect
                counterparty credit risk and the length of CRT coverage (i.e.,
                remaining time until maturity). The proposed rule would also set a
                credit risk capital requirement floor for retained risk effectuated
                through a tranche-level risk weight floor.
                 In addition, the approach would reduce the risk-weighted assets for
                risk sold by 10 percent to account for the fact that CRT transactions
                do not provide the same protection as regulatory capital. As discussed
                by several commenters on the 2018 proposal, the credit protection from
                a CRT is not fungible to cover losses on other exposures. Furthermore,
                during a financial stress the Enterprises can stop equity dividend
                payments whereas the cost of CRT credit protection, in many cases, is
                an ongoing liability. Therefore, for each tranche, an Enterprise would
                reduce the risk-weighted assets assigned to private investors or
                covered by a loss sharing agreement by 10 percent and add the reduction
                to the Enterprise's apportioned exposure amount in the tranche.
                 Overall, the proposed rule would require each Enterprise to hold
                either: (i) Credit risk capital on any credit risk which it has
                retained or to which it is otherwise exposed (including non-
                transferable counterparty credit risk on the CRT's underlying mortgage
                exposures); or (ii) the aggregate credit risk capital on the CRT's
                underlying mortgage exposures. If the Enterprise chooses the former,
                then in general, an Enterprise would be required to hold less
                regulatory capital for CRT transactions that provide coverage (i) on a
                higher percentage of unexpected losses, (ii) for a longer period, and
                (iii) with lower levels of counterparty credit risk.
                 The following example provides an illustration of the proposed
                rule's capital requirements if an Enterprise elects to hold capital
                against the credit risk from its retained CRT exposures. Consider the
                following inputs from an illustrative CRT (see Figure 3):
                 $1,000 million in unpaid principal balance of performing
                30-year fixed rate single-family mortgage exposures with OLTVs greater
                than 60 percent and less than or equal to 80 percent;
                 CRT coverage term of 10 years;
                 Three tranches--B, M1, and AH--where tranche B attaches at
                0% and detaches at 0.5%, tranche M1 attaches at 0.5% and detaches at
                4.5%, and tranche AH attaches at 4.5% and detaches at 100%;
                 Tranches B and AH are retained by the Enterprise, and
                ownership of tranche M1 is split between capital markets (60 percent),
                a reinsurer (35 percent), and the Enterprise (5.0 percent);
                 The aggregate credit risk-weighted assets on the single-
                family mortgage exposures underlying the CRT are $343.8 million;
                 Aggregate expected losses on the single-family mortgage
                exposures underlying the CRT of $2.5 million; and
                 The reinsurer posts $2.8 million in collateral, has a
                counterparty financial strength rating of 3, and does not have a high
                level of mortgage concentration risk.
                [[Page 39333]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.025
                 The Enterprises would first calculate the risk weights for each
                tranche assuming full effectiveness of the CRT in transferring credit
                risk on the underlying mortgage exposures. In general, tranche risk
                weights are the highest for the riskiest, most junior tranches (such as
                tranche B), and lower for the more senior tranches (such as tranches M1
                and AH). For the illustrative CRT, the overall risk weights for
                tranches AH, M1, and B are 10%, 781%, and 1,250%, where 10% reflects
                the minimum risk weight.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.026
                where
                [[Page 39334]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.027
                 Next, the Enterprise would calculate the adjusted exposure amount
                of its retained CRT exposures to reflect the effectiveness of the CRT
                in transferring credit risk on the underlying mortgage exposures. For
                the illustrative CRT, tranches AH and B are retained by the Enterprise,
                and do not need further adjustment. Risk associated with tranche M1 is
                transferred through a capital markets transaction and a loss sharing
                agreement. Risk transfer on this tranche is subject to the following
                three effectiveness adjustments, which are reflected in the
                Enterprise's adjusted exposure amount: Loss sharing effectiveness
                adjustment (LSEA), loss timing effectiveness adjustment (LTEA), and
                overall effectiveness adjustment (OEA).
                 To account for the effectiveness of loss sharing on tranche M1, the
                proposed rule would adjust its exposure amount on tranche M1 to reflect
                the retention of some of the counterparty credit risk that was
                nominally transferred to the counterparty. The proposed rule adjusts
                effectiveness for (i) uncollateralized unexpected loss (UnCollatUL) and
                (ii) uncollateralized risk-in-force above stress loss (SRIF). For the
                illustrative CRT, the counterparty haircut is 5.2% as per the proposed
                single-family CP haircuts, from Table 21, UnCollatUL is 42.5%, and SRIF
                is 37.5%. The proposed rule's LTEA on tranche M1 would be 96.4%.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.028
                where
                [GRAPHIC] [TIFF OMITTED] TP30JN20.029
                 To account for effectiveness from the timing of coverage, the
                proposed rule would adjust the Enterprise's exposure amount for tranche
                M1 to reflect the retention of some loss timing risk that was nominally
                transferred. The loss timing factor addresses the mismatch between
                lifetime losses on the 30-year fixed-rate single-family mortgage
                exposures underlying the CRT and the CRT's coverage. The loss timing
                factor for the illustrative CRT with 10 years of coverage and backed by
                30-year fixed-rate single-family whole loans and guarantees with OLTVs
                greater than 60 percent and less than or equal to 80 percent is 88
                percent for both the capital markets transaction and loss sharing
                agreement. For the illustrative CRT, tranche M1's LTEA is 85.6% and is
                derived by scaling stress loss by the 88% loss timing factor.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.030
                where
                LTKA = max((2.75% + 0.25%) * 88%-0.25%, 0%) =
                2.39%
                 For the last adjustment, the proposed rule would include a 10%
                overall reduction in capital relief to reflect for the fact that CRT
                transactions do not provide the same loss-absorbing capacity as
                regulatory capital (OEA).
                OEA = (1-10%) = 90%
                 The adjusted exposure amounts (AEAs) combine the effectiveness
                adjustments, aggregate UPB, tranche thickness, and an adjustment for
                expected losses (to tranche B in the example). For the illustrative
                CRT, the proposed rule would calculate AEAs as follows:
                [[Page 39335]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.031
                where the Enterprise's adjusted exposures (EAEs) for tranches A and B
                are 100% and
                EAE,M1 = 100%-(60% * 85.6% * 90%)-(35% * 96.4% *
                85.6% * 90%) = 27.8%.
                 Finally, to calculate risk weighted assets after CRT, the proposed
                rule combines AEAs with the tranche-level risk weights. For the
                illustrative CRT, the proposed rule would calculate risk weighted
                assets (RWA) as follows:
                RWA$,AH = AEA$,AH * RW,AH =
                $955m * 10% = 95.5m
                RWA$,M1 = AEA$,M1 * RWA,M1 =
                11.1m * 781% = 86.7m
                RWA$,B = AEA$,B * RW,B = 2.5m
                * 1250% = $31.3m
                with total RWAs on the retained CRT exposures at $213.5 million, a
                decline of $130.3 million from the aggregate credit risk-weighted
                assets on the underlying single-family mortgage exposures of $343.8
                million.
                Seasoned CRT
                 A seasoned CRT differs from when it was newly issued due to the
                changing risk profile on the mortgage exposures underlying the CRT, and
                changes to the CRT structure which may have developed since issuance.
                Therefore, an Enterprise would be required to periodically re-calculate
                capital adjustments on its seasoned CRT transactions.
                 For each seasoned CRT, the proposed rule would require the
                Enterprise to update the data elements originally considered. In
                particular, the proposed rule would require the Enterprise to update
                credit risk capital and expected losses on the underlying whole loans
                and guarantees, tranche structure, ownership, and counterparty credit
                risk.
                CRT Prepayments
                 The rate at which principal on a CRT's underlying exposures is paid
                down (principal paydowns) affects the allocation of credit losses
                between the Enterprises and investors/reinsurers. Principal paydowns
                include regularly scheduled principal payments and unscheduled
                principal prepayments. In general, a CRT's tranches are paid down in
                the order of their seniority outlined in the CRT's transaction
                documents. For tranches with shared ownership, principal paydowns are
                allocated on a pro-rata basis. Under certain conditions unusually fast
                prepayments can erode the credit protection provided by the CRT by
                paying down the subordinate tranches and leave the Enterprises more
                vulnerable to credit losses. In particular, unexpectedly high
                prepayments can compromise the protection afforded by CRT and reduce
                the CRT's benefit or capital relief.
                 FHFA reviewed the effect on capital relief of applying stressful
                prepayment and loan delinquency projections to recent CRT. FHFA
                concluded that deal features, specifically triggers, mitigate the
                effects of fast prepayments by diverting unscheduled principal
                prepayments to the Enterprise-held senior tranche. For example, a
                minimum credit enhancement trigger redirects prepayments to the senior
                tranche when the senior credit enhancement falls below a pre-specified
                threshold. Similarly, a delinquency trigger diverts prepayments when
                the average monthly delinquency balance (i.e., underlying single-family
                mortgage exposures that are 90 days or more delinquent, in foreclosure,
                bankruptcy, or REO) exceeds a pre-specified threshold.
                 FHFA considered whether it would be desirable to include language
                in the proposed rule requiring specific triggers in CRT transactions.
                However, FHFA decided against such language because variations across
                transactions complicate the establishment of fixed triggers that could
                be prudently applied uniformly across deals. Further, mandating a fixed
                set of triggers could reduce innovation in managing principal paydowns.
                For these reasons, FHFA believes that the proposed rule would
                appropriately consider single-family CRT prepayments.
                Multifamily Loss-Timing Factors
                 One notable enhancement in the proposed CRT capital framework for
                multifamily mortgage exposures would be the application of multifamily
                loss timing factors. The loss timing factor would address the mismatch
                between lifetime multifamily losses on the whole loans and guarantees
                underlying a CRT and the term of coverage on the CRT. In the 2018
                proposal, FHFA sought comment on how to implement a multifamily loss
                timing adjustment, but commenters did not suggest an approach. The
                proposed rule would implement a simple adjustment based on the
                contractual maturity of the CRT and the maturities of the underlying
                multifamily mortgage exposures.
                Multifamily Counterparty Risk
                 In multifamily CRT transactions involving loss sharing and/or
                reinsurance agreements, an Enterprise is exposed to counterparty credit
                risk. In such instances, the Enterprise would consider posted
                collateral, concentration risk, and the financial strength of the
                counterparty before applying the counterparty haircut. In multifamily
                loss sharing agreements, the Enterprise would also consider at-risk
                servicing rights before applying the haircut.
                 In the proposed CRT capital framework, an Enterprise would be
                permitted to offset counterparty credit risk with collateral by
                reducing the Enterprise's uncollateralized exposure subject to a
                counterparty haircut. Fannie Mae has historically required DUS lenders
                to post collateral subject to certain terms and conditions, referred to
                as restricted liquidity, which Fannie Mae can access in the event of a
                lender default. In the proposed rule, restricted liquidity would be
                considered equivalent to other forms of collateral. In addition, as
                part of its DUS loss sharing agreements, Fannie Mae generally retains a
                contractual claim to the lenders' at-risk servicing rights that can be
                exercised by Fannie Mae under different circumstances. The 2018
                proposal included a provision for an Enterprise to decrease its
                uncollateralized exposure by 50 percent if the Enterprise had any
                contractual claim to at-risk servicing rights. In response to comments
                that suggested FHFA should clarify the treatment of
                [[Page 39336]]
                servicing rights, the proposed rule would include an updated treatment
                of servicing rights such that in the counterparty haircut calculation,
                an Enterprise may reduce its uncollateralized exposure by 1 year of
                estimated future servicing revenue if the Enterprise has a contractual
                claim to the at-risk servicing rights. FHFA believes that this more
                explicit accounting of the value of lender servicing rights would
                reduce the possibility of manipulation without materially affecting the
                magnitude of the adjustment to uncollateralized exposure in the CRT
                capital calculation.
                 In response to comments on the 2018 proposal, FHFA considered
                additional potential risk mitigants that may be present in loss-sharing
                CRT transactions such as entity-based capital, lender CRT transactions,
                and intrinsic risk-retention benefits, but opted not to include
                counterparty credit risk offsets for these features in the proposed
                rule. While these features may lead to benefits that decrease the
                credit risk faced by an Enterprise, FHFA does not have sufficient
                information to accurately quantify the magnitude of these potential
                benefits. However, to the extent that features such as entity-based
                capital and lender CRT transactions lead to stronger counterparty
                financial strength ratings, these loss mitigating factors would be
                reflected in an Enterprise's risk-based capital requirements in the
                form of smaller counterparty haircuts.
                 To calculate the counterparty haircut in the proposed rule, an
                Enterprise would use a modified version of the Basel IRB approach that
                considers the creditworthiness of the counterparty. Similar to the
                single-family discussion of how counterparty risk is amplified due to
                the correlation between a counterparty's credit exposure and the
                Enterprises' credit exposure (concentration risk), the proposed rule
                would assign larger haircuts to multifamily counterparties with higher
                levels of concentration risk relative to diversified counterparties. An
                Enterprise would assess the level of multifamily mortgage risk
                concentration for each individual counterparty to determine whether the
                counterparty is well diversified or whether it has a high concentration
                risk, and counterparties with a lower concentration risk would be
                assigned a smaller counterparty haircut relative to counterparties with
                higher concentration risk. This difference is captured through the
                asset valuation correlation multiplier, AVCM. An Enterprise would
                assign an AVCM of 1.75 to counterparties with high concentration risk
                and an AVCM of 1.25 to more well-diversified counterparties.
                 The counterparty haircut would be calculated as the product of
                stress loss given default (LGD), stress probability of default (PD),
                and a maturity adjustment for the asset. Along with the AVCM, other
                parameterization assumptions in the proposed rule include a stress LGD
                of 45 percent, a maturity adjustment calibrated to five years, a
                stringency level of 99.9 percent, and expected PDs calculated using an
                historical one-year PD matrix for all financial institutions. For each
                CRT that involves counterparty credit risk, an Enterprise would select
                a counterparty haircut and apply it to the uncollateralized exposure in
                the CRT. The proposed multifamily counterparty risk haircut multipliers
                are presented below in Table 25.
                [GRAPHIC] [TIFF OMITTED] TP30JN20.032
                 Question 70. Is the proposed approach to determining the credit
                risk capital requirement for retained CRT exposures appropriately
                formulated?
                 Question 71. Are the adjustments for counterparty risk
                appropriately calibrated?
                 Question 72. Are the adjustments for loss-timing and other
                maturity-related risk appropriately calibrated?
                 Question 73. Is the 10 percent adjustment for the general
                effectiveness of CRT appropriately calibrated?
                 Question 74. Is the 10 percent adjustment for the general
                effectiveness of CRT appropriate in light of the proposed rule's
                prudential floor on the risk weight for retained CRT exposures?
                 Question 75. Should FHFA impose any restrictions on the collateral
                eligible to secure CRT that pose counterparty risk?
                d. Alternative Approach
                 The proposed approach to CRT described under VIII.C.3.c has
                significant advantages over the approach to CRT taken by the Basel and
                U.S. banking framework's SSFA to the extent that it provides a more
                granular and mortgage risk-sensitive framework for determining the
                capital relief from CRT. There is, however, a trade-off between a more
                risk-sensitive approach
                [[Page 39337]]
                and the complexity and other operational burdens of that more granular
                approach. FHFA is also soliciting comment on a simpler but less
                tailored alternative approach under which the Enterprise would
                determine the risk weight for a retained CRT exposure using the SSFA of
                the securitization framework. A 1,250 percent risk weight would be
                assigned to any retained CRT exposure that absorbs losses up to the
                adjusted aggregate credit risk capital requirement of the underlying
                exposures. After that point, the risk weight for the retained CRT
                exposure would be assigned pursuant to an exponential decay function
                that decreases as the detachment point or attachment point increases.
                The key difference from the SSFA under the securitization framework
                would be that the prudential floor for the risk weight for a retained
                CRT exposure would be 10 percent instead of 20 percent.
                 Under this approach, there would be no specific, tailored
                adjustment for counterparty risk or loss-timing risk or a general
                adjustment for the differences between CRT and equity financing.
                Instead, as under the Basel and U.S. banking framework's SSFA, FHFA
                proposes to use a supervisory adjustment factor, the constant term p,
                to determine the overall level of regulatory capital required for all
                tranches of a CRT under the SSFA. A higher value of p would increase
                the amount of regulatory capital required under the SSFA with
                detachment points beyond the adjusted aggregate credit risk capital
                requirement of the underlying exposures. As described by the BCBS,
                ``[t]he supervisory adjustment factor in the SSFA is intended to reduce
                cliff effects and apply conservatism for tranches with detachment
                points beyond [the adjusted aggregate credit risk capital requirement
                of the underlying exposures]. In addition, the supervisory adjustment
                factor can be seen to account for imprecision or uncertainty associated
                with using standardized approach risk weights for underlying exposures.
                . . .'' \79\
                ---------------------------------------------------------------------------
                 \79\ BCBS, Revisions to the Basel Securisation Framework
                Consultative Document at 23 (Dec. 2012; final Dec. 2014) available
                at https://www.bis.org/publ/bcbs236.pdf.
                ---------------------------------------------------------------------------
                 Question 76. Should FHFA require an Enterprise to determine the
                credit risk capital requirement for retained CRT exposures using a
                modified version of the SSFA?
                 Question 77. Is the SSFA properly formulated for retained CRT
                exposures or should other risk drivers, such as maturity, be
                incorporated?
                 Question 78. Is the SSFA (particularly the supervisory adjustment
                factor, p) appropriately calibrated for retained CRT exposures?
                D. Other Exposures
                 While substantially all of an Enterprise's credit risk is posed by
                its single-family and multifamily mortgage exposures, each Enterprise
                does have some amount of credit risk arising from a wide variety of
                other exposures, including non-traditional mortgage exposures and non-
                mortgage exposures. Some of these non-mortgage exposures--for example,
                an Enterprise's OTC and cleared derivatives and repo-style
                transactions--raise complex and technical issues to calibrating credit
                risk capital requirements. FHFA believes it is important to assign a
                credit risk capital requirement to all material exposures, even if
                small in amount relative to an Enterprise's aggregate credit risk
                exposure. As under the 2018 proposal, FHFA proposes to incorporate into
                the proposed rule the extensive expertise of the U.S. and international
                banking regulators in calibrating credit risk capital requirements for
                these other exposures, with adjustments as appropriate for the
                Enterprises. The Basel framework has evolved over almost four decades
                of debate and collaboration among the world's experts in regulatory
                capital. That framework also has been revamped to incorporate the
                lessons of the 2008 financial crisis. Moreover, the complex and
                technical issues posed by these other exposures risk distracting FHFA
                from its core area of relative expertise--fashioning a mortgage risk-
                sensitive framework for the Enterprises--were FHFA to endeavor to
                develop its own framework for assigning credit risk capital
                requirements for these other exposures.
                 As discussed in this Section VIII.D, an Enterprise generally would
                assign risk weight for exposures other than mortgage exposures using
                the same risk weights assigned under the U.S. banking framework's
                standardized approach, in particular the Federal Reserve Board's
                regulatory capital requirements at subpart D of 12 CFR part 217
                (Regulation Q).\80\ Exposures that would be assigned risk weights under
                the U.S. banking framework include corporate exposures, exposures to
                sovereigns, OTC derivatives, cleared transactions, collateralized
                transactions, and off-balance sheet exposures.
                ---------------------------------------------------------------------------
                 \80\ The proposed rule cross-references relevant sections of 12
                CFR part 217 as in effect on April 23, 2020. For the final rule,
                FHFA will assess whether the final rule will cross-reference
                sections of 12 CFR part 217 as of that same date or as of a later
                date, taking into account the materiality and nature of any
                amendments to that part after April 23, 2020 and any restrictions
                under applicable law.
                ---------------------------------------------------------------------------
                 Similarly, some exposures that were assigned credit risk capital
                requirements under the 2018 proposal would instead have a risk weight
                assigned under the U.S. banking framework. These would include some
                DTAs, municipal debt, reverse mortgage loans, reverse MBS, and cash and
                cash equivalents.
                 For any exposure that is not assigned a specific risk weight under
                the proposed rule, the default risk weight would be 100 percent,
                consistent with the U.S. banking framework.
                1. Commitments and Other Off-Balance Sheet Exposures
                 As under the U.S. banking framework, the proposed rule would
                require an Enterprise to calculate the exposure amount of an off-
                balance sheet item by multiplying the off-balance sheet component,
                which is usually the notional amount, by the applicable credit
                conversion factor (CCF). Off-balance sheet items subject to this
                approach would include guarantees, mortgage commitments, contingent
                items, certain repo-style transactions, financial standby letters of
                credit, and forward agreements.
                 An Enterprise would apply a zero percent CCF to the unused portion
                of commitments that are unconditionally cancelable by the Enterprise. A
                commitment would be any legally binding arrangement that obligates an
                Enterprise to extend credit or to purchase assets.
                 The CCF would increase to 20 percent for a commitment with an
                original maturity of one year or less that is not unconditionally
                cancelable by the Enterprise. The CCF would increase to 50 percent for
                a commitment with an original maturity of more than one year that is
                not unconditionally cancelable by the Enterprise. An Enterprise would
                apply a 100 percent CCF to off-balance sheet guarantees, repurchase
                agreements, securities lending or borrowing transactions, financial
                standby letters of credit, and forward agreements.
                 The off-balance sheet component of a repurchase agreement would
                equal the sum of the current market values of all positions the
                Enterprise has sold subject to repurchase. The off-balance sheet
                component of a securities lending transaction would equal the sum of
                the current fair values of all positions the Enterprise has lent under
                the transaction. For securities borrowing transactions, the off-balance
                sheet component would equal the sum of the current fair values of all
                non-cash
                [[Page 39338]]
                positions the Enterprise has posted as collateral under the
                transaction.
                2. Exposures to Sovereigns
                 Consistent with the U.S. banking framework, exposures to the U.S.
                government, its central bank, or a U.S. government agency and the
                portion of an exposure that is directly and unconditionally guaranteed
                by the U.S. government, its central bank, or a U.S. government agency
                would receive a zero percent risk weight. The portion of a deposit
                insured by the Federal Deposit Insurance Corporation (FDIC) or the
                National Credit Union Administration (NCUA) also may be assigned a zero
                percent risk weight. An exposure conditionally guaranteed by the U.S.
                government, its central bank, or a U.S. government agency would receive
                a 20 percent risk weight.
                3. Crossholdings of Enterprise MBS
                 Under the 2018 proposal, an MBS guaranteed by an Enterprise would
                have had a credit risk capital requirement of 0 percent. Consistent
                with the U.S. banking framework, the proposed rule would assign a 20
                percent risk weight to the exposures of an Enterprise to the other
                Enterprise or another GSE (other than equity exposures and acquired CRT
                exposures). The 20 percent risk weight would extend to an Enterprise's
                exposures to MBS guaranteed by the other Enterprise.
                 The Enterprises currently are in conservatorship and benefit from
                Treasury support under the PSPA. However, the Enterprises remain
                privately-owned corporations, and their obligations do not have the
                explicit guarantee of the full faith and credit of the United States.
                The U.S. banking regulators ``have long held the view that obligations
                of the GSEs should not be accorded the same treatment as obligations
                that carry the explicit guarantee of the U.S. government.'' \81\ FHFA
                agrees that the MBS and other obligations of an Enterprise should be
                subject to a credit risk capital requirement that is greater than that
                assigned to those obligations that have an explicit guarantee of the
                full faith and credit of the United States.
                ---------------------------------------------------------------------------
                 \81\ 77 FR 52888, 52896 (Aug. 30, 2012).
                ---------------------------------------------------------------------------
                 Under the direction of FHFA, the Enterprises have implemented a
                single security initiative that is intended to increase the liquidity
                of the to-be-announced (TBA) market. Under the initiative, each
                Enterprise has begun issuing a single MBS known as the Uniform
                Mortgage-Backed Security (UMBS). On March 12, 2019, UMBS trading began
                in the forward TBA market, marking the consolidation of the formerly
                distinct markets for each Enterprise's MBS. In June 2019, settlement of
                TBA trades for UMBS began.
                 FHFA believes that the new, consolidated UMBS market will lead to a
                more efficient, resilient, and liquid secondary mortgage market and
                further FHFA's statutory obligation and the Enterprises' charter
                obligations to support the liquidity of U.S. housing finance markets.
                For the UMBS market to continue to work, market participants must
                continue to view UMBS as fungible with respect to the issuing
                Enterprise. That is, investors must generally agree that a UMBS of a
                certain coupon and maturity issued by one Enterprise is roughly
                equivalent to the corresponding UMBS issued by the other.\82\
                ---------------------------------------------------------------------------
                 \82\ To support investor confidence in that fungibility, FHFA
                promulgated a final rule governing Enterprise actions that affect
                UMBS cash flows to investors, issues quarterly prepayment monitoring
                reports, and has used its powers as the Enterprises' conservator to
                limit certain pooling practices with respect to the creation of
                UMBS. In November 2019, FHFA issued a request for input on
                Enterprise UMBS pooling practices.
                ---------------------------------------------------------------------------
                 To foster that fungibility, each Enterprise may issue a ``Supers''
                mortgage-related security, which is a re-securitization of UMBS and
                certain other TBA-eligible securities, including other Supers. If an
                Enterprise guarantees a security backed in whole or in part by
                securities of the other Enterprise, the Enterprise is obligated under
                its guarantee to fund any shortfall in the event that the other
                Enterprise fails to make a payment due on its securities. The
                Enterprises have entered into an indemnification agreement relating to
                commingled securities issued by the Enterprises. The indemnification
                agreement obligates each Enterprise to reimburse the other for any such
                shortfall.
                 Question 79. Should FHFA adjust the regulatory capital treatment
                for exposures to MBS guaranteed by the other Enterprise to mitigate any
                risk of disruption to the UMBS?
                 Question 80. Should FHFA consider a different risk weight for
                second-level re-securitizations backed by UMBS?
                 Question 81. What should be the regulatory capital treatment of any
                credit risk mitigation effect of any indemnification or similar
                arrangements between the Enterprises relating to UMBS re-
                securitizations?
                 Question 82. Should FHFA adopt different risk weights for MBS
                guaranteed by an Enterprise and the unsecured debt of an Enterprise?
                4. Corporate Exposures
                 Consistent with the U.S. banking framework, credit exposures to
                companies that are not depository institutions or securitization
                vehicles generally would be assigned a 100 percent risk weight. A
                corporate exposure is an exposure to a company that is not an exposure
                to a sovereign, the Bank for International Settlements, the European
                Central Bank, the European Commission, the International Monetary Fund,
                the European Stability Mechanism, the European Financial Stability
                Facility, a multi-lateral development bank (MDB), a depository
                institution, a foreign bank, a credit union, or a public sector entity
                (PSE), a GSE, a mortgage exposure, a cleared transaction, a default
                fund contribution, a securitization exposure, an equity exposure, or an
                unsettled transaction.
                5. OTC Derivative Contracts
                 An Enterprise would determine its credit risk capital requirement
                for the counterparty risk for OTC derivative contracts as if it were a
                banking organization subject to the Federal Reserve Board's risk-based
                capital requirements, in particular 12 CFR 217.34. An OTC derivative
                contract generally would not include a derivative contract that is a
                cleared transaction, which would be subject to a different approach as
                discussed in Section VIII.D.6.
                 A derivative contract is a financial contract whose value is
                derived from the values of one or more underlying assets, reference
                rates, or indices of asset values or reference rates. Derivative
                contracts include interest rate derivative contracts, exchange rate
                derivative contracts, equity derivative contracts, commodity derivative
                contracts, credit derivative contracts, and any other instrument that
                poses similar counterparty credit risks. Derivative contracts also
                include unsettled securities, commodities, and foreign exchange
                transactions with a contractual settlement or delivery lag that is
                longer than the lesser of the market standard for the particular
                instrument or five business days.
                 To determine the risk-weighted assets for an OTC derivative
                contract, an Enterprise would first determine its exposure amount for
                the OTC derivative contract and then apply to that amount a risk weight
                based on the counterparty, eligible guarantor, or recognized
                collateral.
                 For a single OTC derivative contract that is not subject to a
                qualifying master netting agreement, the exposure amount would be the
                sum of (i) the current
                [[Page 39339]]
                credit exposure, which would be the greater of the mark-to-market value
                or zero, and (ii) the potential future exposure (PFE), which would be
                calculated by multiplying the notional principal amount of the OTC
                derivative contract by a prescribed conversion factor.
                 For multiple OTC derivative contracts subject to a qualifying
                master netting agreement, the exposure amount would be calculated by
                adding the net current credit exposure and the adjusted sum of the PFE
                amounts for all OTC derivative contracts subject to the qualifying
                master netting agreement. The net current credit exposure would be the
                greater of zero and the net sum of all positive and negative mark-to-
                market values of the individual OTC derivative contracts subject to the
                qualifying master netting agreement.
                 If an OTC derivative contract is collateralized by financial
                collateral, an Enterprise may recognize the credit risk mitigation
                benefits of the financial collateral pursuant to the rules governing
                collateralized transactions, as discussed in Section VIII.D.7.
                6. Cleared Transactions
                 An Enterprise would determine its credit risk capital requirement
                for the counterparty risk for derivatives and repo-style transactions
                cleared through a central counterparty as if it were a banking
                organization subject to the Federal Reserve Board's risk-based capital
                requirements, in particular 12 CFR 217.35. To determine the risk-
                weighted assets for a cleared transaction, an Enterprise that is a
                clearing member client or a clearing member would multiply the trade
                exposure amount for the cleared transaction by the appropriate risk
                weight. An Enterprise also would be subject to a credit risk capital
                requirement for default fund contributions to CCPs.
                7. Credit Risk Mitigation
                 An Enterprise may recognize the risk-mitigation effects of
                guarantees, credit derivatives, and collateral for purposes of its
                risk-based capital requirements in the same way a banking organization
                may under the Federal Reserve Board's risk-based capital requirements,
                in particular 12 CFR 217.36 and 217.37. Under that approach, an
                Enterprise generally may use the substitution approach to recognize the
                credit risk-mitigation effect of an eligible guarantee from an eligible
                guarantor or eligible credit derivative and the simple approach to
                recognize the effect of eligible collateral. Under the substitution
                approach, if the protection amount of an eligible guarantee or eligible
                credit derivative is greater than or equal to the exposure amount of
                the hedged exposure, an Enterprise generally may substitute the risk
                weight applicable to the guarantor or credit derivative protection
                provider for the risk weight assigned to the hedged exposure. Under the
                simple approach, the collateralized portion of the exposure generally
                would receive the risk weight applicable to the eligible collateral
                (with an exception for repo-style transactions, eligible margin loans,
                collateralized derivative contracts, and single-product netting sets of
                such transactions).
                IX. Credit Risk Capital: Advanced Approach
                 The proposed rule would require an Enterprise to comply with the
                risk-based capital requirements using the higher of its risk-weighted
                assets calculated under the standardized approach and the advanced
                approach, where risk-weighted assets include credit risk, operational
                risk, and market risk components. The advanced approach requirements
                would require each Enterprise to maintain its own processes for
                identifying and assessing credit risk, market risk, and operational
                risk. These requirements should ensure that each Enterprise continues
                to enhance its risk management system and also that neither Enterprise
                simply relies on the standardized approach's lookup grids and
                multipliers to define credit risk tolerances, measure its credit risk,
                or allocate economic capital. In the course of FHFA's supervision of
                each Enterprise's internal models for credit risk, FHFA also could
                identify opportunities to update or otherwise enhance the standardized
                approach's lookup grids and multipliers through future rulemakings as
                market conditions evolve.
                 Under the proposed rule's advanced approach requirements, an
                Enterprise would be required to have a process for assessing its
                overall capital adequacy in relation to its risk profile and maintain
                infrastructure with risk measurement and management processes that are
                appropriate given the Enterprise's size and complexity. An Enterprise's
                senior management would be required to ensure that the Enterprise's
                internal models, operational risk quantification systems, and related
                advanced systems functions comply with the proposed rule's minimum
                requirements. The Enterprise's board of directors (or a designated
                committee of the board) would be required to at least annually review
                the effectiveness of, and approve, the Enterprise's advanced systems.
                 An Enterprise's advanced systems would be required to include an
                internal risk rating and segmentation system that differentiates among
                degrees of credit risk for the Enterprise's mortgage and other
                exposures. An Enterprise also would be required to have a process that
                estimates risk parameters for the Enterprise's exposures. An
                Enterprise's estimates of risk parameters must incorporate relevant and
                available data, and an Enterprise generally must demonstrate, among
                other things, that its estimates are representative of long run
                experience and take into account any changes in underwriting or
                recovery practices. Default, loss severity, and exposure amount data
                generally must include periods of economic downturn conditions. An
                Enterprise would be required to review--at least annually--its
                reference data.
                 An Enterprise would be required to conduct an independent
                validation, on an ongoing basis, of its advanced systems. The
                validation must include an evaluation of the conceptual soundness of
                the advanced systems, an ongoing monitoring process that includes
                verification of processes and benchmarking, and an outcomes analysis
                process that includes backtesting.
                 An Enterprise also would be required to periodically stress test
                its advanced systems including a consideration of how economic cycles,
                especially downturns, affect risk-based capital requirements.
                 An Enterprise would be required to meet these minimum requirements
                on an ongoing basis. An Enterprise also would be required to notify
                FHFA when the Enterprise makes any material change to its advanced
                systems.
                 In addition to the proposed rule's requirements, an Enterprise's
                advanced systems would be implemented under FHFA's supervisory review.
                As part of that review process, FHFA issues advisory bulletins to
                communicate its supervisory expectations to FHFA supervision staff and
                to the Enterprises on specific supervisory matters and topics. Through
                FHFA's supervision program, FHFA on-site examiners conduct supervisory
                activities to ensure safe and sound operations of the Enterprises.
                These supervisory activities may include the examination of the
                Enterprises to determine whether they meet the expectations set in the
                advisory bulletins. Examinations may also be conducted to determine
                whether the Enterprises comply with their own policies and procedures,
                regulatory and
                [[Page 39340]]
                statutory requirements, or FHFA directives.
                 FHFA's 2013-07 Advisory Bulletin reflects supervisory expectations
                for an Enterprise's model risk management. The Advisory Bulletin sets
                minimum thresholds for model risk management and differentiates between
                large, complex entities and smaller, less complex entities. As the
                Enterprises are large complex entities, the Advisory Bulletin subjects
                them to heightened standards for internal audit, model risk management,
                model control framework, and model lifecycle management.
                 The proposed rule would not provide a comprehensive set of
                guardrails and prescriptions for an Enterprise's internal models
                outside of the minimum requirements discussed above and FHFA's
                supervision.
                 Question 83. Should FHFA require an Enterprise to separately
                determine its credit risk-weighted assets using its own internal
                models?
                 Question 84. Should there be a prudential floor on the credit risk
                capital requirement for a mortgage exposure determined by an Enterprise
                using its internal models?
                 Question 85. Should FHFA prescribe more specific requirements and
                restrictions governing the internal models and other procedures used by
                an Enterprise to determine its advanced credit risk-weighted assets?
                 Question 86. Should FHFA require an Enterprise to determine its
                advanced credit risk-weighted assets under subpart E of the Federal
                Reserve Board's Regulation Q? If so, what changes to that subpart E
                would be appropriate?
                 Question 87. Alternatively, should compliance with subpart E of the
                Federal Reserve Board's Regulation Q offer a safe harbor for compliance
                with the proposed rule's advanced approaches requirements?
                 Question 88. Should FHFA preserve the U.S. banking framework's
                scalar factor of 1.06 for determining advanced credit risk-weighted
                assets calculated?
                 Question 89. What transition period, if any, is appropriate for an
                Enterprise to comply with the proposed rule's requirements governing
                the determination of the Enterprise's advanced credit risk-weighted
                assets?
                 Question 90. What transition period would be appropriate if an
                Enterprise were required to determine its advanced credit risk-weighted
                assets under subpart E of the Federal Reserve Board's Regulation Q?
                 Question 91. Should there be an additional capital requirement to
                mitigate any model risk associated with the internal models used by an
                Enterprise to determine its advanced credit risk-weighted assets?
                X. Market Risk Capital
                 The proposed rule would require an Enterprise to calculate its
                market risk-weighted assets for mortgage exposures and other exposures
                with spread risk. Single-family and multifamily loans and investments
                in securities held in an Enterprise's portfolio have market risk from
                changes in value due to movements in interest rates and credit spreads,
                among other things. As the Enterprises currently hedge interest rate
                risk at the portfolio level, and under the assumption that the
                Enterprises' hedging effectively manages that risk, the market risk
                capital requirements would be limited only to spread risk.\83\
                ---------------------------------------------------------------------------
                 \83\ FHFA's supervision of each Enterprise includes examinations
                of the effectiveness of the Enterprise's hedging of its interest
                rate risk.
                ---------------------------------------------------------------------------
                 This proposed approach is considerably different from that of the
                U.S. banking framework. Under the U.S. banking framework, covered
                banking organizations are required to measure and otherwise manage
                market risk and hold a commensurate amount of capital. Generally, an
                asset held by a covered banking organization for trading purposes is
                not included in the calculation of credit risk-weighted assets.
                Instead, the covered banking organization determines the market risk
                capital requirement for its trading assets using prescribed
                methodologies, multiplies that market risk capital requirement by 12.5
                to determine the market risk-weighted assets for its covered positions,
                and then adds the market risk-weighted assets to its credit risk-
                weighted assets to determine its risk-based capital requirements. The
                prescribed methodologies under the U.S. banking framework determine
                market risk capital requirements for trading assets based on the
                general and specific market risk of the assets. General risk is the
                risk of loss in the market value of positions resulting from broad
                market movements (e.g., changes in interest rates), while specific risk
                is the risk of loss in the market value of positions due to factors
                other than broad market movements, including event risk or default
                risk. Notably, the U.S. banking framework's approach to market risk
                capital is not limited only to spread risk, as is contemplated by the
                proposed rule. FHFA is seeking comment on whether to adopt a different
                approach, perhaps one more similar to that of the U.S. banking
                framework.
                 Exposures subject to the market risk capital requirement would
                include any tangible asset that has more than de minimis spread risk,
                regardless of whether the position is marked-to-market for financial
                statement reporting purposes and regardless of whether the position is
                held by the Enterprise for the purpose of short-term resale or with the
                intent of benefiting from actual or expected short-term price
                movements, or to lock in arbitrage profits. Covered positions include:
                 Any NPL, re-performing loan (RPL), reverse mortgage loan,
                or other mortgage exposure that, in any case, does not secure an MBS
                guaranteed by the Enterprise;
                 Any MBS guaranteed by an Enterprise, MBS guaranteed by
                Ginnie Mae, reverse mortgage security, PLS, CRT exposure, or other
                securitization exposure; and
                 Any other trading asset or trading liability, whether on-
                or off-balance sheet.
                A. Standardized Approach
                 Under the standardized approach, an Enterprise would calculate
                market risk-weighted assets using a prescribed single point approach, a
                spread duration approach, or the Enterprise's internal models depending
                on the risk characteristics of the covered position.
                1. Single Point Approach
                 An Enterprise would utilize the single point approach for any RPL,
                NPL, reverse mortgage loan, or reverse mortgage security. The primary
                risk for these assets generally is credit risk. The underlying
                borrowers may have limited refinancing opportunities due to recent or
                current delinquencies, and these covered positions are often relatively
                insensitive to prepayment risk. For these reasons, FHFA believes the
                spread risk profile of these covered positions would be sufficiently
                represented by a single point estimate.
                 An Enterprise would calculate the market risk-weighted assets for
                these covered positions as the product of the market value of the
                covered position, the applicable single point shock assumption for the
                covered position, and 12.5. The applicable single point shock
                assumptions would be:
                 0.0475 for an RPL or an NPL;
                 0.0160 for a reverse mortgage loan; and
                 0.0410 for a reverse mortgage security.
                2. Spread Duration Approach
                 An Enterprise would utilize the spread duration approach for any
                multifamily mortgage exposure, any PLS, or any MBS guaranteed by an
                Enterprise or Ginnie Mae and secured
                [[Page 39341]]
                by multifamily mortgage exposures due to their increased complexity
                relative to exposures in the single point approach category. Despite
                their complexity, PLS represent only a small portion of the
                Enterprises' portfolios, as the Enterprises' purchases of PLS have been
                restricted during conservatorship. Under the spread duration approach,
                an Enterprise would multiply the amount of the applicable spread shock
                by the spread duration of the covered position. Spread shock is
                typically based on historical spread shocks. Spread duration, or the
                sensitivity of the market value of an asset to changes in the spread,
                is often determined by using models that involve assumptions about
                interest rate movements and prepayment sensitivity.
                 An Enterprise would calculate the market risk-weighted assets for
                each of these covered positions as the product of the market value of
                the covered position, the spread duration as estimated by the
                Enterprise using its internal models, the applicable spread shock for
                the covered position, and 12.5. The applicable spread shocks would be:
                 0.0015 for a multifamily mortgage exposure that does not
                secure an MBS guaranteed by an Enterprise;
                 0.0265 for a PLS; and
                 0.0100 for an MBS guaranteed by an Enterprise or by Ginnie
                Mae and secured by multifamily mortgage exposures (other than interest-
                only (IO) securities guaranteed by an Enterprise or Ginnie Mae).
                 FHFA received a comment on the 2018 proposal suggesting the
                multifamily mortgage exposure spread shock of 15 basis points was too
                low relative to the 100 basis point spread shock prescribed for
                Enterprise- and Ginnie Mae-guaranteed multifamily MBS, considering that
                the Enterprises' MBS are pass-through securities and that historically,
                multifamily mortgage exposures have been less liquid than multifamily
                MBS. The commenter recommended that FHFA, at a minimum, equate the
                spread shocks.
                 FHFA analyzed the impact of increasing the multifamily mortgage
                exposure spread shock from 15 basis points to 100 basis points. In
                addition to a market risk capital requirement, multifamily mortgage
                exposures would also have a credit risk capital requirement, and in
                practice, perceptions of credit risk might be a component of market
                risk. In the proposed rule, Ginnie Mae-guaranteed MBS would not have a
                credit risk capital requirement, while Enterprise-guaranteed MBS would
                have a 20 percent risk weight for purposes of the credit risk capital
                requirements. FHFA determined that if the market risk capital
                requirement for multifamily mortgage exposures were increased through
                the imposition of a 100 basis point spread shock, the total risk-based
                capital requirement (credit risk capital plus market risk capital plus
                operational risk capital) for multifamily mortgage exposures would
                exceed, to an undesirable degree, the total risk-based capital
                requirement for Enterprise- and Ginnie Mae-guaranteed multifamily MBS.
                For this reason, FHFA is opting not to implement the commenter's
                recommendation.
                3. Internal Models Approach
                 An Enterprise would utilize the internal models approach for
                covered positions with spread risk not covered under the single point
                approach or the spread duration approach. This would include an
                Enterprise's CMBS exposures, which in the 2018 proposal would have
                received a combined single-point capital requirement for credit risk
                and spread risk. In general, an Enterprise would use the internal
                models approach for covered positions with relatively higher levels of
                complexity or higher prepayment sensitivity.
                 Single-family exposures in this category would include performing
                loans and Enterprise- and Ginnie Mae-guaranteed single-family MBS. The
                spread risk profile on performing loans is relatively complex due to
                high prepayment sensitivity. Prepayment risk on performing loans might
                vary significantly across amortization terms, vintages, and mortgage
                rates. The high prepayment sensitivity might suggest that more
                simplified approaches, such as the single point approach, would not
                capture key risk drivers. Also, spread shocks may vary across a variety
                of single-family mortgage exposure characteristics. Thus, the spread
                duration approach, which relies on a constant spread shock, might not
                capture key single-family market movements. An internal models
                approach, however, would allow the Enterprises to differentiate spread
                risk across multiple risk characteristics such as amortization term,
                vintage, and mortgage rates. Further, the Enterprises could account for
                important market risk factors, such as updated spread shocks, to
                reflect market changes.
                 Similarly, the spread risk profile on Enterprise- and Ginnie Mae-
                guaranteed single-family MBS is relatively complex due to high
                prepayment sensitivity of the underlying collateral. Further, CMOs can
                often contain complex features and structures that alter prepayments
                across different tranches based on the CMO's structure. As a result,
                spread durations might vary significantly across mortgage products,
                amortization terms, vintages and mortgage rates and tranches. The use
                of an Enterprise's internal models to calculate market risk capital
                requirements would allow the Enterprise to account for important market
                risk factors that affect spreads and spread durations.
                 One commenter on the 2018 proposal recommended FHFA allow the
                Enterprises to utilize internal models for complex multifamily MBS in
                order to maintain flexibility in allowing the spread shocks to vary
                according to each security's features and structure, as well as
                underlying market conditions. FHFA determined that multifamily IO
                securities represent, in general, the more complex of Enterprise-
                guaranteed MBS. In consideration of the commenter's suggestion and in
                alignment with the proposed market risk capital requirement for
                Enterprise- and Ginnie Mae-guaranteed single-family IO securities, the
                proposed rule would require an Enterprise to use its internal models to
                calculate the market risk-weighted assets for Enterprise- and Ginnie
                Mae-guaranteed multifamily IO securities.
                 Because an Enterprise would calculate the market risk-weighted
                assets for these covered positions using its internal models, the
                Enterprise would be subject to certain model risk management
                requirements, as discussed in Section X.B. In addition, an Enterprise
                utilizing its internal models would be subject to FHFA's general
                regulatory oversight and supervisory review.
                 Question 92. Are the point and spread measures used to determine
                spread risk capital requirements for certain covered positions
                appropriately calibrated for that purpose?
                 Question 93. Should there be a minimum floor on the spread risk
                capital requirement for any covered position subject to the internal
                models approach?
                 Question 94. Should FHFA adopt an approach to market risk capital
                that is more similar to the Basel framework, for example by limiting
                the scope of the market risk capital requirements to a smaller set of
                positions (e.g., those positions analogous to the trading book) or by
                requiring market risk capital for market risks other than spread risk
                (e.g., value-at-risk, stress value-at-risk, incremental risk, etc.)? If
                so, what positions and activities of the Enterprises should be subject
                to that approach?
                [[Page 39342]]
                 Question 95. Should the spread risk and other market risks for
                single-family and multifamily whole loans instead be set in an
                Enterprise-specific manner through the supervisory process, taking into
                account the market risk management strategies employed by the
                Enterprise?
                 Question 96. Should FHFA assume interest rate risk is fully hedged
                for purposes of determining market risk capital requirements?
                 Question 97. What requirements and restrictions should apply to the
                internal models used to determine standardized market risk-weighted
                assets?
                B. Advanced Approach
                 An Enterprise also would calculate its advanced market risk-
                weighted assets using its own internal models. An Enterprise would have
                significant latitude in the scope and design of those internal models
                for measuring spread risk on its covered positions. FHFA is soliciting
                comment on whether to adopt a more prescriptive approach, perhaps
                requiring an Enterprise to determine a measure of market risk that
                includes a VaR-based capital requirement, a stressed VaR-based capital
                requirement, specific risk add-ons, incremental risk capital
                requirements, and comprehensive risk capital requirements, as under the
                U.S. banking framework.
                 Given the central role of the Enterprises' internal models in
                determining both standardized and advanced market risk capital
                requirements, the proposed rule includes a number of requirements and
                restrictions relating to the management of the related model risks. An
                independent risk control unit would be required to approve any internal
                model to calculate its risk-based capital requirement. An Enterprise
                must notify FHFA when the Enterprise plans to extend the use of a model
                to an additional business line or product type or the Enterprise makes
                any material change to its internal models.
                 The Enterprise would be required to periodically review (and at
                least annually) its internal models, and enhance those models as
                appropriate. The Enterprise also must integrate the internal models
                used for calculating its spread risk measure into its daily risk
                management process.
                 More generally, the sophistication of an Enterprise's internal
                models would have to be commensurate with the complexity and amount of
                its covered positions. The Enterprise's internal models must properly
                measure all the material risks. The Enterprise would be required to
                have a process for updating its internal models to ensure continued
                applicability and relevance.
                 The Enterprise also must have an independent risk control unit that
                reports directly to senior management. The Enterprise must have an
                independent validation process that includes an evaluation of the
                conceptual soundness of the internal models, an ongoing monitoring
                process that includes verification of processes and the comparison of
                the Enterprise's model outputs with relevant internal and external data
                sources or estimation techniques, and an outcomes analysis process that
                includes backtesting.
                 Question 98. Are the requirements governing an Enterprise's
                internal models for determining spread risk capital requirements
                appropriately formulated?
                 Question 99. Should FHFA adopt a more prescriptive approach to the
                determination of advanced market risk-weighted assets, perhaps
                requiring an Enterprise to determine a measure of market risk that
                includes a VaR-based capital requirement, a stressed VaR-based capital
                requirement, specific risk add-ons, incremental risk capital
                requirements, and comprehensive risk capital requirements, as under the
                U.S. banking framework?
                C. Market Risk Management
                 The reliability of the internal models used in determining an
                Enterprise's standardized and advanced market risk-weighted assets will
                depend in part on the Enterprise's market risk management practices
                more generally. Consistent with the U.S. banking framework, the
                proposed rule includes a number of requirements and restrictions
                relating to the management of spread risk and also other market risks.
                 An Enterprise would be required to have a process for assessing its
                overall capital adequacy in relation to its market risk. An Enterprise
                also would be required to have policies and procedures for actively
                managing all covered positions. At a minimum, these policies and
                procedures must require, among other things, marking covered positions
                to market or to model on a daily basis, daily assessment of the
                Enterprise's ability to hedge position and portfolio risks, and
                establishment and daily monitoring of limits on covered positions by an
                independent risk control unit.
                 An Enterprise also would be required to have a process for
                valuation of its covered positions that includes policies and
                procedures on marking positions to market or to model, independent
                price verification, and valuation adjustments or reserves.
                 An Enterprise would be required to periodically (and at least
                quarterly) stress test the market risk of its covered positions. The
                stress tests must take into account concentration risk, illiquidity
                under stressed market conditions, and risks arising from the
                Enterprise's trading activities that may not be adequately captured in
                its internal models.
                 An Enterprise also must have an internal audit function that at
                least annually assesses the effectiveness of the controls supporting
                the Enterprise's market risk measurement systems and reports its
                findings to the Enterprise's board of directors (or a committee
                thereof).
                XI. Operational Risk Capital
                 The proposed rule would establish an operational risk capital
                requirement to be calculated using the advanced measurement approach of
                the U.S. banking framework, but with a floor set at 15 basis points of
                adjusted total assets. The operational risk capital requirement would
                be included in an Enterprise's risk-weighted assets for the purposes of
                calculating risk-based capital requirements. This approach has been
                developed in response to comments on the 2018 proposal. Commenters on
                the 2018 proposal suggested that the proposed Basel basic indicators
                approach was insufficient because the Enterprises were too complex to
                justify such a simple approach and also because FHFA's implementation
                did not allow the requirement to vary appropriately under the basic
                indicators approach.
                 Operational risk is the risk of loss resulting from inadequate or
                failed internal processes, people, and systems or from external events
                (including legal risk but excluding strategic and reputational risk).
                Under the proposed rule, the Enterprise's risk-based capital
                requirement for operational risk generally would be its operational
                risk exposure minus any eligible operational risk offsets. That amount
                would potentially be subject to adjustments if the Enterprise qualifies
                to use operational risk mitigants. An Enterprise's operational risk
                exposure would be the 99.9th percentile of the distribution of
                potential aggregate operational losses, as generated by the
                Enterprise's operational risk quantification system over a one-year
                horizon (and not incorporating eligible operational risk offsets or
                qualifying operational risk mitigants).
                 While the advanced measurement approach is risk-sensitive, the
                proposed
                [[Page 39343]]
                operational risk capital requirement would be subject to a floor of 15
                basis points of adjusted total assets. It is important that operational
                risk capital does not fall below a meaningful, credible amount. Fifteen
                (15) basis points of adjusted total assets would represent
                approximately double what FHFA originally proposed in the 2018
                proposal, and approximately double the amount of operational risk
                capital estimated internally by the Enterprises using the Basel
                standardized approach. FHFA believes doubling the internally estimated
                figure is appropriate given the estimates were calculated using
                historical results achieved exclusively while in conservatorship. FHFA
                also calibrated this floor taking into account the operational risk
                capital requirements of large U.S. banking organizations. Of the U.S.
                bank holding companies with at least $500 billion in total assets at
                the end of 2019, the smallest operational risk capital requirement was
                0.69 percent of that U.S. banking organization's total leverage
                exposure.
                 Question 100. Is the advanced measurement approach appropriately
                formulated and calibrated as a measure of operational risk capital for
                the Enterprises?
                 Question 101. Should FHFA consider other approaches to calculating
                operational risk capital requirements (e.g., the Basel standardized
                approach)?
                 Question 102. Is the minimum floor on an Enterprise's operational
                risk capital appropriately calibrated?
                XII. Impact of the Enterprise Capital Rule
                A. Enterprise-Wide
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                B. Single-Family Business
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                C. Multifamily Business
                [GRAPHIC] [TIFF OMITTED] TP30JN20.044
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                D. Other Assets
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                BILLING CODE 8070-01-C
                XIII. Comparisons to the U.S. Banking Framework
                 As discussed in Section V.B.2 and also in the 2018 proposal,
                comparisons to the U.S. banking framework's capital requirements are
                complicated by the different risk profiles of the Enterprises and large
                banking organizations.\84\ The Enterprises, for example, transfer much
                of the interest rate and funding risk on their mortgage exposures
                through their sales of guaranteed MBS, while banking organizations
                generally fund themselves through customer deposits and other sources.
                On the other hand, the monoline nature of the Enterprises' mortgage-
                focused businesses suggests that the concentration risk profile of an
                Enterprise is generally greater than that of a diversified banking
                organization
                [[Page 39355]]
                with a similar amount of mortgage credit risk.
                ---------------------------------------------------------------------------
                 \84\ 83 FR at 33323.
                ---------------------------------------------------------------------------
                 While the Enterprises and large banking organizations' risk
                profiles are different with respect to some risks, those differences
                should not preclude a comparison of the credit risk capital requirement
                of a large U.S. banking organization for a specific mortgage exposure
                to the credit risk capital requirement of an Enterprise for a similar
                mortgage exposure. Under both frameworks, the credit risk capital
                requirements for mortgage exposures are calibrated to absorb unexpected
                losses. Comparisons of credit risk capital requirements of the large
                U.S. banking organizations to credit risk capital requirements of the
                Enterprises under the proposed rule are, however, still complicated by
                the fact that the proposed rule's requirements could be very different
                depending on the economic environment. In a favorable economic
                environment, particularly after sustained periods of house price growth
                and strong employment such as experienced in the U.S. prior to the
                first quarter of 2020, the proposed rule's mortgage risk-sensitive
                framework is likely to show lower credit risk capital requirements than
                the U.S. banking framework. Conversely, in a period of financial
                stress, the proposed rule's mortgage risk-sensitive framework could
                show higher credit risk capital requirements than the U.S. banking
                framework.
                 FHFA's mortgage risk-sensitive framework results in a more granular
                calibration of credit risk capital requirements for mortgage exposures,
                and some meaningful portion of the current gap between the credit risk
                capital requirements of the Enterprises and large banking organizations
                under the proposed rule is due to the proposed rule's use of MTMLTV
                instead of OLTV, as under the U.S. banking framework, to assign credit
                risk capital requirements. Adjusting for the appreciation in the value
                of the underlying real property generally has led to lower actual
                credit risk capital requirements at the Enterprises, and some of the
                gap between the credit risk capital requirements of the Enterprises and
                large U.S. banking organizations might be expected to narrow were real
                property prices to move toward their long-term trend.
                 With that context, FHFA is seeking comment on the appropriateness
                of key differences between the credit risk capital requirements for
                mortgage exposures under the proposed rule and the U.S. banking
                framework.
                 Risk-based credit risk capital requirements. As discussed
                in Sections VIII.A.7 and VIII.B.6, as of September 30, 2019 and before
                adjusting for CRT or the buffers under both frameworks, the average
                credit risk capital requirements for the Enterprises' single-family and
                multifamily mortgage exposures generally were roughly half those of
                similar exposures under the U.S. banking framework. Those lower average
                credit risk capital requirements are before any capital relief afforded
                through CRT.
                 CRT capital treatment. As discussed in Sections VIII.C.3.c
                and VIII.C.3.d, the proposed rule solicits comments on two different
                approaches to determining the remaining credit risk on exposures of a
                CRT that are retained by the Enterprise and any credit risk in effect
                retained by the Enterprise as a result of the potential ineffectiveness
                of CRT in transferring credit risk. Under both approaches, the minimum
                risk weight assigned to retained CRT exposures would be 10 percent,
                which is less than the 20 percent risk weight floor for securitization
                exposures under the U.S. banking framework.
                 CRT eligibility. As discussed in Section VIII.C.3.b, the
                proposed rule provides credit risk capital relief for a number of CRT
                structures that would not be eligible for capital relief under the U.S.
                banking framework. The proposed rule also generally subjects CRT
                structures to less restrictive operational criteria.
                 Mortgage insurance. Similarly, as discussed in Section
                VIII.A.6, the proposed rule generally provides more credit risk capital
                relief for mortgage insurance and other loan-level credit enhancement,
                and for a broader range of counterparties, than the U.S. banking
                framework.
                 In addition to these different credit risk capital requirements for
                mortgage exposures, FHFA is seeking comment on other aspects in which
                the proposed rule and the U.S. banking framework differs. For example:
                 Leverage ratio requirements. Under the proposed rule's
                leverage ratio requirement, an Enterprise would be required to maintain
                tier 1 capital in excess of 2.5 percent of its adjusted total assets.
                An Enterprise also would be required to maintain tier 1 capital in
                excess of 4.0 percent of its adjusted total assets to avoid
                restrictions on capital distributions and discretionary bonus payments.
                A U.S. banking organization is required to maintain tier 1 capital
                greater than 4.0 percent of its total assets. A large U.S. banking
                organization also must maintain tier 1 capital in excess of 5.0 percent
                of its total leverage exposure to avoid restrictions on capital
                distributions and discretionary bonus payments.\85\
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                 \85\ Insured depository institutions subsidiaries of certain
                large U.S. bank holding companies must maintain tier 1 capital of
                6.0 percent or greater of total assets to be ``well capitalized.''
                See, e.g., 12 CFR 6.4(b)(1)(i)(D).
                ---------------------------------------------------------------------------
                 Market risk capital. The proposed rule and U.S. banking
                framework take considerably different approaches to market risk capital
                requirements. As discussed in Section X, the proposed rule generally
                assigns market risk capital requirements to a broader set of exposures,
                including ones already subject to credit risk capital requirements,
                while the U.S. banking framework requires market risk capital not just
                for spread risk but also a broader range of market risks.
                 Capital conservation buffer. As discussed in Section
                VII.A, the proposed rule's PCCBA is assessed against adjusted total
                assets, not risk-weighted assets. This risk-insensitive approach
                reduces the impact that the PCCBA potentially could have on higher risk
                exposures, avoids amplifying the secondary effects of any model or
                similar risks inherent to the calibration of granular risk weights for
                mortgage exposures, and further mitigates the pro-cyclicality in
                aggregate risk-based capital requirements.
                 Stability capital buffer. The proposed rule's stability
                capital buffer is tailored to the risk that an Enterprise's default or
                other financial distress could have on the liquidity, efficiency,
                competitiveness, and resiliency of national housing finance markets.
                The U.S. banking framework's GSIB surcharge is tailored to equalize the
                expected impact on the stability of the financial system of the failure
                of a GSIB with the expected systemic impact of the failure of a large
                bank holding company that is not a GSIB. Because the stability capital
                buffer is a component of the capital conservation buffer, the stability
                capital buffer is assessed against an Enterprise's adjusted total
                assets, while the GSIB surcharge is more risk-sensitive in that it is
                assessed against risk-weighted assets.
                 Internal-ratings approach. Like the U.S. banking
                framework, each Enterprise would be required to determine its risk-
                weighted assets under two approaches--a standardized approach and an
                advanced approach--with the greater of the two risk-weighted assets
                used to determine its risk-based capital requirements. Unlike the U.S.
                banking framework, the proposed rule would be significantly less
                prescriptive as to requirements and restrictions governing the internal
                models used to
                [[Page 39356]]
                determine the advanced risk-weighted assets.
                 Question 103. Are the differences between the credit risk capital
                requirements for mortgage exposures under the proposed rule and the
                U.S. banking framework appropriate?
                 Question 104. Which, if any, aspects of the proposed rule should be
                further aligned with the U.S. banking framework?
                XIV. Compliance Period
                 This proposed rule would establish a post-conservatorship
                regulatory capital framework that ensures that each Enterprise operates
                in a safe and sound manner and is positioned to fulfill its statutory
                mission to provide stability and ongoing assistance to the secondary
                mortgage market across the economic cycle. Given the Enterprises'
                current conservatorship status and capitalization, certain sections and
                subparts of the proposed rule would be subject to delayed compliance
                dates as set forth in Sec. 1240.4. The capital requirements and
                buffers set out in subpart B of the proposed rule would have a delayed
                compliance date, unless adjusted by FHFA as described below, of the
                later of one year from publication of the final rule or the date of the
                termination of conservatorship. FHFA recognizes that the path for
                transition out of conservatorship and meeting the full capital
                requirements and buffers is not settled at this time. Therefore, the
                proposed rule would provide FHFA with the discretion, based on FHFA's
                assessment of capital market conditions and the likely feasibility of
                an Enterprise to achieve capital levels sufficient to comply with the
                capital requirements proposed at Sec. 1240.10, to defer compliance
                with the capital requirements and thereby not subject an Enterprise to
                statutory prohibitions on capital distributions that would apply if
                those requirements were not met. During that deferral period, the PCCBA
                would be the CET1 capital that would otherwise be required under Sec.
                1240.10 plus the PCCBA that would otherwise apply under normal
                conditions under Sec. 1240.11(a)(5); and the PLBA would be 4.0 percent
                of the adjusted total assets of the Enterprise. To benefit from the
                deferral period, an Enterprise would be required to comply with any
                corrective plan or agreement or order that sets out the actions by
                which an Enterprise will achieve compliance with the capital
                requirements by a specified date.
                 In addition, the proposed rule would delay compliance for reporting
                under Sec. 1240.1(f) for one year from the date of publication of the
                final rule.
                 Question 105. Are the delayed compliance dates tailored in a manner
                to promote the ability of an Enterprise to achieve compliant regulatory
                capital levels?
                XV. Temporary Increases of Minimum Capital Requirements and Other
                Conforming Amendments
                 To reinforce its reserved authorities under Sec. 1240.1(d), FHFA
                is proposing to amend its existing rule, 12 CFR part 1225, ``Minimum
                Capital--Temporary Increase,'' to clarify that the authority
                implemented in that rule to temporarily increase a regulated entity's
                required capital minimums applies to risk-based minimum capital levels
                as well as to minimum leverage ratios. This amendment aligns the scope
                of this regulation, adopted under 12 U.S.C. 4612(d), with the FHFA
                Director's authority under 12 U.S.C. 4612(e) to establish additional
                capital and reserve requirements for particular purposes, which
                authorizes risk-based adjustments to capital requirements for
                particular products and activities and is not limited to adjustments to
                the leverage ratio. FHFA is also proposing to amend the definition of
                ``total exposure'' in Sec. 1206.2 to have the same meaning as
                ``adjusted total assets'' as defined in Sec. 1240.2. FHFA is also
                proposing to remove 12 CFR part 1750.
                 Question 106. Should FHFA conform the definition of ``total
                exposure'' in Sec. 1206.2 to have the same meaning as ``adjusted total
                assets'' as defined in Sec. 1240.2?
                 Question 107. In addition to the questions asked above, FHFA
                requests comments on any aspect of the proposed rule.
                XVI. Paperwork Reduction Act
                 The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
                that regulations involving the collection of information receive
                clearance from the Office of Management and Budget (OMB). The proposed
                rule contains no such collection of information requiring OMB approval
                under the PRA. Therefore, no information has been submitted to OMB for
                review.
                XVII. Regulatory Flexibility Act
                 The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
                a regulation that has a significant economic impact on a substantial
                number of small entities, small businesses, or small organizations must
                include an initial regulatory flexibility analysis describing the
                regulation's impact on small entities. FHFA need not undertake such an
                analysis if the agency has certified that the regulation will not have
                a significant economic impact on a substantial number of small
                entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
                proposed rule under the Regulatory Flexibility Act. The General Counsel
                of FHFA certifies that the proposed rule, if adopted as a final rule,
                would not have a significant economic impact on a substantial number of
                small entities because the proposed rule is applicable only to the
                Enterprises, which are not small entities for purposes of the
                Regulatory Flexibility Act.
                List of Subjects
                12 CFR Part 1206
                 Assessments, Federal home loan banks, Government-sponsored
                enterprises, Reporting and recordkeeping requirements.
                12 CFR Part 1225
                 Federal home loan banks, Federal National Mortgage Association,
                Federal Home Loan Mortgage Corporation, Capital, Filings, Minimum
                capital, Procedures, Standards.
                12 CFR Part 1240
                 Capital, Credit, Enterprise, Investments, Reporting and
                recordkeeping requirements.
                12 CFR Part 1750
                 Banks, banking, Capital classification, Mortgages, Organization and
                functions (Government agencies), Risk-based capital, Securities.
                Authority and Issuance
                 For the reasons stated in the preamble, under the authority of 12
                U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-4612, 4631-36, FHFA
                proposes to amend chapters XII and XVII, of title 12 of the Code of
                Federal Regulation as follows:
                CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
                SUBCHAPTER A--ORGANIZATION AND OPERATIONS
                PART 1206--ASSESSMENTS
                0
                1. The authority citation for part 1206 continues to read as follows:
                 Authority: 12 U.S.C. 4516.
                0
                2. Amend 12 CFR 1206.2 by revising the definition of ``Total exposure''
                to read as follows:
                Sec. 1206.2 Definitions.
                * * * * *
                 Total exposure has the same meaning given to adjusted total assets
                in 12 CFR 1240.2.
                * * * * *
                [[Page 39357]]
                SUBCHAPTER B--ENTITY REGULATIONS
                PART 1225--MINIMUM CAPITAL--TEMPORARY INCREASE
                0
                3. The authority citation for part 1225 continues to read as follows:
                 Authority: 12 U.S.C. 4513, 4526 and 4612.
                0
                4. Amend 12 CFR 1225.2 by revising the definition of ``Minimum capital
                level'' to read as follows:
                Sec. 1225.2 Definitions.
                * * * * *
                 Minimum capital level means the lowest amount of capital meeting
                any regulation or orders issued pursuant to 12 U.S.C. 1426 and 12
                U.S.C. 4612, or any similar requirement established by regulation,
                order or other action.
                * * * * *
                SUBCHAPTER C--ENTERPRISES
                0
                5. Add part 1240 to subchapter C to read as follows:
                PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
                Sec.
                Subpart A--General Provisions
                1240.1 Purpose, applicability, reservations of authority, and
                reporting.
                1240.2 Definitions.
                1240.3 Operational requirements for counterparty credit risk.
                1240.4 Compliance dates.
                Subpart B--Capital Requirements and Buffers
                1240.10 Capital requirements.
                1240.11 Capital conservation buffer and leverage buffer.
                Subpart C--Definition of Capital
                1240.20 Capital components and eligibility criteria for regulatory
                capital instruments.
                1240.21 [Reserved]
                1240.22 Regulatory capital adjustments and deductions.
                Subpart D--Risk-Weighted Assets--Standardized Approach
                1240.30 Applicability.
                Risk-Weighted Assets for General Credit Risk
                1240.31 Mechanics for calculating risk-weighted assets for general
                credit risk.
                1240.32 General risk weights.
                1240.33 Single-family mortgage exposures.
                1240.34 Multifamily mortgage exposures.
                1240.35 Off-balance sheet exposures.
                1240.36 Derivative contracts.
                1240.37 Cleared transactions.
                1240.38 Guarantees and credit derivatives: Substitution treatment.
                1240.39 Collateralized transactions.
                Risk-Weighted Assets for Unsettled Transactions
                1240.40 Unsettled transactions.
                Risk-Weighted Assets for CRT and Other Securitization Exposures
                1240.41 Operational requirements for CRT and other securitization
                exposures.
                1240.42 Risk-weighted assets for CRT and other securitization
                exposures.
                1240.43 Simplified supervisory formula approach (SSFA).
                1240.44 Credit risk transfer approach (CRTA).
                1240.45 Securitization exposures to which the SSFA and the CRTA do
                not apply.
                1240.46 Recognition of credit risk mitigants for securitization
                exposures.
                Risk-Weighted Assets for Equity Exposures
                1240.51 Exposure measurement.
                Subpart E--Risk-Weighted Assets--Internal Ratings-Based and Advanced
                Measurement Approaches
                1240.100 Purpose, applicability, and principle of conservatism.
                1240.101 Definitions.
                1240.121 Minimum requirements.
                1240.122 Ongoing qualification.
                1240.123 Advanced approaches credit risk-weighted asset
                calculations.
                1240.161 Qualification requirements for incorporation of operational
                risk mitigants.
                1240.162 Mechanics of operational risk risk-weighted asset
                calculation.
                Subpart F--Risk-Weighted Assets--Market Risk
                1240.201 Purpose, applicability, and reservation of authority.
                1240.202 Definitions.
                1240.203 Requirements for managing market risk.
                1240.204 Measure for spread risk.
                Subpart G--Stability Capital Buffer
                1240.400 Stability capital buffer.
                 Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
                4611-4612, 4631-36.
                Subpart A--General Provisions
                Sec. 1240.1 Purpose, applicability, reservations of authority, and
                reporting.
                 (a) Purpose. This part establishes capital requirements and overall
                capital adequacy standards for the Enterprises. This part includes
                methodologies for calculating capital requirements.
                 (b) Authorities--(1) Limitations of authority. Nothing in this part
                shall be read to limit the authority of FHFA to take action under other
                provisions of law, including action to address unsafe or unsound
                practices or conditions, deficient capital levels, or violations of law
                or regulation under the Safety and Soundness Act, and including action
                under sections 1313(a)(2), 1365-1367, 1371-1376 (12 U.S.C. 4513(a)(2),
                4615-4617, and 4631-4636).
                 (2) Permissible activities. Nothing in this part may be construed
                to authorize, permit, or require an Enterprise to engage in any
                activity not authorized by its authorizing statute or that would
                otherwise be inconsistent with its authorizing statute or the Safety
                and Soundness Act.
                 (c) Applicability--(1) Covered regulated entities. This part
                applies on a consolidated basis to each Enterprise.
                 (2) Capital requirements and overall capital adequacy standards.
                Each Enterprise must calculate its capital requirements and meet the
                overall capital adequacy standards in subpart B of this part.
                 (3) Regulatory capital. Each Enterprise must calculate its
                regulatory capital in accordance with subpart C of this part.
                 (4) Risk-weighted assets. (i) Each Enterprise must use the
                methodologies in subparts D and F of this part to calculate
                standardized total risk-weighted assets.
                 (ii) Each Enterprise must use the methodologies in subpart E and
                subpart F of this part to calculate advanced approaches total risk-
                weighted assets.
                 (d) Reservation of authority regarding capital. Subject to
                applicable provisions of the Safety and Soundness Act--
                 (1) Additional capital in the aggregate. FHFA may require an
                Enterprise to hold an amount of regulatory capital greater than
                otherwise required under this part if FHFA determines that the
                Enterprise's capital requirements under this part are not commensurate
                with the Enterprise's credit, market, operational, or other risks.
                 (2) Regulatory capital elements. (i) If FHFA determines that a
                particular common equity tier 1 capital, additional tier 1 capital, or
                tier 2 capital element has characteristics or terms that diminish its
                ability to absorb losses, or otherwise present safety and soundness
                concerns, FHFA may require the Enterprise to exclude all or a portion
                of such element from common equity tier 1 capital, additional tier 1
                capital, or tier 2 capital, as appropriate.
                 (ii) Notwithstanding the criteria for regulatory capital
                instruments set forth in subpart C of this part, FHFA may find that a
                capital element may be included in an Enterprise's common equity tier 1
                capital, additional tier 1 capital, or tier 2 capital on a permanent or
                temporary basis consistent with the loss absorption capacity of the
                element and in accordance with Sec. 1240.20(e).
                 (3) Risk-weighted asset amounts. If FHFA determines that the risk-
                weighted asset amount calculated under this part by the Enterprise for
                one or more exposures is not commensurate with the risks associated
                with those exposures, FHFA may require the Enterprise to assign a
                different risk-weighted asset amount to the exposure(s) or to deduct
                [[Page 39358]]
                the amount of the exposure(s) from its regulatory capital.
                 (4) Total leverage. If FHFA determines that the adjusted total
                asset amount calculated by an Enterprise under Sec. 1240.10 is
                inappropriate for the exposure(s) or the circumstances of the
                Enterprise, FHFA may require the Enterprise to adjust this exposure
                amount in the numerator and the denominator for purposes of the
                leverage ratio calculations.
                 (5) Consolidation of certain exposures. FHFA may determine that the
                risk-based capital treatment for an exposure or the treatment provided
                to an entity that is not consolidated on the Enterprise's balance sheet
                is not commensurate with the risk of the exposure and the relationship
                of the Enterprise to the entity. Upon making this determination, FHFA
                may require the Enterprise to treat the exposure or entity as if it
                were consolidated on the balance sheet of the Enterprise for purposes
                of determining the Enterprise's risk-based capital requirements and
                calculating the Enterprise's risk-based capital ratios accordingly.
                FHFA will look to the substance of, and risk associated with, the
                transaction, as well as other relevant factors FHFA deems appropriate
                in determining whether to require such treatment.
                 (6) Other reservation of authority. With respect to any deduction
                or limitation required under this part, FHFA may require a different
                deduction or limitation, provided that such alternative deduction or
                limitation is commensurate with the Enterprise's risk and consistent
                with safety and soundness.
                 (e) Corrective action and enforcement. FHFA may enforce this part
                pursuant to sections 1371, 1372, and 1376 of the Safety and Soundness
                Act (12 U.S.C. 4631, 4632, 4636) and also may enforce the total capital
                requirement established under Sec. 1240.10(a) and the core capital
                requirement established under Sec. 1240.10(e) pursuant to section 1364
                of the Safety and Soundness Act (12 U.S.C. 4614). This part is also a
                prudential standard adopted under section 1313b of the Safety and
                Soundness Act (12 U.S.C. 4513b), excluding Sec. 1240.11, which is a
                prudential standard only for purposes of Sec. 1240.4(d). That section
                authorizes the Director to require that an Enterprise submit a
                corrective plan under 12 CFR 1236.4 specifying the actions the
                Enterprise will take to correct the deficiency if the Director
                determines that an Enterprise is not in compliance with this part.
                 (f) Reporting procedure and timing--(1) Capital Reports. Each
                Enterprise shall file a capital report with FHFA every calendar quarter
                providing the information and data required by FHFA. The specifics of
                required information and data, and the report format, will be
                separately provided to the Enterprise by FHFA. The report shall include
                the ratio of capital requirement under Sec. 1240.10 to the adjusted
                total assets of the Enterprise and the maximum payout ratio of the
                Enterprise.
                 (2) Timing. The capital report shall be submitted not later than 60
                days after calendar quarter end or at such other time as the Director
                requires.
                 (3) Approval. The capital report must be approved by the Chief Risk
                Officer and the Chief Financial Officer of an Enterprise prior to
                submission to FHFA.
                 (4) Adjustment. In the event an Enterprise makes an adjustment to
                its financial statements for a quarter or a date for which information
                was provided pursuant to this paragraph (f), which would cause an
                adjustment to a capital report, an Enterprise must file with the
                Director an amended capital report not later than 15 days after the
                date of such adjustment.
                Sec. 1240.2 Definitions.
                 As used in this part:
                 12 CFR 217 means the regulation published at 12 CFR part 217 as of
                April 23, 2020.
                 Acquired CRT exposure means, with respect to an Enterprise:
                 (1) Any exposure that arises from a credit risk transfer of the
                Enterprise and has been acquired by the Enterprise since the issuance
                or entry into the credit risk transfer by the Enterprise; or
                 (2) Any exposure that arises from a credit risk transfer of the
                other Enterprise.
                 Additional tier 1 capital is defined in Sec. 1240.20(c).
                 Adjusted allowances for credit losses (AACL) means valuation
                allowances that have been established through a charge against earnings
                or retained earnings for expected credit losses on financial assets
                measured at amortized cost and a lessor's net investment in leases that
                have been established to reduce the amortized cost basis of the assets
                to amounts expected to be collected as determined in accordance with
                GAAP. For purposes of this part, adjusted allowances for credit losses
                include allowances for expected credit losses on off-balance sheet
                credit exposures not accounted for as insurance as determined in
                accordance with GAAP. Adjusted allowances for credit losses allowances
                created that reflect credit losses on purchased credit deteriorated
                assets and available-for-sale debt securities.
                 Adjusted total assets means the sum of the items described in
                paragraphs (1) though (9) of this definition, as adjusted pursuant to
                paragraph (9) for a clearing member Enterprise:
                 (1) The balance sheet carrying value of all of the Enterprise's on-
                balance sheet assets, plus the value of securities sold under a
                repurchase transaction or a securities lending transaction that
                qualifies for sales treatment under GAAP, less amounts deducted from
                tier 1 capital under Sec. 1240.22(a), (c), and (d), and less the value
                of securities received in security-for-security repo-style
                transactions, where the Enterprise acts as a securities lender and
                includes the securities received in its on-balance sheet assets but has
                not sold or re-hypothecated the securities received, and less the fair
                value of any derivative contracts;
                 (2) The potential future credit exposure (PFE) for each derivative
                contract or each single-product netting set of derivative contracts
                (including a cleared transaction except as provided in paragraph (9) of
                this definition and, at the discretion of the Enterprise, excluding a
                forward agreement treated as a derivative contract that is part of a
                repurchase or reverse repurchase or a securities borrowing or lending
                transaction that qualifies for sales treatment under GAAP), to which
                the Enterprise is a counterparty as determined under 12 CFR 217.34, but
                without regard to 12 CFR 217.34(b), provided that:
                 (i) An Enterprise may choose to exclude the PFE of all credit
                derivatives or other similar instruments through which it provides
                credit protection when calculating the PFE under 12 CFR 217.34, but
                without regard to 12 CFR 217.34(b), provided that it does not adjust
                the net-to-gross ratio (NGR); and
                 (ii) An Enterprise that chooses to exclude the PFE of credit
                derivatives or other similar instruments through which it provides
                credit protection pursuant to paragraph (2)(i) of this definition must
                do so consistently over time for the calculation of the PFE for all
                such instruments;
                 (3) The amount of cash collateral that is received from a
                counterparty to a derivative contract and that has offset the mark-to-
                fair value of the derivative asset, or cash collateral that is posted
                to a counterparty to a derivative contract and that has reduced the
                Enterprise's on-balance sheet assets, unless such cash collateral is
                all or part of variation margin that satisfies the following
                requirements:
                 (i) The variation margin is used to reduce the current credit
                exposure of the derivative contract, calculated as
                [[Page 39359]]
                described in 12 CFR 217.34(b) and not the PFE; and
                 (ii) For derivative contracts that are not cleared through a QCCP,
                the cash collateral received by the recipient counterparty is not
                segregated (by law, regulation, or an agreement with the counterparty);
                 (iii) Variation margin is calculated and transferred on a daily
                basis based on the mark-to-fair value of the derivative contract;
                 (iv) The variation margin transferred under the derivative contract
                or the governing rules of the CCP or QCCP for a cleared transaction is
                the full amount that is necessary to fully extinguish the net current
                credit exposure to the counterparty of the derivative contracts,
                subject to the threshold and minimum transfer amounts applicable to the
                counterparty under the terms of the derivative contract or the
                governing rules for a cleared transaction;
                 (v) The variation margin is in the form of cash in the same
                currency as the currency of settlement set forth in the derivative
                contract, provided that for the purposes of this paragraph, currency of
                settlement means any currency for settlement specified in the governing
                qualifying master netting agreement and the credit support annex to the
                qualifying master netting agreement, or in the governing rules for a
                cleared transaction; and
                 (vi) The derivative contract and the variation margin are governed
                by a qualifying master netting agreement between the legal entities
                that are the counterparties to the derivative contract or by the
                governing rules for a cleared transaction, and the qualifying master
                netting agreement or the governing rules for a cleared transaction must
                explicitly stipulate that the counterparties agree to settle any
                payment obligations on a net basis, taking into account any variation
                margin received or provided under the contract if a credit event
                involving either counterparty occurs;
                 (4) The effective notional principal amount (that is, the apparent
                or stated notional principal amount multiplied by any multiplier in the
                derivative contract) of a credit derivative, or other similar
                instrument, through which the Enterprise provides credit protection,
                provided that:
                 (i) The Enterprise may reduce the effective notional principal
                amount of the credit derivative by the amount of any reduction in the
                mark-to-fair value of the credit derivative if the reduction is
                recognized in common equity tier 1 capital;
                 (ii) The Enterprise may reduce the effective notional principal
                amount of the credit derivative by the effective notional principal
                amount of a purchased credit derivative or other similar instrument,
                provided that the remaining maturity of the purchased credit derivative
                is equal to or greater than the remaining maturity of the credit
                derivative through which the Enterprise provides credit protection and
                that:
                 (A) With respect to a credit derivative that references a single
                exposure, the reference exposure of the purchased credit derivative is
                to the same legal entity and ranks pari passu with, or is junior to,
                the reference exposure of the credit derivative through which the
                Enterprise provides credit protection; or
                 (B) With respect to a credit derivative that references multiple
                exposures, the reference exposures of the purchased credit derivative
                are to the same legal entities and rank pari passu with the reference
                exposures of the credit derivative through which the Enterprise
                provides credit protection, and the level of seniority of the purchased
                credit derivative ranks pari passu to the level of seniority of the
                credit derivative through which the Enterprise provides credit
                protection;
                 (C) Where an Enterprise has reduced the effective notional amount
                of a credit derivative through which the Enterprise provides credit
                protection in accordance with paragraph (4)(i) of this definition, the
                Enterprise must also reduce the effective notional principal amount of
                a purchased credit derivative used to offset the credit derivative
                through which the Enterprise provides credit protection, by the amount
                of any increase in the mark-to-fair value of the purchased credit
                derivative that is recognized in common equity tier 1 capital; and
                 (D) Where the Enterprise purchases credit protection through a
                total return swap and records the net payments received on a credit
                derivative through which the Enterprise provides credit protection in
                net income, but does not record offsetting deterioration in the mark-
                to-fair value of the credit derivative through which the Enterprise
                provides credit protection in net income (either through reductions in
                fair value or by additions to reserves), the Enterprise may not use the
                purchased credit protection to offset the effective notional principal
                amount of the related credit derivative through which the Enterprise
                provides credit protection;
                 (5) Where an Enterprise acting as a principal has more than one
                repo-style transaction with the same counterparty and has offset the
                gross value of receivables due from a counterparty under reverse
                repurchase transactions by the gross value of payables under repurchase
                transactions due to the same counterparty, the gross value of
                receivables associated with the repo-style transactions less any on-
                balance sheet receivables amount associated with these repo-style
                transactions included under paragraph (1) of this definition, unless
                the following criteria are met:
                 (i) The offsetting transactions have the same explicit final
                settlement date under their governing agreements;
                 (ii) The right to offset the amount owed to the counterparty with
                the amount owed by the counterparty is legally enforceable in the
                normal course of business and in the event of receivership, insolvency,
                liquidation, or similar proceeding; and
                 (iii) Under the governing agreements, the counterparties intend to
                settle net, settle simultaneously, or settle according to a process
                that is the functional equivalent of net settlement, (that is, the cash
                flows of the transactions are equivalent, in effect, to a single net
                amount on the settlement date), where both transactions are settled
                through the same settlement system, the settlement arrangements are
                supported by cash or intraday credit facilities intended to ensure that
                settlement of both transactions will occur by the end of the business
                day, and the settlement of the underlying securities does not interfere
                with the net cash settlement;
                 (6) The counterparty credit risk of a repo-style transaction,
                including where the Enterprise acts as an agent for a repo-style
                transaction and indemnifies the customer with respect to the
                performance of the customer's counterparty in an amount limited to the
                difference between the fair value of the security or cash its customer
                has lent and the fair value of the collateral the borrower has
                provided, calculated as follows:
                 (i) If the transaction is not subject to a qualifying master
                netting agreement, the counterparty credit risk (E*) for transactions
                with a counterparty must be calculated on a transaction by transaction
                basis, such that each transaction i is treated as its own netting set,
                in accordance with the following formula, where Ei is the fair value of
                the instruments, gold, or cash that the Enterprise has lent, sold
                subject to repurchase, or provided as collateral to the counterparty,
                and Ci is the fair value of the instruments, gold, or cash that the
                Enterprise has borrowed, purchased subject to resale, or received as
                collateral from the counterparty:
                Ei* = max {0, [Ei-Ci]{time}
                [[Page 39360]]
                 (ii) If the transaction is subject to a qualifying master netting
                agreement, the counterparty credit risk (E*) must be calculated as the
                greater of zero and the total fair value of the instruments, gold, or
                cash that the Enterprise has lent, sold subject to repurchase or
                provided as collateral to a counterparty for all transactions included
                in the qualifying master netting agreement ([Sigma]Ei), less the total
                fair value of the instruments, gold, or cash that the Enterprise
                borrowed, purchased subject to resale or received as collateral from
                the counterparty for those transactions ([Sigma]Ci), in accordance with
                the following formula:
                E* = max {0, [[Sigma]Ei-[Sigma]Ci]{time}
                 (7) If an Enterprise acting as an agent for a repo-style
                transaction provides a guarantee to a customer of the security or cash
                its customer has lent or borrowed with respect to the performance of
                the customer's counterparty and the guarantee is not limited to the
                difference between the fair value of the security or cash its customer
                has lent and the fair value of the collateral the borrower has
                provided, the amount of the guarantee that is greater than the
                difference between the fair value of the security or cash its customer
                has lent and the value of the collateral the borrower has provided;
                 (8) The credit equivalent amount of all off-balance sheet exposures
                of the Enterprise, excluding repo-style transactions, repurchase or
                reverse repurchase or securities borrowing or lending transactions that
                qualify for sales treatment under GAAP, and derivative transactions,
                determined using the applicable credit conversion factor under 12 CFR
                217.33(b), provided, however, that the minimum credit conversion factor
                that may be assigned to an off-balance sheet exposure under this
                paragraph is 10 percent; and
                 (9) For an Enterprise that is a clearing member:
                 (i) A clearing member Enterprise that guarantees the performance of
                a clearing member client with respect to a cleared transaction must
                treat its exposure to the clearing member client as a derivative
                contract for purposes of determining its adjusted total assets;
                 (ii) A clearing member Enterprise that guarantees the performance
                of a CCP with respect to a transaction cleared on behalf of a clearing
                member client must treat its exposure to the CCP as a derivative
                contract for purposes of determining its adjusted total assets;
                 (iii) A clearing member Enterprise that does not guarantee the
                performance of a CCP with respect to a transaction cleared on behalf of
                a clearing member client may exclude its exposure to the CCP for
                purposes of determining its adjusted total assets;
                 (iv) An Enterprise that is a clearing member may exclude from its
                adjusted total assets the effective notional principal amount of credit
                protection sold through a credit derivative contract, or other similar
                instrument, that it clears on behalf of a clearing member client
                through a CCP as calculated in accordance with paragraph (4) of this
                definition; and
                 (v) Notwithstanding paragraphs (9)(i) through (iii) of this
                definition, an Enterprise may exclude from its adjusted total assets a
                clearing member's exposure to a clearing member client for a derivative
                contract, if the clearing member client and the clearing member are
                affiliates and consolidated for financial reporting purposes on the
                Enterprise's balance sheet.
                 Adjusted total capital means the sum of tier 1 capital and tier 2
                capital.
                 Advanced approaches total risk-weighted assets means:
                 (1) The sum of:
                 (i) Credit-risk-weighted assets for general credit risk (including
                for mortgage exposures), cleared transactions, default fund
                contributions, unsettled transactions, securitization exposures
                (including retained CRT exposures), equity exposures, and the fair
                value adjustment to reflect counterparty credit risk in valuation of
                OTC derivative contracts, each as calculated under Sec. 1240.123.
                 (ii) Risk-weighted assets for operational risk, as calculated under
                Sec. 1240.162(c); and
                 (iii) Advanced market risk-weighted assets; minus
                 (2) Excess eligible credit reserves not included in the
                Enterprise's tier 2 capital.
                 Advanced market risk-weighted assets means the advanced measure for
                spread risk calculated under Sec. 1240.204(a) multiplied by 12.5.
                 Affiliate has the meaning given in section 1303(1) of the Safety
                and Soundness Act (12 U.S.C. 4502(1)).
                 Allowances for loan and lease losses (ALLL) means valuation
                allowances that have been established through a charge against earnings
                to cover estimated credit losses on loans, lease financing receivables
                or other extensions of credit as determined in accordance with GAAP.
                For purposes of this part, ALLL includes allowances that have been
                established through a charge against earnings to cover estimated credit
                losses associated with off-balance sheet credit exposures as determined
                in accordance with GAAP.
                 Carrying value means, with respect to an asset, the value of the
                asset on the balance sheet of an Enterprise as determined in accordance
                with GAAP. For all assets other than available-for-sale debt securities
                or purchased credit deteriorated assets, the carrying value is not
                reduced by any associated credit loss allowance that is determined in
                accordance with GAAP.
                 Central counterparty (CCP) means a counterparty (for example, a
                clearing house) that facilitates trades between counterparties in one
                or more financial markets by either guaranteeing trades or novating
                contracts.
                 CFTC means the U.S. Commodity Futures Trading Commission.
                 Clean-up call means a contractual provision that permits an
                originating Enterprise or servicer to call securitization exposures
                before their stated maturity or call date.
                 Cleared transaction means an exposure associated with an
                outstanding derivative contract or repo-style transaction that an
                Enterprise or clearing member has entered into with a central
                counterparty (that is, a transaction that a central counterparty has
                accepted).
                 (1) The following transactions are cleared transactions:
                 (i) A transaction between a CCP and an Enterprise that is a
                clearing member of the CCP where the Enterprise enters into the
                transaction with the CCP for the Enterprise's own account;
                 (ii) A transaction between a CCP and an Enterprise that is a
                clearing member of the CCP where the Enterprise is acting as a
                financial intermediary on behalf of a clearing member client and the
                transaction offsets another transaction that satisfies the requirements
                set forth in Sec. 1240.3(a);
                 (iii) A transaction between a clearing member client Enterprise and
                a clearing member where the clearing member acts as a financial
                intermediary on behalf of the clearing member client and enters into an
                offsetting transaction with a CCP, provided that the requirements set
                forth in Sec. 1240.3(a) are met; or
                 (iv) A transaction between a clearing member client Enterprise and
                a CCP where a clearing member guarantees the performance of the
                clearing member client Enterprise to the CCP and the transaction meets
                the requirements of Sec. 1240.3(a)(2) and (a)(3).
                 (2) The exposure of an Enterprise that is a clearing member to its
                clearing member client is not a cleared transaction where the
                Enterprise is either acting as a financial intermediary and enters into
                an offsetting transaction with a CCP or where the Enterprise
                [[Page 39361]]
                provides a guarantee to the CCP on the performance of the client.
                 Clearing member means a member of, or direct participant in, a CCP
                that is entitled to enter into transactions with the CCP.
                 Clearing member client means a party to a cleared transaction
                associated with a CCP in which a clearing member acts either as a
                financial intermediary with respect to the party or guarantees the
                performance of the party to the CCP.
                 Client-facing derivative transaction means a derivative contract
                that is not a cleared transaction where the Enterprise is either acting
                as a financial intermediary and enters into an offsetting transaction
                with a qualifying central counterparty (QCCP) or where the Enterprise
                provides a guarantee on the performance of a client on a transaction
                between the client and a QCCP.
                 Collateral agreement means a legal contract that specifies the time
                when, and circumstances under which, a counterparty is required to
                pledge collateral to an Enterprise for a single financial contract or
                for all financial contracts in a netting set and confers upon the
                Enterprise a perfected, first-priority security interest
                (notwithstanding the prior security interest of any custodial agent),
                or the legal equivalent thereof, in the collateral posted by the
                counterparty under the agreement. This security interest must provide
                the Enterprise with a right to close-out the financial positions and
                liquidate the collateral upon an event of default of, or failure to
                perform by, the counterparty under the collateral agreement. A contract
                would not satisfy this requirement if the Enterprise's exercise of
                rights under the agreement may be stayed or avoided:
                 (1) Under applicable law in the relevant jurisdictions, other than
                 (i) In receivership, conservatorship, or resolution under the
                Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
                any similar insolvency law applicable to GSEs, or laws of foreign
                jurisdictions that are substantially similar to the U.S. laws
                referenced in this paragraph (1)(i) in order to facilitate the orderly
                resolution of the defaulting counterparty;
                 (ii) Where the agreement is subject by its terms to, or
                incorporates, any of the laws referenced in paragraph (1)(i) of this
                definition; or
                 (2) Other than to the extent necessary for the counterparty to
                comply with the requirements of subpart I of Federal Reserve Board's
                Regulation YY (part 252 of this title), part 47 of this title, or part
                382 of this title, as applicable.
                 Commitment means any legally binding arrangement that obligates an
                Enterprise to extend credit or to purchase assets.
                 Common equity tier 1 capital is defined in Sec. 1240.20(b).
                 Company means a corporation, partnership, limited liability
                company, depository institution, business trust, special purpose
                entity, association, or similar organization.
                 Core capital has the meaning given at section 1303(7) of the Safety
                and Soundness Act (12 U.S.C. 4502(7)).
                 Corporate exposure means an exposure to a company that is not:
                 (1) An exposure to a sovereign, the Bank for International
                Settlements, the European Central Bank, the European Commission, the
                International Monetary Fund, the European Stability Mechanism, the
                European Financial Stability Facility, a multi-lateral development bank
                (MDB), a depository institution, a foreign bank, a credit union, or a
                public sector entity (PSE);
                 (2) An exposure to a GSE;
                 (3) A mortgage exposure;
                 (4) A cleared transaction;
                 (5) A default fund contribution;
                 (6) A securitization exposure; or
                 (7) An equity exposure.
                 Credit derivative means a financial contract executed under
                standard industry credit derivative documentation that allows one party
                (the protection purchaser) to transfer the credit risk of one or more
                exposures (reference exposure(s)) to another party (the protection
                provider) for a certain period of time.
                 Credit-enhancing interest-only strip (CEIO) means an on-balance
                sheet asset that, in form or in substance:
                 (1) Represents a contractual right to receive some or all of the
                interest and no more than a minimal amount of principal due on the
                underlying exposures of a securitization; and
                 (2) Exposes the holder of the CEIO to credit risk directly or
                indirectly associated with the underlying exposures that exceeds a pro
                rata share of the holder's claim on the underlying exposures, whether
                through subordination provisions or other credit-enhancement
                techniques.
                 Credit risk mitigant means collateral, a credit derivative, or a
                guarantee.
                 Credit union means an insured credit union as defined under the
                Federal Credit Union Act (12 U.S.C. 1752 et seq.).
                 Credit risk transfer (CRT) means any traditional securitization,
                synthetic securitization, senior/subordinated structure, credit
                derivative, guarantee, or other structure or arrangement (other than
                primary mortgage insurance, a traditional securitization that satisfies
                the conditions under Sec. 1240.41(a), or a synthetic securitization
                that satisfies the conditions under Sec. 1240.41(b)) that allows an
                Enterprise to transfer the credit risk of one or more mortgage
                exposures (reference exposure(s)) to another party (the protection
                provider).
                 Current Expected Credit Losses (CECL) means the current expected
                credit losses methodology under GAAP.
                 Default fund contribution means the funds contributed or
                commitments made by a clearing member to a CCP's mutualized loss
                sharing arrangement.
                 Depository institution means a depository institution as defined in
                section 3 of the Federal Deposit Insurance Act.
                 Derivative contract means a financial contract whose value is
                derived from the values of one or more underlying assets, reference
                rates, or indices of asset values or reference rates. Derivative
                contracts include interest rate derivative contracts, exchange rate
                derivative contracts, equity derivative contracts, commodity derivative
                contracts, credit derivative contracts, and any other instrument that
                poses similar counterparty credit risks. Derivative contracts also
                include unsettled securities, commodities, and foreign exchange
                transactions with a contractual settlement or delivery lag that is
                longer than the lesser of the market standard for the particular
                instrument or five business days.
                 Discretionary bonus payment means a payment made to an executive
                officer of an Enterprise, where:
                 (1) The Enterprise retains discretion as to whether to make, and
                the amount of, the payment until the payment is awarded to the
                executive officer;
                 (2) The amount paid is determined by the Enterprise without prior
                promise to, or agreement with, the executive officer; and
                 (3) The executive officer has no contractual right, whether express
                or implied, to the bonus payment.
                 Distribution means:
                 (1) A reduction of tier 1 capital through the repurchase of a tier
                1 capital instrument or by other means, except when an Enterprise,
                within the same quarter when the repurchase is announced, fully
                replaces a tier 1 capital instrument it has repurchased by issuing
                another capital instrument that meets the eligibility criteria for:
                 (i) A common equity tier 1 capital instrument if the instrument
                being repurchased was part of the Enterprise's common equity tier 1
                capital, or
                 (ii) A common equity tier 1 or additional tier 1 capital instrument
                if
                [[Page 39362]]
                the instrument being repurchased was part of the Enterprise's tier 1
                capital;
                 (2) A reduction of tier 2 capital through the repurchase, or
                redemption prior to maturity, of a tier 2 capital instrument or by
                other means, except when an Enterprise, within the same quarter when
                the repurchase or redemption is announced, fully replaces a tier 2
                capital instrument it has repurchased by issuing another capital
                instrument that meets the eligibility criteria for a tier 1 or tier 2
                capital instrument;
                 (3) A dividend declaration or payment on any tier 1 capital
                instrument;
                 (4) A dividend declaration or interest payment on any tier 2
                capital instrument if the Enterprise has full discretion to permanently
                or temporarily suspend such payments without triggering an event of
                default; or
                 (5) Any similar transaction that FHFA determines to be in substance
                a distribution of capital.
                 Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer
                Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
                 Early amortization provision means a provision in the documentation
                governing a securitization that, when triggered, causes investors in
                the securitization exposures to be repaid before the original stated
                maturity of the securitization exposures, unless the provision:
                 (1) Is triggered solely by events not directly related to the
                performance of the underlying exposures or the originating Enterprise
                (such as material changes in tax laws or regulations); or
                 (2) Leaves investors fully exposed to future draws by borrowers on
                the underlying exposures even after the provision is triggered.
                 Effective notional amount means for an eligible guarantee or
                eligible credit derivative, the lesser of the contractual notional
                amount of the credit risk mitigant and the exposure amount of the
                hedged exposure, multiplied by the percentage coverage of the credit
                risk mitigant.
                 Eligible clean-up call means a clean-up call that:
                 (1) Is exercisable solely at the discretion of the originating
                Enterprise or servicer;
                 (2) Is not structured to avoid allocating losses to securitization
                exposures held by investors or otherwise structured to provide credit
                enhancement to the securitization; and
                 (3)(i) For a traditional securitization, is only exercisable when
                10 percent or less of the principal amount of the underlying exposures
                or securitization exposures (determined as of the inception of the
                securitization) is outstanding; or
                 (ii) For a synthetic securitization or credit risk transfer, is
                only exercisable when 10 percent or less of the principal amount of the
                reference portfolio of underlying exposures (determined as of the
                inception of the securitization) is outstanding.
                 Eligible credit derivative means a credit derivative in the form of
                a credit default swap, nth-to-default swap, total return swap, or any
                other form of credit derivative approved by FHFA, provided that:
                 (1) The contract meets the requirements of an eligible guarantee
                and has been confirmed by the protection purchaser and the protection
                provider;
                 (2) Any assignment of the contract has been confirmed by all
                relevant parties;
                 (3) If the credit derivative is a credit default swap or nth-to-
                default swap, the contract includes the following credit events:
                 (i) Failure to pay any amount due under the terms of the reference
                exposure, subject to any applicable minimal payment threshold that is
                consistent with standard market practice and with a grace period that
                is closely in line with the grace period of the reference exposure; and
                 (ii) Receivership, insolvency, liquidation, conservatorship or
                inability of the reference exposure issuer to pay its debts, or its
                failure or admission in writing of its inability generally to pay its
                debts as they become due, and similar events;
                 (4) The terms and conditions dictating the manner in which the
                contract is to be settled are incorporated into the contract;
                 (5) If the contract allows for cash settlement, the contract
                incorporates a robust valuation process to estimate loss reliably and
                specifies a reasonable period for obtaining post-credit event
                valuations of the reference exposure;
                 (6) If the contract requires the protection purchaser to transfer
                an exposure to the protection provider at settlement, the terms of at
                least one of the exposures that is permitted to be transferred under
                the contract provide that any required consent to transfer may not be
                unreasonably withheld;
                 (7) If the credit derivative is a credit default swap or nth-to-
                default swap, the contract clearly identifies the parties responsible
                for determining whether a credit event has occurred, specifies that
                this determination is not the sole responsibility of the protection
                provider, and gives the protection purchaser the right to notify the
                protection provider of the occurrence of a credit event; and
                 (8) If the credit derivative is a total return swap and the
                Enterprise records net payments received on the swap as net income, the
                Enterprise records offsetting deterioration in the value of the hedged
                exposure (either through reductions in fair value or by an addition to
                reserves).
                 Eligible credit reserves means all general allowances that have
                been established through a charge against earnings or retained earnings
                to cover expected credit losses associated with on- or off-balance
                sheet wholesale and retail exposures, including AACL associated with
                such exposures. Eligible credit reserves exclude allowances that
                reflect credit losses on purchased credit deteriorated assets and
                available-for-sale debt securities and other specific reserves created
                against recognized losses.
                 Eligible CRT structure means any category of credit risk transfers
                that has been approved by FHFA as effective in transferring the credit
                risk of one or more mortgage exposures to another party, taking into
                account any counterparty, recourse, or other risk to the Enterprise and
                any capital, liquidity, or other requirements applicable to
                counterparties (including any arrangement under which an entity that is
                approved by an Enterprise to originate multifamily mortgage exposures
                retains credit risk of one or more multifamily mortgage exposures pari
                passu with the Enterprise on substantially the same terms and
                conditions as in effect on [the date the proposed rule is published]
                for Fannie Mae's credit risk transfers known as the ``Delegated
                Underwriting and Servicing program'').
                 Eligible guarantee means a guarantee that:
                 (1) Is written;
                 (2) Is either:
                 (i) Unconditional, or
                 (ii) A contingent obligation of the U.S. government or its
                agencies, the enforceability of which is dependent upon some
                affirmative action on the part of the beneficiary of the guarantee or a
                third party (for example, meeting servicing requirements);
                 (3) Covers all or a pro rata portion of all contractual payments of
                the obligated party on the reference exposure;
                 (4) Gives the beneficiary a direct claim against the protection
                provider;
                 (5) Is not unilaterally cancelable by the protection provider for
                reasons other than the breach of the contract by the beneficiary;
                 (6) Except for a guarantee by a sovereign, is legally enforceable
                against
                [[Page 39363]]
                the protection provider in a jurisdiction where the protection provider
                has sufficient assets against which a judgment may be attached and
                enforced;
                 (7) Requires the protection provider to make payment to the
                beneficiary on the occurrence of a default (as defined in the
                guarantee) of the obligated party on the reference exposure in a timely
                manner without the beneficiary first having to take legal actions to
                pursue the obligor for payment;
                 (8) Does not increase the beneficiary's cost of credit protection
                on the guarantee in response to deterioration in the credit quality of
                the reference exposure;
                 (9) Is not provided by an affiliate of the Enterprise; and
                 (10) Is provided by an eligible guarantor.
                 Eligible guarantor means:
                 (1) A sovereign, the Bank for International Settlements, the
                International Monetary Fund, the European Central Bank, the European
                Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
                Corporation (Farmer Mac), the European Stability Mechanism, the
                European Financial Stability Facility, a multilateral development bank
                (MDB), a depository institution, a bank holding company as defined in
                section 2 of the Bank Holding Company Act of 1956, as amended (12
                U.S.C. 1841 et seq.), a savings and loan holding company, a credit
                union, a foreign bank, or a qualifying central counterparty; or
                 (2) An entity (other than a special purpose entity):
                 (i) That at the time the guarantee is issued or anytime thereafter,
                has issued and outstanding an unsecured debt security without credit
                enhancement that is investment grade;
                 (ii) Whose creditworthiness is not positively correlated with the
                credit risk of the exposures for which it has provided guarantees; and
                 (iii) That is not an insurance company engaged predominately in the
                business of providing credit protection (such as a monoline bond
                insurer or re-insurer).
                 Eligible margin loan means:
                 (1) An extension of credit where:
                 (i) The extension of credit is collateralized exclusively by liquid
                and readily marketable debt or equity securities, or gold;
                 (ii) The collateral is marked-to-fair value daily, and the
                transaction is subject to daily margin maintenance requirements; and
                 (iii) The extension of credit is conducted under an agreement that
                provides the Enterprise the right to accelerate and terminate the
                extension of credit and to liquidate or set-off collateral promptly
                upon an event of default, including upon an event of receivership,
                insolvency, liquidation, conservatorship, or similar proceeding, of the
                counterparty, provided that, in any such case:
                 (A) Any exercise of rights under the agreement will not be stayed
                or avoided under applicable law in the relevant jurisdictions, other
                than:
                 (1) In receivership, conservatorship, or resolution under the
                Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
                any similar insolvency law applicable to GSEs,\1\ or laws of foreign
                jurisdictions that are substantially similar to the U.S. laws
                referenced in this paragraph (1)(iii)(A)(1) in order to facilitate the
                orderly resolution of the defaulting counterparty; or
                ---------------------------------------------------------------------------
                 \1\ This requirement is met where all transactions under the
                agreement are (i) executed under U.S. law and (ii) constitute
                ``securities contracts'' under section 555 of the Bankruptcy Code
                (11 U.S.C. 555), qualified financial contracts under section
                11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
                between or among financial institutions under sections 401-407 of
                the Federal Deposit Insurance Corporation Improvement Act or the
                Federal Reserve's Regulation EE (12 CFR part 231).
                ---------------------------------------------------------------------------
                 (2) Where the agreement is subject by its terms to, or
                incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of
                this definition; and
                 (B) The agreement may limit the right to accelerate, terminate, and
                close-out on a net basis all transactions under the agreement and to
                liquidate or set-off collateral promptly upon an event of default of
                the counterparty to the extent necessary for the counterparty to comply
                with the requirements of subpart I of the Federal Reserve Board's
                Regulation YY (part 252 of this title), part 47 of this title, or part
                382 of this title, as applicable.
                 (2) In order to recognize an exposure as an eligible margin loan
                for purposes of this subpart, an Enterprise must comply with the
                requirements of Sec. 1240.3(b) with respect to that exposure.
                 Equity exposure means:
                 (1) A security or instrument (whether voting or non-voting) that
                represents a direct or an indirect ownership interest in, and is a
                residual claim on, the assets and income of a company, unless:
                 (i) The issuing company is consolidated with the Enterprise under
                GAAP;
                 (ii) The Enterprise is required to deduct the ownership interest
                from tier 1 or tier 2 capital under this part;
                 (iii) The ownership interest incorporates a payment or other
                similar obligation on the part of the issuing company (such as an
                obligation to make periodic payments); or
                 (iv) The ownership interest is a securitization exposure;
                 (2) A security or instrument that is mandatorily convertible into a
                security or instrument described in paragraph (1) of this definition;
                 (3) An option or warrant that is exercisable for a security or
                instrument described in paragraph (1) of this definition; or
                 (4) Any other security or instrument (other than a securitization
                exposure) to the extent the return on the security or instrument is
                based on the performance of a security or instrument described in
                paragraph (1) of this definition.
                 ERISA means the Employee Retirement Income and Security Act of 1974
                (29 U.S.C. 1001 et seq.).
                 Executive officer means a person who holds the title or, without
                regard to title, salary, or compensation, performs the function of one
                or more of the following positions: President, chief executive officer,
                executive chairman, chief operating officer, chief financial officer,
                chief investment officer, chief legal officer, chief lending officer,
                chief risk officer, or head of a major business line, and other staff
                that the board of directors of the Enterprise deems to have equivalent
                responsibility.
                 Exposure amount means:
                 (1) For the on-balance sheet component of an exposure (including a
                mortgage exposure); an OTC derivative contract; a repo-style
                transaction or an eligible margin loan for which the Enterprise
                determines the exposure amount under Sec. 1240.39; a cleared
                transaction; a default fund contribution; or a securitization
                exposure), the Enterprise's carrying value of the exposure.
                 (2) For the off-balance sheet component of an exposure (other than
                an OTC derivative contract; a repo-style transaction or an eligible
                margin loan for which the Enterprise calculates the exposure amount
                under Sec. 1240.39; a cleared transaction; a default fund
                contribution; or a securitization exposure), the notional amount of the
                off-balance sheet component multiplied by the appropriate credit
                conversion factor (CCF) in Sec. 1240.35.
                 (3) For an exposure that is an OTC derivative contract, the
                exposure amount determined under Sec. 1240.36.
                 (4) For an exposure that is a cleared transaction, the exposure
                amount determined under Sec. 1240.37.
                 (5) For an exposure that is an eligible margin loan or repo-style
                transaction for which the Enterprise calculates the exposure amount as
                provided in Sec. 1240.39, the exposure amount determined under Sec.
                1240.39.
                [[Page 39364]]
                 (6) For an exposure that is a securitization exposure, the exposure
                amount determined under Sec. 1240.42.
                 Federal Deposit Insurance Act means the Federal Deposit Insurance
                Act (12 U.S.C. 1813).
                 Federal Deposit Insurance Corporation Improvement Act means the
                Federal Deposit Insurance Corporation Improvement Act (12 U.S.C. 4401).
                 Federal Reserve Board means the Board of Governors of the Federal
                Reserve System.
                 Financial collateral means collateral:
                 (1) In the form of:
                 (i) Cash on deposit with the Enterprise (including cash held for
                the Enterprise by a third-party custodian or trustee);
                 (ii) Gold bullion;
                 (iii) Long-term debt securities that are not resecuritization
                exposures and that are investment grade;
                 (iv) Short-term debt instruments that are not resecuritization
                exposures and that are investment grade;
                 (v) Equity securities that are publicly traded;
                 (vi) Convertible bonds that are publicly traded; or
                 (vii) Money market fund shares and other mutual fund shares if a
                price for the shares is publicly quoted daily; and
                 (2) In which the Enterprise has a perfected, first-priority
                security interest or, outside of the United States, the legal
                equivalent thereof (with the exception of cash on deposit and
                notwithstanding the prior security interest of any custodial agent).
                 Foreign bank means a foreign bank as defined in Sec. 211.2 of the
                Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a
                depository institution).
                 Gain-on-sale means an increase in the equity capital of an
                Enterprise resulting from a traditional securitization other than an
                increase in equity capital resulting from:
                 (1) The Enterprise's receipt of cash in connection with the
                securitization; or
                 (2) The reporting of a mortgage servicing asset.
                 General obligation means a bond or similar obligation that is
                backed by the full faith and credit of a public sector entity (PSE).
                 Government-sponsored enterprise (GSE) means an entity established
                or chartered by the U.S. government to serve public purposes specified
                by the U.S. Congress but whose debt obligations are not explicitly
                guaranteed by the full faith and credit of the U.S. government,
                including an Enterprise.
                 Guarantee means a financial guarantee, letter of credit, insurance,
                or other similar financial instrument (other than a credit derivative)
                that allows one party (beneficiary) to transfer the credit risk of one
                or more specific exposures (reference exposure) to another party
                (protection provider).
                 Investment grade means that the entity to which the Enterprise is
                exposed through a loan or security, or the reference entity with
                respect to a credit derivative, has adequate capacity to meet financial
                commitments for the projected life of the asset or exposure. Such an
                entity or reference entity has adequate capacity to meet financial
                commitments if the risk of its default is low and the full and timely
                repayment of principal and interest is expected.
                 Mortgage-backed security (MBS) means a security collateralized by a
                pool or pools of mortgage exposures, including any pass-through or
                collateralized mortgage obligation.
                 Mortgage exposure means either a single-family mortgage exposure or
                a multifamily mortgage exposure.
                 Multifamily mortgage exposure means an exposure that is secured by
                a first or subsequent lien on a property with five or more residential
                units.
                 Mortgage servicing assets (MSAs) means the contractual rights owned
                by an Enterprise to service for a fee mortgage loans that are owned by
                others.
                 Multilateral development bank (MDB) means the International Bank
                for Reconstruction and Development, the Multilateral Investment
                Guarantee Agency, the International Finance Corporation, the Inter-
                American Development Bank, the Asian Development Bank, the African
                Development Bank, the European Bank for Reconstruction and Development,
                the European Investment Bank, the European Investment Fund, the Nordic
                Investment Bank, the Caribbean Development Bank, the Islamic
                Development Bank, the Council of Europe Development Bank, and any other
                multilateral lending institution or regional development bank in which
                the U.S. government is a shareholder or contributing member or which
                FHFA determines poses comparable credit risk.
                 Netting set means a group of transactions with a single
                counterparty that are subject to a qualifying master netting agreement
                or a qualifying cross-product master netting agreement. For purposes of
                calculating risk-based capital requirements using the internal models
                methodology in subpart E of this part, this term does not cover a
                transaction:
                 (1) That is not subject to such a master netting agreement; or
                 (2) Where the Enterprise has identified specific wrong-way risk.
                 Nth-to-default credit derivative means a credit derivative that
                provides credit protection only for the nth-defaulting reference
                exposure in a group of reference exposures.
                 Originating Enterprise, with respect to a securitization, means an
                Enterprise that directly or indirectly originated or securitized the
                underlying exposures included in the securitization.
                 Over-the-counter (OTC) derivative contract means a derivative
                contract that is not a cleared transaction. An OTC derivative includes
                a transaction:
                 (1) Between an Enterprise that is a clearing member and a
                counterparty where the Enterprise is acting as a financial intermediary
                and enters into a cleared transaction with a CCP that offsets the
                transaction with the counterparty; or
                 (2) In which an Enterprise that is a clearing member provides a CCP
                a guarantee on the performance of the counterparty to the transaction.
                 Protection amount (P) means, with respect to an exposure hedged by
                an eligible guarantee or eligible credit derivative, the effective
                notional amount of the guarantee or credit derivative, reduced to
                reflect any currency mismatch, maturity mismatch, or lack of
                restructuring coverage (as provided in Sec. 1240.38).
                 Publicly-traded means traded on:
                 (1) Any exchange registered with the SEC as a national securities
                exchange under section 6 of the Securities Exchange Act; or
                 (2) Any non-U.S.-based securities exchange that:
                 (i) Is registered with, or approved by, a national securities
                regulatory authority; and
                 (ii) Provides a liquid, two-way market for the instrument in
                question.
                 Public sector entity (PSE) means a state, local authority, or other
                governmental subdivision below the sovereign level.
                 Qualifying central counterparty (QCCP) means a central counterparty
                that:
                 (1)(i) Is a designated financial market utility (FMU) under Title
                VIII of the Dodd-Frank Act;
                 (ii) If not located in the United States, is regulated and
                supervised in a manner equivalent to a designated FMU; or
                 (iii) Meets the following standards:
                 (A) The central counterparty requires all parties to contracts
                cleared by the counterparty to be fully collateralized on a daily
                basis;
                 (B) The Enterprise demonstrates to the satisfaction of FHFA that
                the central counterparty:
                [[Page 39365]]
                 (1) Is in sound financial condition;
                 (2) Is subject to supervision by the Federal Reserve Board, the
                CFTC, or the Securities Exchange Commission (SEC), or, if the central
                counterparty is not located in the United States, is subject to
                effective oversight by a national supervisory authority in its home
                country; and
                 (3) Meets or exceeds the risk-management standards for central
                counterparties set forth in regulations established by the Federal
                Reserve Board, the CFTC, or the SEC under Title VII or Title VIII of
                the Dodd-Frank Act; or if the central counterparty is not located in
                the United States, meets or exceeds similar risk-management standards
                established under the law of its home country that are consistent with
                international standards for central counterparty risk management as
                established by the relevant standard setting body of the Bank of
                International Settlements; and
                 (2)(i) Provides the Enterprise with the central counterparty's
                hypothetical capital requirement or the information necessary to
                calculate such hypothetical capital requirement, and other information
                the Enterprise is required to obtain under 12 CFR 217.35(d)(3);
                 (ii) Makes available to FHFA and the CCP's regulator the
                information described in paragraph (2)(i) of this definition; and
                 (iii) Has not otherwise been determined by FHFA to not be a QCCP
                due to its financial condition, risk profile, failure to meet
                supervisory risk management standards, or other weaknesses or
                supervisory concerns that are inconsistent with the risk weight
                assigned to qualifying central counterparties under Sec. 1240.37.
                 (3) A QCCP that fails to meet the requirements of a QCCP in the
                future may still be treated as a QCCP under the conditions specified in
                Sec. 1240.3(e).
                 Qualifying master netting agreement means a written, legally
                enforceable agreement provided that:
                 (1) The agreement creates a single legal obligation for all
                individual transactions covered by the agreement upon an event of
                default following any stay permitted by paragraph (2) of this
                definition, including upon an event of receivership, conservatorship,
                insolvency, liquidation, or similar proceeding, of the counterparty;
                 (2) The agreement provides the Enterprise the right to accelerate,
                terminate, and close-out on a net basis all transactions under the
                agreement and to liquidate or set-off collateral promptly upon an event
                of default, including upon an event of receivership, conservatorship,
                insolvency, liquidation, or similar proceeding, of the counterparty,
                provided that, in any such case:
                 (i) Any exercise of rights under the agreement will not be stayed
                or avoided under applicable law in the relevant jurisdictions, other
                than:
                 (A) In receivership, conservatorship, or resolution under the
                Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
                any similar insolvency law applicable to GSEs, or laws of foreign
                jurisdictions that are substantially similar to the U.S. laws
                referenced in this paragraph (2)(i)(A) in order to facilitate the
                orderly resolution of the defaulting counterparty; or
                 (B) Where the agreement is subject by its terms to, or
                incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
                definition; and
                 (ii) The agreement may limit the right to accelerate, terminate,
                and close-out on a net basis all transactions under the agreement and
                to liquidate or set-off collateral promptly upon an event of default of
                the counterparty to the extent necessary for the counterparty to comply
                with the requirements of subpart I of the Federal Reserve Board's
                Regulation YY (part 252 of this title), part 47 of this title, or part
                382 of this title, as applicable.
                 Repo-style transaction means a repurchase or reverse repurchase
                transaction, or a securities borrowing or securities lending
                transaction, including a transaction in which the Enterprise acts as
                agent for a customer and indemnifies the customer against loss,
                provided that:
                 (1) The transaction is based solely on liquid and readily
                marketable securities, cash, or gold;
                 (2) The transaction is marked-to-fair value daily and subject to
                daily margin maintenance requirements;
                 (3)(i) The transaction is a ``securities contract'' or ``repurchase
                agreement'' under section 555 or 559, respectively, of the Bankruptcy
                Code (11 U.S.C. 555 or 559), a qualified financial contract under
                section 11(e)(8) of the Federal Deposit Insurance Act, or a netting
                contract between or among financial institutions under sections 401-407
                of the Federal Deposit Insurance Corporation Improvement Act or the
                Federal Reserve Board's Regulation EE (12 CFR part 231); or
                 (ii) If the transaction does not meet the criteria set forth in
                paragraph (3)(i) of this definition, then either:
                 (A) The transaction is executed under an agreement that provides
                the Enterprise the right to accelerate, terminate, and close-out the
                transaction on a net basis and to liquidate or set-off collateral
                promptly upon an event of default, including upon an event of
                receivership, insolvency, liquidation, or similar proceeding, of the
                counterparty, provided that, in any such case:
                 (1) Any exercise of rights under the agreement will not be stayed
                or avoided under applicable law in the relevant jurisdictions, other
                than:
                 (i) In receivership, conservatorship, or resolution under the
                Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
                any similar insolvency law applicable to GSEs, or laws of foreign
                jurisdictions that are substantially similar to the U.S. laws
                referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate
                the orderly resolution of the defaulting counterparty;
                 (ii) Where the agreement is subject by its terms to, or
                incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i)
                of this definition; and
                 (2) The agreement may limit the right to accelerate, terminate, and
                close-out on a net basis all transactions under the agreement and to
                liquidate or set-off collateral promptly upon an event of default of
                the counterparty to the extent necessary for the counterparty to comply
                with the requirements of subpart I of the Federal Reserve Board's
                Regulation YY (part 252 of this title), part 47 of this title, or part
                382 of this title, as applicable; or
                 (B) The transaction is:
                 (1) Either overnight or unconditionally cancelable at any time by
                the Enterprise; and
                 (2) Executed under an agreement that provides the Enterprise the
                right to accelerate, terminate, and close-out the transaction on a net
                basis and to liquidate or set-off collateral promptly upon an event of
                counterparty default; and
                 (3) In order to recognize an exposure as a repo-style transaction
                for purposes of this subpart, an Enterprise must comply with the
                requirements of Sec. 1240.3(e) with respect to that exposure.
                 Resecuritization means a securitization which has more than one
                underlying exposure and in which one or more of the underlying
                exposures is a securitization exposure.
                 Resecuritization exposure means:
                 (1) An on- or off-balance sheet exposure to a resecuritization; or
                 (2) An exposure that directly or indirectly references a
                resecuritization exposure.
                 Retained CRT exposure means, with respect to an Enterprise, any
                exposure that arises from a credit risk transfer of the Enterprise and
                has been retained by the Enterprise since the issuance or
                [[Page 39366]]
                entry into the credit risk transfer by the Enterprise.
                 Revenue obligation means a bond or similar obligation that is an
                obligation of a PSE, but which the PSE is committed to repay with
                revenues from the specific project financed rather than general tax
                funds.
                 Securities and Exchange Commission (SEC) means the U.S. Securities
                and Exchange Commission.
                 Securities Exchange Act means the Securities Exchange Act of 1934
                (15 U.S.C. 78).
                 Securitization exposure means:
                 (1) An on-balance sheet or off-balance sheet credit exposure
                (including credit-enhancing representations and warranties) that arises
                from a traditional securitization or synthetic securitization
                (including a resecuritization);
                 (2) An exposure that directly or indirectly references a
                securitization exposure described in paragraph (1) of this definition;
                 (3) A retained CRT exposure; or
                 (4) An acquired CRT exposure.
                 Securitization special purpose entity (securitization SPE) means a
                corporation, trust, or other entity organized for the specific purpose
                of holding underlying exposures of a securitization, the activities of
                which are limited to those appropriate to accomplish this purpose, and
                the structure of which is intended to isolate the underlying exposures
                held by the entity from the credit risk of the seller of the underlying
                exposures to the entity.
                 Servicer cash advance facility means a facility under which the
                servicer of the underlying exposures of a securitization may advance
                cash to ensure an uninterrupted flow of payments to investors in the
                securitization, including advances made to cover foreclosure costs or
                other expenses to facilitate the timely collection of the underlying
                exposures.
                 Single-family mortgage exposure means an exposure that is secured
                by a first or subsequent lien on a property with one to four
                residential units.
                 Sovereign means a central government (including the U.S.
                government) or an agency, department, ministry, or central bank of a
                central government.
                 Sovereign default means noncompliance by a sovereign with its
                external debt service obligations or the inability or unwillingness of
                a sovereign government to service an existing loan according to its
                original terms, as evidenced by failure to pay principal and interest
                timely and fully, arrearages, or restructuring.
                 Sovereign exposure means:
                 (1) A direct exposure to a sovereign; or
                 (2) An exposure directly and unconditionally backed by the full
                faith and credit of a sovereign.
                 Standardized market risk-weighted assets means the standardized
                measure for spread risk calculated under Sec. 1240.204(a) multiplied
                by 12.5.
                 Standardized total risk-weighted assets means:
                 (1) The sum of:
                 (i) Total risk-weighted assets for general credit risk as
                calculated under Sec. 1240.31;
                 (ii) Total risk-weighted assets for cleared transactions and
                default fund contributions as calculated under Sec. 1240.37;
                 (iii) Total risk-weighted assets for unsettled transactions as
                calculated under Sec. 1240.40;
                 (iv) Total risk-weighted assets for CRT and other securitization
                exposures as calculated under Sec. 1240.42;
                 (v) Total risk-weighted assets for equity exposures as calculated
                under Sec. 1240.51;
                 (vi) Risk-weighted assets for operational risk, as calculated under
                Sec. 1240.162(c); and
                 (vii) Standardized market risk-weighted assets; minus
                 (2) Excess eligible credit reserves not included in the
                Enterprise's tier 2 capital.
                 Subsidiary means, with respect to a company, a company controlled
                by that company.
                 Synthetic securitization means a transaction in which:
                 (1) All or a portion of the credit risk of one or more underlying
                exposures is retained or transferred to one or more third parties
                through the use of one or more credit derivatives or guarantees (other
                than a guarantee that transfers only the credit risk of an individual
                mortgage exposure or other retail exposure);
                 (2) The credit risk associated with the underlying exposures has
                been separated into at least two tranches reflecting different levels
                of seniority;
                 (3) Performance of the securitization exposures depends upon the
                performance of the underlying exposures; and
                 (4) All or substantially all of the underlying exposures are
                financial exposures (such as mortgage exposures, loans, commitments,
                credit derivatives, guarantees, receivables, asset-backed securities,
                mortgage-backed securities, other debt securities, or equity
                securities).
                 Tier 1 capital means the sum of common equity tier 1 capital and
                additional tier 1 capital.
                 Tier 2 capital is defined in Sec. 1240.20(d).
                 Total capital has the meaning given at section 1303(23) of the
                Safety and Soundness Act (12 U.S.C. 4502(23)).
                 Traditional securitization means a transaction in which:
                 (1) All or a portion of the credit risk of one or more underlying
                exposures is transferred to one or more third parties other than
                through the use of credit derivatives or guarantees;
                 (2) The credit risk associated with the underlying exposures has
                been separated into at least two tranches reflecting different levels
                of seniority;
                 (3) Performance of the securitization exposures depends upon the
                performance of the underlying exposures;
                 (4) All or substantially all of the underlying exposures are
                financial exposures (such as mortgage exposures, loans, commitments,
                credit derivatives, guarantees, receivables, asset-backed securities,
                mortgage-backed securities, other debt securities, or equity
                securities);
                 (5) The underlying exposures are not owned by an operating company;
                 (6) The underlying exposures are not owned by a small business
                investment company defined in section 302 of the Small Business
                Investment Act;
                 (7) The underlying exposures are not owned by a firm an investment
                in which qualifies as a community development investment under section
                24 (Eleventh) of the National Bank Act;
                 (8) FHFA may determine that a transaction in which the underlying
                exposures are owned by an investment firm that exercises substantially
                unfettered control over the size and composition of its assets,
                liabilities, and off-balance sheet exposures is not a traditional
                securitization based on the transaction's leverage, risk profile, or
                economic substance;
                 (9) FHFA may deem a transaction that meets the definition of a
                traditional securitization, notwithstanding paragraph (5), (6), or (7)
                of this definition, to be a traditional securitization based on the
                transaction's leverage, risk profile, or economic substance; and
                 (10) The transaction is not:
                 (i) An investment fund;
                 (ii) A collective investment fund (as defined in 12 CFR 208.34);
                 (iii) An employee benefit plan (as defined in 29 U.S.C. 1002(3)), a
                governmental plan (as defined in 29 U.S.C. 1002(32)) that complies with
                the tax deferral qualification requirements provided in the Internal
                Revenue Code;
                 (iv) A synthetic exposure to the capital of a financial institution
                to the
                [[Page 39367]]
                extent deducted from capital under Sec. 1240.22; or
                 (v) Registered with the SEC under the Investment Company Act of
                1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents thereof.
                 Tranche means all securitization exposures associated with a
                securitization that have the same seniority level.
                 Underlying exposures means one or more exposures that have been
                securitized in a securitization transaction.
                 Wrong-way risk means the risk that arises when an exposure to a
                particular counterparty is positively correlated with the probability
                of default of such counterparty itself.
                Sec. 1240.3 Operational requirements for counterparty credit risk.
                 For purposes of calculating risk-weighted assets under subpart D of
                this part:
                 (a) Cleared transaction. In order to recognize certain exposures as
                cleared transactions pursuant to paragraphs (1)(ii), (iii), or (iv) of
                the definition of ``cleared transaction'' in Sec. 1240.2, the
                exposures must meet the applicable requirements set forth in this
                paragraph (a).
                 (1) The offsetting transaction must be identified by the CCP as a
                transaction for the clearing member client.
                 (2) The collateral supporting the transaction must be held in a
                manner that prevents the Enterprise from facing any loss due to an
                event of default, including from a liquidation, receivership,
                insolvency, or similar proceeding of either the clearing member or the
                clearing member's other clients. Omnibus accounts established under 17
                CFR parts 190 and 300 satisfy the requirements of this paragraph (a).
                 (3) The Enterprise must conduct sufficient legal review to conclude
                with a well-founded basis (and maintain sufficient written
                documentation of that legal review) that in the event of a legal
                challenge (including one resulting from a default or receivership,
                insolvency, liquidation, or similar proceeding) the relevant court and
                administrative authorities would find the arrangements of paragraph
                (a)(2) of this section to be legal, valid, binding and enforceable
                under the law of the relevant jurisdictions.
                 (4) The offsetting transaction with a clearing member must be
                transferable under the transaction documents and applicable laws in the
                relevant jurisdiction(s) to another clearing member should the clearing
                member default, become insolvent, or enter receivership, insolvency,
                liquidation, or similar proceedings.
                 (b) Eligible margin loan. In order to recognize an exposure as an
                eligible margin loan as defined in Sec. 1240.2, an Enterprise must
                conduct sufficient legal review to conclude with a well-founded basis
                (and maintain sufficient written documentation of that legal review)
                that the agreement underlying the exposure:
                 (1) Meets the requirements of paragraph (1)(iii) of the definition
                of eligible margin loan in Sec. 1240.2, and
                 (2) Is legal, valid, binding, and enforceable under applicable law
                in the relevant jurisdictions.
                 (c) Qualifying master netting agreement. In order to recognize an
                agreement as a qualifying master netting agreement as defined in Sec.
                1240.2, an Enterprise must:
                 (1) Conduct sufficient legal review to conclude with a well-founded
                basis (and maintain sufficient written documentation of that legal
                review) that:
                 (i) The agreement meets the requirements of paragraph (2) of the
                definition of qualifying master netting agreement in Sec. 1240.2; and
                 (ii) In the event of a legal challenge (including one resulting
                from default or from receivership, insolvency, liquidation, or similar
                proceeding) the relevant court and administrative authorities would
                find the agreement to be legal, valid, binding, and enforceable under
                the law of the relevant jurisdictions; and
                 (2) Establish and maintain written procedures to monitor possible
                changes in relevant law and to ensure that the agreement continues to
                satisfy the requirements of the definition of qualifying master netting
                agreement in Sec. 1240.2.
                 (d) Repo-style transaction. In order to recognize an exposure as a
                repo-style transaction as defined in Sec. 1240.2, an Enterprise must
                conduct sufficient legal review to conclude with a well-founded basis
                (and maintain sufficient written documentation of that legal review)
                that the agreement underlying the exposure:
                 (1) Meets the requirements of paragraph (3) of the definition of
                ``repo-style transaction'' in Sec. 1240.2, and
                 (2) Is legal, valid, binding, and enforceable under applicable law
                in the relevant jurisdictions.
                 (e) Failure of a QCCP to satisfy the rule's requirements. If an
                Enterprise determines that a CCP ceases to be a QCCP due to the failure
                of the CCP to satisfy one or more of the requirements set forth in
                paragraphs (2)(i) through (2)(iii) of the definition of a QCCP in Sec.
                1240.2, the Enterprise may continue to treat the CCP as a QCCP for up
                to three months following the determination. If the CCP fails to remedy
                the relevant deficiency within three months after the initial
                determination, or the CCP fails to satisfy the requirements set forth
                in paragraphs (2)(i) through (2)(iii) of the definition of a ``QCCP''
                continuously for a three-month period after remedying the relevant
                deficiency, an Enterprise may not treat the CCP as a QCCP for the
                purposes of this part until after the Enterprise has determined that
                the CCP has satisfied the requirements in paragraphs (2)(i) through
                (2)(iii) of the definition of a QCCP for three continuous months.
                Sec. 1240.4 Compliance dates.
                 (a) Delayed compliance dates. Certain sections and subparts of this
                part are subject to delayed compliance dates under this section.
                 (b) Reporting compliance. Section 1240.1(f) has a compliance date
                of one year from [DATE OF PUBLICATION OF FINAL RULE].
                 (c) Capital requirements and buffers. Subject to paragraph (d) of
                this section, subpart B of this part has a compliance date with respect
                to an Enterprise of the later of:
                 (1) One year from [DATE OF PUBLICATION OF FINAL RULE]; and
                 (2) The date of the termination of the conservatorship of the
                Enterprise.
                 (d) Capital restoration plan or other interim order. (1) The
                Director may determine to direct a later compliance date for an
                Enterprise to achieve compliance with Sec. 1240.10 based on his
                assessment of capital market conditions and the likely feasibility of
                the plan of the Enterprise to achieve capital levels sufficient to
                comply with Sec. 1240.10 and avoid restrictions on capital
                distributions and discretionary bonuses under Sec. 1240.11(b).
                 (2) If the Director makes a determination under paragraph (d)(1) of
                this section:
                 (i) For the period between the compliance date for Sec. 1240.11
                under paragraph (c) of this section and any later compliance date for
                Sec. 1240.10 under this paragraph (d), the prescribed capital
                conservation buffer amount of the Enterprise will be the amount equal
                to:
                 (A) The CET1 capital that would otherwise be required under Sec.
                1240.10(d); plus
                 (B) The prescribed capital conservation buffer amount that would
                otherwise apply under Sec. 1240.11(a)(5);
                 (ii) For the period between the compliance date for Sec. 1240.11
                under paragraph (c) of this section and the later compliance date for
                Sec. 1240.10 under this paragraph (d), the prescribed leverage buffer
                amount of the Enterprise
                [[Page 39368]]
                will be equal to 4.0 percent of the adjusted total assets of the
                Enterprise; and
                 (iii) The compliance date for Sec. 1240.10 will be tolled if the
                Enterprise is in compliance with:
                 (A) Any corrective plan pursuant to section 1313B of the Safety and
                Soundness Act (12 U.S.C. 4513b(b)(1)) and 12 CFR 1236.4(c), approved by
                FHFA, which may prescribe the feasible actions and milestones by which
                the Enterprise will achieve compliance with Sec. 1240.10 by the date
                directed by FHFA; and
                 (B) Any agreement or order pursuant to section 1371 of the Safety
                and Soundness Act (12 U.S.C. 4631), including any requirement under any
                plan required under that agreement or order to achieve compliance with
                Sec. 1240.10.
                Subpart B--Capital Requirements and Buffers
                Sec. 1240.10 Capital requirements.
                 (a) Total capital. An Enterprise must maintain total capital not
                less than the amount equal to 8.0 percent of the greater of:
                 (1) Standardized total risk-weighted assets; and
                 (2) Advanced approaches total risk-weighted assets.
                 (b) Adjusted total capital. An Enterprise must maintain adjusted
                total capital not less than the amount equal to 8.0 percent of the
                greater of:
                 (1) Standardized total risk-weighted assets; and
                 (2) Advanced approaches total risk-weighted assets.
                 (c) Tier 1 capital. An Enterprise must maintain tier 1 capital not
                less than the amount equal to 6.0 percent of the greater of:
                 (1) Standardized total risk-weighted assets; and
                 (2) Advanced approaches total risk-weighted assets.
                 (d) Common equity tier 1 capital. An Enterprise must maintain
                common equity tier 1 capital not less than the amount equal to 4.5
                percent of the greater of:
                 (1) Standardized total risk-weighted assets; and
                 (2) Advanced approaches total risk-weighted assets.
                 (e) Core capital. An Enterprise must maintain core capital not less
                than the amount equal to 2.5 percent of adjusted total assets.
                 (f) Leverage ratio. An Enterprise must maintain tier 1 capital not
                less than the amount equal to 2.5 percent of adjusted total assets.
                 (g) Capital adequacy. (1) Notwithstanding the minimum requirements
                in this part, an Enterprise must maintain capital commensurate with the
                level and nature of all risks to which the Enterprise is exposed. The
                supervisory evaluation of an Enterprise's capital adequacy is based on
                an individual assessment of numerous factors, including the character
                and condition of the Enterprise's assets and its existing and
                prospective liabilities and other corporate responsibilities.
                 (2) An Enterprise must have a process for assessing its overall
                capital adequacy in relation to its risk profile and a comprehensive
                strategy for maintaining an appropriate level of capital.
                Sec. 1240.11 Capital conservation buffer and leverage buffer.
                 (a) Definitions. For purposes of this section, the following
                definitions apply:
                 (1) Capital conservation buffer. An Enterprise's capital
                conservation buffer is the amount calculated under paragraph (c)(2) of
                this section.
                 (2) Eligible retained income. The eligible retained income of an
                Enterprise is the greater of:
                 (i) The Enterprise's net income, as defined under GAAP, for the
                four calendar quarters preceding the current calendar quarter, net of
                any distributions and associated tax effects not already reflected in
                net income; and
                 (ii) The average of the Enterprise's net income for the four
                calendar quarters preceding the current calendar quarter.
                 (3) Leverage buffer. An Enterprise's leverage buffer is the amount
                calculated under paragraph (d)(2) of this section.
                 (4) Maximum payout ratio. The maximum payout ratio is the
                percentage of eligible retained income that an Enterprise can pay out
                in the form of distributions and discretionary bonus payments during
                the current calendar quarter. The maximum payout ratio is determined
                under paragraph (b)(2) of this section.
                 (5) Prescribed capital conservation buffer amount. An Enterprise's
                prescribed capital conservation buffer amount is equal to its stress
                capital buffer in accordance with paragraph (a)(7) of this section plus
                its applicable countercyclical capital buffer amount in accordance with
                paragraph (e) of this section plus its applicable stability capital
                buffer in accordance with paragraph (f) of this section.
                 (6) Prescribed leverage buffer amount. An Enterprise's prescribed
                leverage buffer amount is 1.5 percent of the Enterprise's adjusted
                total assets, as of the last day of the previous calendar quarter.
                 (7) Stress capital buffer. An Enterprise's stress capital buffer is
                0.75 percent of the Enterprise's adjusted total assets, as of the last
                day of the previous calendar quarter.
                 (b) Maximum payout amount. (1) Limits on distributions and
                discretionary bonus payments. An Enterprise shall not make
                distributions or discretionary bonus payments or create an obligation
                to make such distributions or payments during the current calendar
                quarter that, in the aggregate, exceed the amount equal to the
                Enterprise's eligible retained income for the calendar quarter,
                multiplied by its maximum payout ratio.
                 (2) Maximum payout ratio. The maximum payout ratio of an Enterprise
                is the lowest of the payout ratios determined by its capital
                conservation buffer and its leverage buffer, as set forth on Table 1 to
                paragraph (b)(5) of this section.
                 (3) No maximum payout amount limitation. An Enterprise is not
                subject to a restriction under paragraph (b)(1) of this section if it
                has:
                 (i) A capital conservation buffer that is greater than its
                prescribed capital conservation buffer amount; and
                 (ii) A leverage buffer that is greater than its prescribed leverage
                buffer amount.
                 (4) Negative eligible retained income. An Enterprise may not make
                distributions or discretionary bonus payments during the current
                calendar quarter if:
                 (i) The eligible retained income of the Enterprise is negative; and
                 (ii) Either:
                 (A) The capital conservation buffer of the Enterprise was less than
                its stress capital buffer; or
                 (B) The leverage buffer of the Enterprise was less than its
                prescribed leverage buffer amount.
                 (5) Prior approval. Notwithstanding the limitations in paragraphs
                (b)(1) through (b)(3) of this section, FHFA may permit an Enterprise to
                make a distribution or discretionary bonus payment upon a request of
                the Enterprise, if FHFA determines that the distribution or
                discretionary bonus payment would not be contrary to the purposes of
                this section or to the safety and soundness of the Enterprise. In
                making such a determination, FHFA will consider the nature and extent
                of the request and the particular circumstances giving rise to the
                request.
                [[Page 39369]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.046
                 (c) Capital conservation buffer--(1) Composition of the capital
                conservation buffer. The capital conservation buffer is composed solely
                of common equity tier 1 capital.
                ---------------------------------------------------------------------------
                 \2\ An Enterprise's ``capital buffer'' means, as applicable, its
                capital conservation buffer or its leverage buffer.
                 \3\ An Enterprise's ``prescribed buffer amount'' means, as
                applicable, its prescribed capital conservation buffer amount or its
                leverage prescribed buffer amount.
                ---------------------------------------------------------------------------
                 (2) Calculation of capital conservation buffer. (i) An Enterprise's
                capital conservation buffer is equal to the lowest of the following,
                calculated as of the last day of the previous calendar quarter:
                 (A) The Enterprise's adjusted total capital minus the minimum
                amount of adjusted total capital under Sec. 1240.10(b);
                 (B) The Enterprise's tier 1 capital minus the minimum amount of
                tier 1 capital under Sec. 1240.10(c); or
                 (C) The Enterprise's common equity tier 1 capital minus the minimum
                amount of common equity tier 1 capital under Sec. 1240.10(d).
                 (ii) Notwithstanding paragraphs (c)(2)(i)(A) through (C) of this
                section, if the Enterprise's adjusted total capital, tier 1 capital, or
                common equity tier 1 capital is less than or equal to the Enterprise's
                minimum adjusted total capital, tier 1 capital, or common equity tier 1
                capital, respectively, the Enterprise's capital conservation buffer is
                zero.
                 (d) Leverage buffer--(1) Composition of the leverage buffer. The
                leverage buffer is composed solely of tier 1 capital.
                 (2) Calculation of the leverage buffer. (i) An Enterprise's
                leverage buffer is equal to the Enterprise's tier 1 capital minus the
                minimum amount of tier 1 capital under Sec. 1240.10(f), calculated as
                of the last day of the previous calendar quarter.
                 (ii) Notwithstanding paragraph (d)(2)(i) of this section, if the
                Enterprise's tier 1 capital is less than or equal to the minimum amount
                of tier 1 capital under Sec. 1240.10(d), the Enterprise's leverage
                buffer is zero.
                 (e) Countercyclical capital buffer amount--(1) Composition of the
                countercyclical capital buffer amount. The countercyclical capital
                buffer amount is composed solely of common equity tier 1 capital.
                 (2) Amount--(i) Initial countercyclical capital buffer. The initial
                countercyclical capital buffer amount is zero.
                 (ii) Adjustment of the countercyclical capital buffer amount. FHFA
                will adjust the countercyclical capital buffer amount in accordance
                with applicable law.
                 (iii) Range of countercyclical capital buffer amount. FHFA will
                adjust the countercyclical capital buffer amount between zero percent
                and 0.75 percent of adjusted total assets.
                 (iv) Adjustment determination. FHFA will base its decision to
                adjust the countercyclical capital buffer amount under this section on
                a range of macroeconomic, financial, and supervisory information
                indicating an increase in systemic risk, including the ratio of credit
                to gross domestic product, a variety of asset prices, other factors
                indicative of relative credit and liquidity expansion or contraction,
                funding spreads, credit condition surveys, indices based on credit
                default swap spreads, options implied volatility, and measures of
                systemic risk.
                 (3) Effective date of adjusted countercyclical capital buffer
                amount--
                 (i) Increase adjustment. A determination by FHFA under paragraph
                (e)(2)(ii) of this section to increase the countercyclical capital
                buffer amount will be effective 12 months from the date of
                announcement, unless FHFA establishes an earlier effective date and
                includes a statement articulating the reasons for the earlier effective
                date.
                 (ii) Decrease adjustment. A determination by FHFA to decrease the
                established countercyclical capital buffer amount under paragraph
                (e)(2)(ii) of this section will be effective on the day following
                announcement of the final determination or the earliest date
                permissible under applicable law or regulation, whichever is later.
                 (iii) Twelve month sunset. The countercyclical capital buffer
                amount will return to zero percent 12 months after the effective date
                that the adjusted countercyclical capital buffer amount is announced,
                unless FHFA announces a decision to maintain the adjusted
                countercyclical capital buffer amount or adjust it again before the
                expiration of the 12-month period.
                 (f) Stability capital buffer. An Enterprise must use its stability
                capital buffer calculated in accordance with subpart G of this part for
                purposes of determining its maximum payout ratio under Table 1 to
                paragraph (b)(5) of this section.
                Subpart C--Definition of Capital
                Sec. 1240.20 Capital components and eligibility criteria for
                regulatory capital instruments.
                 (a) Regulatory capital components. An Enterprise's regulatory
                capital components are:
                 (1) Common equity tier 1 capital;
                 (2) Additional tier 1 capital;
                 (3) Tier 2 capital;
                 (4) Core capital; and
                 (5) Total capital.
                [[Page 39370]]
                 (b) Common equity tier 1 capital. Common equity tier 1 capital is
                the sum of the common equity tier 1 capital elements in this paragraph
                (b), minus regulatory adjustments and deductions in Sec. 1240.22. The
                common equity tier 1 capital elements are:
                 (1) Any common stock instruments (plus any related surplus) issued
                by the Enterprise, net of treasury stock, that meet all the following
                criteria:
                 (i) The instrument is paid-in, issued directly by the Enterprise,
                and represents the most subordinated claim in a receivership,
                insolvency, liquidation, or similar proceeding of the Enterprise;
                 (ii) The holder of the instrument is entitled to a claim on the
                residual assets of the Enterprise that is proportional with the
                holder's share of the Enterprise's issued capital after all senior
                claims have been satisfied in a receivership, insolvency, liquidation,
                or similar proceeding;
                 (iii) The instrument has no maturity date, can only be redeemed via
                discretionary repurchases with the prior approval of FHFA to the extent
                otherwise required by law or regulation, and does not contain any term
                or feature that creates an incentive to redeem;
                 (iv) The Enterprise did not create at issuance of the instrument
                through any action or communication an expectation that it will buy
                back, cancel, or redeem the instrument, and the instrument does not
                include any term or feature that might give rise to such an
                expectation;
                 (v) Any cash dividend payments on the instrument are paid out of
                the Enterprise's net income, retained earnings, or surplus related to
                common stock, and are not subject to a limit imposed by the contractual
                terms governing the instrument.
                 (vi) The Enterprise has full discretion at all times to refrain
                from paying any dividends and making any other distributions on the
                instrument without triggering an event of default, a requirement to
                make a payment-in-kind, or an imposition of any other restrictions on
                the Enterprise;
                 (vii) Dividend payments and any other distributions on the
                instrument may be paid only after all legal and contractual obligations
                of the Enterprise have been satisfied, including payments due on more
                senior claims;
                 (viii) The holders of the instrument bear losses as they occur
                equally, proportionately, and simultaneously with the holders of all
                other common stock instruments before any losses are borne by holders
                of claims on the Enterprise with greater priority in a receivership,
                insolvency, liquidation, or similar proceeding;
                 (ix) The paid-in amount is classified as equity under GAAP;
                 (x) The Enterprise, or an entity that the Enterprise controls, did
                not purchase or directly or indirectly fund the purchase of the
                instrument;
                 (xi) The instrument is not secured, not covered by a guarantee of
                the Enterprise or of an affiliate of the Enterprise, and is not subject
                to any other arrangement that legally or economically enhances the
                seniority of the instrument;
                 (xii) The instrument has been issued in accordance with applicable
                laws and regulations; and
                 (xiii) The instrument is reported on the Enterprise's regulatory
                financial statements separately from other capital instruments.
                 (2) Retained earnings.
                 (3) Accumulated other comprehensive income (AOCI) as reported under
                GAAP.\4\
                ---------------------------------------------------------------------------
                 \4\ See Sec. 1240.22 for specific adjustments related to AOCI.
                ---------------------------------------------------------------------------
                 (4) Notwithstanding the criteria for common stock instruments
                referenced above, an Enterprise's common stock issued and held in trust
                for the benefit of its employees as part of an employee stock ownership
                plan does not violate any of the criteria in paragraphs (b)(1)(iii),
                (b)(1)(iv) or (b)(1)(xi) of this section, provided that any repurchase
                of the stock is required solely by virtue of ERISA for an instrument of
                an Enterprise that is not publicly-traded. In addition, an instrument
                issued by an Enterprise to its employee stock ownership plan does not
                violate the criterion in paragraph (b)(1)(x) of this section.
                 (c) Additional tier 1 capital. Additional tier 1 capital is the sum
                of additional tier 1 capital elements and any related surplus, minus
                the regulatory adjustments and deductions in Sec. 1240.22. Additional
                tier 1 capital elements are:
                 (1) Subject to paragraph (e)(2) of this section, instruments (plus
                any related surplus) that meet the following criteria:
                 (i) The instrument is issued and paid-in;
                 (ii) The instrument is subordinated to general creditors and
                subordinated debt holders of the Enterprise in a receivership,
                insolvency, liquidation, or similar proceeding;
                 (iii) The instrument is not secured, not covered by a guarantee of
                the Enterprise or of an affiliate of the Enterprise, and not subject to
                any other arrangement that legally or economically enhances the
                seniority of the instrument;
                 (iv) The instrument has no maturity date and does not contain a
                dividend step-up or any other term or feature that creates an incentive
                to redeem; and
                 (v) If callable by its terms, the instrument may be called by the
                Enterprise only after a minimum of five years following issuance,
                except that the terms of the instrument may allow it to be called
                earlier than five years upon the occurrence of a regulatory event that
                precludes the instrument from being included in additional tier 1
                capital, a tax event, or if the issuing entity is required to register
                as an investment company pursuant to the Investment Company Act of 1940
                (15 U.S.C. 80a-1 et seq.). In addition:
                 (A) The Enterprise must receive prior approval from FHFA to
                exercise a call option on the instrument.
                 (B) The Enterprise does not create at issuance of the instrument,
                through any action or communication, an expectation that the call
                option will be exercised.
                 (C) Prior to exercising the call option, or immediately thereafter,
                the Enterprise must either: Replace the instrument to be called with an
                equal amount of instruments that meet the criteria under paragraph (b)
                of this section or this paragraph (c); \5\ or demonstrate to the
                satisfaction of FHFA that following redemption, the Enterprise will
                continue to hold capital commensurate with its risk.
                ---------------------------------------------------------------------------
                 \5\ Replacement can be concurrent with redemption of existing
                additional tier 1 capital instruments.
                ---------------------------------------------------------------------------
                 (vi) Redemption or repurchase of the instrument requires prior
                approval from FHFA.
                 (vii) The Enterprise has full discretion at all times to cancel
                dividends or other distributions on the instrument without triggering
                an event of default, a requirement to make a payment-in-kind, or an
                imposition of other restrictions on the Enterprise except in relation
                to any distributions to holders of common stock or instruments that are
                pari passu with the instrument.
                 (viii) Any distributions on the instrument are paid out of the
                Enterprise's net income, retained earnings, or surplus related to other
                additional tier 1 capital instruments.
                 (ix) The instrument does not have a credit-sensitive feature, such
                as a dividend rate that is reset periodically based in whole or in part
                on the Enterprise's credit quality, but may have a dividend rate that
                is adjusted periodically independent of the Enterprise's credit
                quality, in relation to general market interest rates or similar
                adjustments.
                 (x) The paid-in amount is classified as equity under GAAP.
                [[Page 39371]]
                 (xi) The Enterprise, or an entity that the Enterprise controls, did
                not purchase or directly or indirectly fund the purchase of the
                instrument.
                 (xii) The instrument does not have any features that would limit or
                discourage additional issuance of capital by the Enterprise, such as
                provisions that require the Enterprise to compensate holders of the
                instrument if a new instrument is issued at a lower price during a
                specified time frame.
                 (xiii) If the instrument is not issued directly by the Enterprise
                or by a subsidiary of the Enterprise that is an operating entity, the
                only asset of the issuing entity is its investment in the capital of
                the Enterprise, and proceeds must be immediately available without
                limitation to the Enterprise or to the Enterprise's top-tier holding
                company in a form which meets or exceeds all of the other criteria for
                additional tier 1 capital instruments.\6\
                ---------------------------------------------------------------------------
                 \6\ De minimis assets related to the operation of the issuing
                entity can be disregarded for purposes of this criterion.
                ---------------------------------------------------------------------------
                 (xiv) The governing agreement, offering circular, or prospectus of
                an instrument issued after [the effective date of the final rule] must
                disclose that the holders of the instrument may be fully subordinated
                to interests held by the U.S. government in the event that the
                Enterprise enters into a receivership, insolvency, liquidation, or
                similar proceeding.
                 (2) Notwithstanding the criteria for additional tier 1 capital
                instruments referenced above, an instrument issued by an Enterprise and
                held in trust for the benefit of its employees as part of an employee
                stock ownership plan does not violate any of the criteria in paragraph
                (c)(1)(iii) of this section, provided that any repurchase is required
                solely by virtue of ERISA for an instrument of an Enterprise that is
                not publicly-traded. In addition, an instrument issued by an Enterprise
                to its employee stock ownership plan does not violate the criteria in
                paragraphs (c)(1)(v) or (c)(1)(xi) of this section.
                 (d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital
                elements and any related surplus, minus the regulatory adjustments and
                deductions in Sec. 1240.22. Tier 2 capital elements are:
                 (1) Subject to paragraph (e)(2) of this section, instruments (plus
                related surplus) that meet the following criteria:
                 (i) The instrument is issued and paid-in.
                 (ii) The instrument is subordinated to general creditors of the
                Enterprise.
                 (iii) The instrument is not secured, not covered by a guarantee of
                the Enterprise or of an affiliate of the Enterprise, and not subject to
                any other arrangement that legally or economically enhances the
                seniority of the instrument in relation to more senior claims.
                 (iv) The instrument has a minimum original maturity of at least
                five years. At the beginning of each of the last five years of the life
                of the instrument, the amount that is eligible to be included in tier 2
                capital is reduced by 20 percent of the original amount of the
                instrument (net of redemptions) and is excluded from regulatory capital
                when the remaining maturity is less than one year. In addition, the
                instrument must not have any terms or features that require, or create
                significant incentives for, the Enterprise to redeem the instrument
                prior to maturity.\7\
                ---------------------------------------------------------------------------
                 \7\ An instrument that by its terms automatically converts into
                a tier 1 capital instrument prior to five years after issuance
                complies with the five-year maturity requirement of this criterion.
                ---------------------------------------------------------------------------
                 (v) The instrument, by its terms, may be called by the Enterprise
                only after a minimum of five years following issuance, except that the
                terms of the instrument may allow it to be called sooner upon the
                occurrence of an event that would preclude the instrument from being
                included in tier 2 capital, a tax event. In addition:
                 (A) The Enterprise must receive the prior approval of FHFA to
                exercise a call option on the instrument.
                 (B) The Enterprise does not create at issuance, through action or
                communication, an expectation the call option will be exercised.
                 (C) Prior to exercising the call option, or immediately thereafter,
                the Enterprise must either: Replace any amount called with an
                equivalent amount of an instrument that meets the criteria for
                regulatory capital under this section; \8\ or demonstrate to the
                satisfaction of FHFA that following redemption, the Enterprise would
                continue to hold an amount of capital that is commensurate with its
                risk.
                ---------------------------------------------------------------------------
                 \8\ An Enterprise may replace tier 2 capital instruments
                concurrent with the redemption of existing tier 2 capital
                instruments.
                ---------------------------------------------------------------------------
                 (vi) The holder of the instrument must have no contractual right to
                accelerate payment of principal or interest on the instrument, except
                in the event of a receivership, insolvency, liquidation, or similar
                proceeding of the Enterprise.
                 (vii) The instrument has no credit-sensitive feature, such as a
                dividend or interest rate that is reset periodically based in whole or
                in part on the Enterprise's credit standing, but may have a dividend
                rate that is adjusted periodically independent of the Enterprise's
                credit standing, in relation to general market interest rates or
                similar adjustments.
                 (viii) The Enterprise, or an entity that the Enterprise controls,
                has not purchased and has not directly or indirectly funded the
                purchase of the instrument.
                 (ix) If the instrument is not issued directly by the Enterprise or
                by a subsidiary of the Enterprise that is an operating entity, the only
                asset of the issuing entity is its investment in the capital of the
                Enterprise, and proceeds must be immediately available without
                limitation to the Enterprise or the Enterprise's top-tier holding
                company in a form that meets or exceeds all the other criteria for tier
                2 capital instruments under this section.\9\
                ---------------------------------------------------------------------------
                 \9\ An Enterprise may disregard de minimis assets related to the
                operation of the issuing entity for purposes of this criterion.
                ---------------------------------------------------------------------------
                 (x) Redemption of the instrument prior to maturity or repurchase
                requires the prior approval of FHFA.
                 (xi) The governing agreement, offering circular, or prospectus of
                an instrument issued after [the effective date of the final rule] must
                disclose that the holders of the instrument may be fully subordinated
                to interests held by the U.S. government in the event that the
                Enterprise enters into a receivership, insolvency, liquidation, or
                similar proceeding.
                 (2) Any eligible credit reserves that exceed expected credit losses
                to the extent that the excess reserve amount does not exceed 0.6
                percent of credit risk-weighted assets.
                 (e) FHFA approval of a capital element. (1) An Enterprise must
                receive FHFA prior approval to include a capital element (as listed in
                this section) in its common equity tier 1 capital, additional tier 1
                capital, or tier 2 capital unless the element:
                 (i) Was included in an Enterprise's tier 1 capital or tier 2
                capital prior to [the publication date of the proposed rule] and the
                underlying instrument may continue to be included under the criteria
                set forth in this section; or
                 (ii) Is equivalent, in terms of capital quality and ability to
                absorb losses with respect to all material terms, to a regulatory
                capital element FHFA determined may be included in regulatory capital
                pursuant to paragraph (e)(3) of this section.
                 (2) An Enterprise may not include an instrument in its additional
                tier 1 capital or a tier 2 capital unless FHFA has determined that the
                Enterprise has made appropriate provision, including in any resolution
                plan of the Enterprise, to ensure that the instrument would not pose a
                material impediment to the
                [[Page 39372]]
                ability of an Enterprise to issue common stock instruments following
                the appointment of FHFA as conservator or receiver under the Safety and
                Soundness Act.
                 (3) After determining that a regulatory capital element may be
                included in an Enterprise's common equity tier 1 capital, additional
                tier 1 capital, or tier 2 capital, FHFA will make its decision publicly
                available, including a brief description of the material terms of the
                regulatory capital element and the rationale for the determination.
                 (f) FHFA prior approval. An Enterprise may not repurchase or redeem
                any common equity tier 1 capital, additional tier 1, or tier 2 capital
                instrument without the prior approval of FHFA to the extent such prior
                approval is required by paragraphs (b), (c), or (d) of this section, as
                applicable.
                Sec. 1240.21 [Reserved]
                Sec. 1240.22 Regulatory capital adjustments and deductions.
                 (a) Regulatory capital deductions from common equity tier 1
                capital. An Enterprise must deduct from the sum of its common equity
                tier 1 capital elements the items set forth in this paragraph (a):
                 (1) Goodwill, net of associated deferred tax liabilities (DTLs) in
                accordance with paragraph (e) of this section, including goodwill that
                is embedded in the valuation of a significant investment in the capital
                of an unconsolidated financial institution in the form of common stock
                (and that is reflected in the consolidated financial statements of the
                Enterprise), in accordance with paragraph (d) of this section;
                 (2) Intangible assets, other than MSAs, net of associated DTLs in
                accordance with paragraph (e) of this section;
                 (3) Deferred tax assets (DTAs) that arise from net operating loss
                and tax credit carryforwards net of any related valuation allowances
                and net of DTLs in accordance with paragraph (e) of this section;
                 (4) Any gain-on-sale in connection with a securitization exposure;
                 (5) Any defined benefit pension fund net asset, net of any
                associated DTL in accordance with paragraph (e) of this section, held
                by the Enterprise. With the prior approval of FHFA, this deduction is
                not required for any defined benefit pension fund net asset to the
                extent the Enterprise has unrestricted and unfettered access to the
                assets in that fund. An Enterprise must risk weight any portion of the
                defined benefit pension fund asset that is not deducted under this
                paragraph (a) as if the Enterprise directly holds a proportional
                ownership share of each exposure in the defined benefit pension fund.
                 (6) The amount of expected credit loss that exceeds its eligible
                credit reserves.
                 (b) Regulatory adjustments to common equity tier 1 capital. (1) An
                Enterprise must adjust the sum of common equity tier 1 capital elements
                pursuant to the requirements set forth in this paragraph (b). Such
                adjustments to common equity tier 1 capital must be made net of the
                associated deferred tax effects.
                 (i) An Enterprise must deduct any accumulated net gains and add any
                accumulated net losses on cash flow hedges included in AOCI that relate
                to the hedging of items that are not recognized at fair value on the
                balance sheet.
                 (ii) An Enterprise must deduct any net gain and add any net loss
                related to changes in the fair value of liabilities that are due to
                changes in the Enterprise's own credit risk. An Enterprise must deduct
                the difference between its credit spread premium and the risk-free rate
                for derivatives that are liabilities as part of this adjustment.
                 (c) Deductions from regulatory capital related to investments in
                capital instruments.\10\ An Enterprise must deduct an investment in the
                Enterprise's own capital instruments as follows:
                ---------------------------------------------------------------------------
                 \10\ The Enterprise must calculate amounts deducted under
                paragraphs (c) through (f) of this section after it calculates the
                amount of ALLL or AACL, as applicable, includable in tier 2 capital
                under Sec. 1240.20(d).
                ---------------------------------------------------------------------------
                 (1) An Enterprise must deduct an investment in the Enterprise's own
                common stock instruments from its common equity tier 1 capital elements
                to the extent such instruments are not excluded from regulatory capital
                under Sec. 1240.20(b)(1);
                 (2) An Enterprise must deduct an investment in the Enterprise's own
                additional tier 1 capital instruments from its additional tier 1
                capital elements; and
                 (3) An Enterprise must deduct an investment in the Enterprise's own
                tier 2 capital instruments from its tier 2 capital elements.
                 (d) Items subject to the 10 and 15 percent common equity tier 1
                capital deduction thresholds. (1) An Enterprise must deduct from common
                equity tier 1 capital elements the amount of each of the items set
                forth in this paragraph (d) that, individually, exceeds 10 percent of
                the sum of the Enterprise's common equity tier 1 capital elements, less
                adjustments to and deductions from common equity tier 1 capital
                required under paragraphs (a) through (c) of this section (the 10
                percent common equity tier 1 capital deduction threshold).
                 (i) DTAs arising from temporary differences that the Enterprise
                could not realize through net operating loss carrybacks, net of any
                related valuation allowances and net of DTLs, in accordance with
                paragraph (e) of this section. An Enterprise is not required to deduct
                from the sum of its common equity tier 1 capital elements DTAs (net of
                any related valuation allowances and net of DTLs, in accordance with
                paragraph (e) of this section) arising from timing differences that the
                Enterprise could realize through net operating loss carrybacks. The
                Enterprise must risk weight these assets at 100 percent.
                 (ii) MSAs net of associated DTLs, in accordance with paragraph (e)
                of this section.
                 (2) An Enterprise must deduct from common equity tier 1 capital
                elements the items listed in paragraph (d)(1) of this section that are
                not deducted as a result of the application of the 10 percent common
                equity tier 1 capital deduction threshold, and that, in aggregate,
                exceed 17.65 percent of the sum of the Enterprise's common equity tier
                1 capital elements, minus adjustments to and deductions from common
                equity tier 1 capital required under paragraphs (a) through (c) of this
                section, minus the items listed in paragraph (d)(1) of this section
                (the 15 percent common equity tier 1 capital deduction threshold).\11\
                ---------------------------------------------------------------------------
                 \11\ The amount of the items in paragraph (d) of this section
                that is not deducted from common equity tier 1 capital pursuant to
                this section must be included in the risk-weighted assets of the
                Enterprise and assigned a 250 percent risk weight.
                ---------------------------------------------------------------------------
                 (3) For purposes of calculating the amount of DTAs subject to the
                10 and 15 percent common equity tier 1 capital deduction thresholds, an
                Enterprise may exclude DTAs and DTLs relating to adjustments made to
                common equity tier 1 capital under paragraph (b) of this section. An
                Enterprise that elects to exclude DTAs relating to adjustments under
                paragraph (b) of this section also must exclude DTLs and must do so
                consistently in all future calculations. An Enterprise may change its
                exclusion preference only after obtaining the prior approval of FHFA.
                 (e) Netting of DTLs against assets subject to deduction. (1) Except
                as described in paragraph (e)(3) of this section, netting of DTLs
                against assets that are subject to deduction under this section is
                permitted, but not required, if the following conditions are met:
                 (i) The DTL is associated with the asset; and
                [[Page 39373]]
                 (ii) The DTL would be extinguished if the associated asset becomes
                impaired or is derecognized under GAAP.
                 (2) A DTL may only be netted against a single asset.
                 (3) For purposes of calculating the amount of DTAs subject to the
                threshold deduction in paragraph (d) of this section, the amount of
                DTAs that arise from net operating loss and tax credit carryforwards,
                net of any related valuation allowances, and of DTAs arising from
                temporary differences that the Enterprise could not realize through net
                operating loss carrybacks, net of any related valuation allowances, may
                be offset by DTLs (that have not been netted against assets subject to
                deduction pursuant to paragraph (e)(1) of this section) subject to the
                conditions set forth in this paragraph (e).
                 (i) Only the DTAs and DTLs that relate to taxes levied by the same
                taxation authority and that are eligible for offsetting by that
                authority may be offset for purposes of this deduction.
                 (ii) The amount of DTLs that the Enterprise nets against DTAs that
                arise from net operating loss and tax credit carryforwards, net of any
                related valuation allowances, and against DTAs arising from temporary
                differences that the Enterprise could not realize through net operating
                loss carrybacks, net of any related valuation allowances, must be
                allocated in proportion to the amount of DTAs that arise from net
                operating loss and tax credit carryforwards (net of any related
                valuation allowances, but before any offsetting of DTLs) and of DTAs
                arising from temporary differences that the Enterprise could not
                realize through net operating loss carrybacks (net of any related
                valuation allowances, but before any offsetting of DTLs), respectively.
                 (4) An Enterprise must net DTLs against assets subject to deduction
                under this section in a consistent manner from reporting period to
                reporting period. An Enterprise may change its preference regarding the
                manner in which it nets DTLs against specific assets subject to
                deduction under this section only after obtaining the prior approval of
                FHFA.
                 (f) Insufficient amounts of a specific regulatory capital component
                to effect deductions. Under the corresponding deduction approach, if an
                Enterprise does not have a sufficient amount of a specific component of
                capital to effect the required deduction after completing the
                deductions required under paragraph (d) of this section, the Enterprise
                must deduct the shortfall from the next higher (that is, more
                subordinated) component of regulatory capital.
                 (g) Treatment of assets that are deducted. An Enterprise must
                exclude from standardized total risk-weighted assets and advanced
                approaches total risk-weighted assets any item deducted from regulatory
                capital under paragraphs (a), (c), and (d) of this section.
                Subpart D--Risk-Weighted Assets--Standardized Approach
                Sec. 1240.30 Applicability.
                 (a) This subpart sets forth methodologies for determining risk-
                weighted assets for purposes of the generally applicable risk-based
                capital requirements for the Enterprises.
                 (b) This subpart is also applicable to covered positions, as
                defined in subpart F of this part.
                Risk-Weighted Assets For General Credit Risk
                Sec. 1240.31 Mechanics for calculating risk-weighted assets for
                general credit risk.
                 (a) General risk-weighting requirements. An Enterprise must apply
                risk weights to its exposures as follows:
                 (1) An Enterprise must determine the exposure amount of each
                mortgage exposure, each other on-balance sheet exposure, each OTC
                derivative contract, and each off-balance sheet commitment, trade and
                transaction-related contingency, guarantee, repo-style transaction,
                forward agreement, or other similar transaction that is not:
                 (i) An unsettled transaction subject to Sec. 1240.40;
                 (ii) A cleared transaction subject to Sec. 1240.37;
                 (iii) A default fund contribution subject to Sec. 1240.37;
                 (iv) A retained CRT exposure, acquired CRT exposure, or other
                securitization exposure subject to Sec. Sec. 1240.41 through 1240.46;
                or
                 (v) An equity exposure (other than an equity OTC derivative
                contract) subject to Sec. 1240.51.
                 (2) An Enterprise must multiply each exposure amount by the risk
                weight appropriate to the exposure based on the exposure type or
                counterparty, eligible guarantor, or financial collateral to determine
                the risk-weighted asset amount for each exposure.
                 (b) Total risk-weighted assets for general credit risk. Total risk-
                weighted assets for general credit risk equals the sum of the risk-
                weighted asset amounts calculated under this section.
                Sec. 1240.32 General risk weights.
                 (a) Exposures to the U.S. government. (1) Notwithstanding any other
                requirement in this subpart, an Enterprise must assign a zero percent
                risk weight to:
                 (i) An exposure to the U.S. government, its central bank, or a U.S.
                government agency; and
                 (ii) The portion of an exposure that is directly and
                unconditionally guaranteed by the U.S. government, its central bank, or
                a U.S. government agency. This includes a deposit or other exposure, or
                the portion of a deposit or other exposure, that is insured or
                otherwise unconditionally guaranteed by the FDIC or NCUA.
                 (2) An Enterprise must assign a 20 percent risk weight to the
                portion of an exposure that is conditionally guaranteed by the U.S.
                government, its central bank, or a U.S. government agency. This
                includes an exposure, or the portion of an exposure, that is
                conditionally guaranteed by the FDIC or NCUA.
                 (b) Certain supranational entities and multilateral development
                banks (MDBs). An Enterprise must assign a zero percent risk weight to
                an exposure to the Bank for International Settlements, the European
                Central Bank, the European Commission, the International Monetary Fund,
                the European Stability Mechanism, the European Financial Stability
                Facility, or an MDB.
                 (c) Exposures to GSEs. (1) An Enterprise must assign a zero percent
                risk weight to any MBS guaranteed by the Enterprise (other than any
                retained CRT exposure).
                 (2) An Enterprise must assign a 20 percent risk weight to an
                exposure to another GSE, including an MBS guaranteed by the other
                Enterprise, other than an equity exposure or preferred stock.
                 (d) Exposures to depository institutions and credit unions. (1) An
                Enterprise must assign a 20 percent risk weight to an exposure to a
                depository institution or credit union that is organized under the laws
                of the United States or any state thereof, except as otherwise provided
                under paragraph (d)(2) of this section.
                 (2) An Enterprise must assign a 100 percent risk weight to an
                exposure to a financial institution if the exposure may be included in
                that financial institution's capital unless the exposure is:
                 (i) An equity exposure; or
                 (ii) Deducted from regulatory capital under Sec. 1240.22.
                 (e) Exposures to U.S. public sector entities (PSEs). (1) An
                Enterprise must assign a 20 percent risk weight to a general obligation
                exposure to a PSE that is organized under the laws of the United States
                or any state or political subdivision thereof.
                 (2) An Enterprise must assign a 50 percent risk weight to a revenue
                [[Page 39374]]
                obligation exposure to a PSE that is organized under the laws of the
                United States or any state or political subdivision thereof.
                 (f) Corporate exposures. An Enterprise must assign a 100 percent
                risk weight to all its corporate exposures.
                 (g) Residential mortgage exposures--(1) Single-family mortgage
                exposures. An Enterprise must assign a risk weight to a single-family
                mortgage exposure in accordance with Sec. 1240.33.
                 (2) Multifamily mortgage exposures. An Enterprise must assign a
                risk weight to a multifamily mortgage exposure in accordance with Sec.
                1240.34.
                 (h) Past due exposures. Except for an exposure to a sovereign
                entity or a mortgage exposure, if an exposure is 90 days or more past
                due or on nonaccrual:
                 (1) An Enterprise must assign a 150 percent risk weight to the
                portion of the exposure that is not guaranteed or that is unsecured;
                 (2) An Enterprise may assign a risk weight to the guaranteed
                portion of a past due exposure based on the risk weight that applies
                under Sec. 1240.38 if the guarantee or credit derivative meets the
                requirements of that section; and
                 (3) An Enterprise may assign a risk weight to the collateralized
                portion of a past due exposure based on the risk weight that applies
                under Sec. 1240.39 if the collateral meets the requirements of that
                section.
                 (i) Other assets. (1) An Enterprise must assign a zero percent risk
                weight to cash owned and held in the offices of an insured depository
                institution or in transit.
                 (2) An Enterprise must assign a 20 percent risk weight to cash
                items in the process of collection.
                 (3) An Enterprise must assign a 100 percent risk weight to DTAs
                arising from temporary differences that the Enterprise could realize
                through net operating loss carrybacks.
                 (4) An Enterprise must assign a 250 percent risk weight to the
                portion of each of the following items to the extent it is not deducted
                from common equity tier 1 capital pursuant to Sec. 1240.22(d):
                 (i) MSAs; and
                 (ii) DTAs arising from temporary differences that the Enterprise
                could not realize through net operating loss carrybacks.
                 (5) An Enterprise must assign a 100 percent risk weight to all
                assets not specifically assigned a different risk weight under this
                subpart and that are not deducted from tier 1 or tier 2 capital
                pursuant to Sec. 1240.22.
                 (j) Insurance assets. (1) An Enterprise must risk-weight the
                individual assets held in a separate account that does not qualify as a
                non-guaranteed separate account as if the individual assets were held
                directly by the Enterprise.
                 (2) An Enterprise must assign a zero percent risk weight to an
                asset that is held in a non-guaranteed separate account.
                Sec. 1240.33 Single-family mortgage exposures.
                 (a) Definitions. Subject to any additional instructions set forth
                on Table 1 to this paragraph (a), for purposes of this section:
                 Adjusted MTMLTV means, with respect to a single-family mortgage
                exposure, the amount equal to:
                 (i) The MTMLTV of the single-family mortgage exposure (or, if the
                loan age of the single-family mortgage exposure is less than 6, the
                OLTV of the single-family mortgage exposure); divided by
                 (ii) The amount equal to 1 plus the single-family countercyclical
                adjustment of the single-family mortgage exposure.
                 Approved insurer means an insurance company that is currently
                approved by an Enterprise to guarantee or insure single-family mortgage
                exposures acquired by the Enterprise.
                 Cancellable mortgage insurance means a mortgage insurance policy
                that, pursuant to its terms, may or will be terminated before the
                maturity date of the insured single-family mortgage exposure, including
                as required or permitted by the Homeowners Protection Act of 1998 (12
                U.S.C. 4901).
                 Charter-level coverage means mortgage insurance that satisfies the
                minimum requirements of the authorizing statute of an Enterprise.
                 Cohort burnout means the number of refinance opportunities since
                the loan age of the single-family mortgage exposure was 6, categorized
                into ranges pursuant to the instructions set forth on Table 1 to this
                paragraph (a).
                 Coverage percent means, with respect to mortgage insurance or a
                recourse agreement, the percent of the sum of the unpaid principal
                balance, any lost interest, and any foreclosure costs that is used to
                determine the benefit or other coverage under a mortgage insurance
                policy or recourse agreement.
                 Days past due means the number of days a single-family mortgage
                exposure is past due.
                 Debt-to-income ratio (DTI) means the ratio of a borrower's total
                monthly obligations (including housing expense) divided by the
                borrower's monthly income, as calculated under the Guide of the
                Enterprise.
                 Deflated single-family house price index (DeflatedSFHPI) means the
                amount equal to:
                 (i) The most recently available FHFA quarterly, not-seasonally-
                adjusted U.S. all transactions house price index; divided by
                 (ii) The average quarterly observation from the Consumer Price
                Index for All Urban Consumers, All Items Less Shelter in U.S. City
                Average, that corresponds to the same quarter.
                 Full recourse agreement means a recourse agreement that provides
                for a coverage percent of 100 percent and has a term of the coverage
                that is equal to the life of the single-family mortgage exposure.
                 Guide means, as applicable, the Fannie Mae Single Family Selling
                Guide, the Fannie Mae Single Family Servicing Guide and the Freddie Mac
                Single-family Seller/Servicers Guide.
                 Guide-level coverage means mortgage insurance that satisfies the
                requirements of the Guide of the Enterprise with respect to mortgage
                insurance that has a coverage percent that exceeds charter-level
                coverage.
                 Interest-only (IO) means a single-family mortgage exposure that
                requires only payment of interest without any principal amortization
                during all or part of the loan term.
                 Loan age means the number of scheduled payment dates since the
                origination of a single-family mortgage exposure.
                 Loan-level credit enhancement means:
                 (i) Mortgage insurance;
                 (ii) A recourse agreement; or
                 (iii) A participation agreement.
                 Loan documentation means the completeness of the documentation used
                to underwrite a single-family mortgage exposure, as determined under
                the Guide of the Enterprise.
                 Loan purpose means the purpose of a single-family mortgage exposure
                at origination.
                 Long-run single-family house price index trend (LRSFHPITrend)
                means,
                 LRSFHPITrend =
                1.0873681e0.00294746 * (Number of Quarters)
                where equal to the number of quarters from 1975Q1 to the given
                reporting quarter and where 1975Q1 is counted as one.
                 MI cancellation feature means an indicator for whether mortgage
                insurance is cancellable mortgage insurance or non-cancellable mortgage
                insurance, assigned pursuant to the instructions set forth on Table 1
                to this paragraph (a).
                 Modification means:
                 (i) Any permanent amendment or other change to the interest rate,
                maturity date, unpaid principal balance, or other contractual term of a
                single-family mortgage exposure; or
                 (ii) Entry into any repayment plan with respect to any amounts that
                are
                [[Page 39375]]
                past due under the terms of a single-family mortgage exposure.
                 Modified re-performing loan (modified RPL) means a single-family
                mortgage exposure (other than an NPL) that has been subject to a
                modification.
                 Months since last modification means the number of scheduled
                payment dates since the effective date of the last modification of a
                single-family mortgage exposure.
                 Mortgage concentration risk means the extent to which a mortgage
                insurer or other counterparty is exposed to mortgage credit risk
                relative to other risks.
                 MTMLTV means, with respect to a single-family mortgage exposure,
                the amount equal to:
                 (i) The unpaid principal balance of the single-family mortgage
                exposure; divided by
                 (ii) The amount equal to:
                 (A) The unpaid principal balance of the single-family mortgage
                exposure at origination; divided by
                 (B) The OLTV of the single-family mortgage exposure; multiplied by
                 (C) The most recently available FHFA Purchase-only State-level
                House Price Index of the State in which the property securing the
                singe-family mortgage exposure is located; divided by
                 (D) The FHFA Purchase-only State-level House Price Index, as of
                date of the origination of the single-family mortgage exposure, in
                which the property securing the singe-family mortgage exposure is
                located.
                 Non-cancellable mortgage insurance means a mortgage insurance
                policy that, pursuant to its terms, may not be terminated before the
                maturity date of the insured single-family mortgage exposure.
                 Non-modified re-performing loan (non-modified RPL) means a single-
                family mortgage exposure (other than a modified RPL or an NPL) that was
                previously an NPL at any time in the prior 48 calendar months.
                 Non-performing loan (NPL) means a single-family mortgage exposure
                that is 60 days or more past due.
                 Occupancy type means the borrowers' intended use of the property
                securing a single-family mortgage exposure.
                 Original credit score means the borrower's credit score as of the
                origination date of a single-family mortgage exposure.
                 OLTV means, with respect to a single-family mortgage exposure, the
                amount equal to:
                 (i) The unpaid principal balance of the single-family mortgage
                exposure at origination; divided by
                 (ii) The lesser of:
                 (A) The appraised value of the property securing the single-family
                mortgage exposure; and
                 (B) The sale price of the property securing the single-family
                mortgage exposure.
                 Origination channel means the type of institution that originated a
                single-family mortgage exposure, assigned pursuant to the instructions
                set forth on Table 1 to this paragraph (a).
                 Partial recourse agreement means a recourse agreement that is not a
                full recourse agreement.
                 Participation agreement means, with respect to a single-family
                mortgage exposure, any agreement between an Enterprise and the seller
                of the single-family mortgage exposure pursuant to which the seller
                retains a participation of not less than 10 percent in the single-
                family mortgage exposure.
                 Past due means, with respect to a single-family mortgage exposure,
                that any amount required to be paid by the borrower under the terms of
                the single-family mortgage exposure has not been paid.
                 Payment change from modification means the amount, expressed as a
                percent, equal to:
                 (i) The amount equal to:
                 (A) The monthly payment of a single-family mortgage exposure after
                a modification; divided by
                 (B) The monthly payment of the single-family mortgage exposure
                before the modification; minus
                 (ii) 1.0.
                 Percentage difference between DeflatedSFHPI and LRSFHPITrend
                (DiffLRSFHPITrend%) means
                [GRAPHIC] [TIFF OMITTED] TP30JN20.047
                 Performing loan means any single-family mortgage exposure that is
                not an NPL, a modified RPL, or a non-modified RPL.
                 Previous maximum days past due means the maximum number of days a
                modified RPL or non-modified RPL was past due in the prior 36 calendar
                months.
                 Product type means an indicator reflecting the contractual terms of
                a single-family mortgage exposure as of the origination date, assigned
                pursuant to the instructions set forth on Table 1 to this paragraph
                (a).
                 Property type means the physical structure of the property securing
                a single-family mortgage exposure.
                 Recourse agreement means, with respect to a single-family mortgage
                exposure, any agreement (other than a participation agreement) between
                an Enterprise and the seller of the single-family mortgage exposure
                pursuant to which the seller agrees either to reimburse the Enterprise
                for any loss arising out of the default of single-family mortgage
                exposure or to repurchase or replace the single-family mortgage
                exposure in the event of the default of the single-family mortgage
                exposure.
                 Refinance opportunity means, with respect to a single-family
                mortgage exposure, any calendar month in which the Primary Mortgage
                Market Survey (PMMS) rate for the month and year of the origination of
                the single-family mortgage exposure exceeds the PMMS rate for that
                calendar month by more than 50 basis points.
                 Refreshed credit score means the borrower's most recently available
                credit score.
                 Single-family countercyclical adjustment (SFCCyCAdj%) means
                [[Page 39376]]
                 if DiffLRSFHPITrend% is greater than 5% then
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.048
                
                 if DiffLRSFHPITrend% is less than -5% then
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.049
                
                 Otherwise SFCCyCAdj% = 0%.
                 Streamlined refi means a single-family mortgage exposure that was
                refinanced through a streamlined refinance program of an Enterprise,
                including the Home Affordable Refinance Program, Relief Refi, and Refi-
                Plus.
                 Subordination means, with respect to a single-family mortgage
                exposure, the amount equal to the original unpaid principal balance of
                any second lien single-family mortgage exposure divided by the lesser
                of the appraised value or sale price of the property that secures the
                single-family mortgage exposure.
                Table 1 to Paragraph (a): Permissible Values and Additional Instructions
                ------------------------------------------------------------------------
                 Additional
                 Defined term Permissible values instructions
                ------------------------------------------------------------------------
                Cohort burnout.............. ``No burnout,'' if High if unable to
                 the single-family determine.
                 mortgage exposure
                 has not had a
                 refinance
                 opportunity since
                 the loan age of the
                 single-family
                 mortgage exposure
                 was 6.
                 ``Low,'' if the
                 single-family
                 mortgage exposure
                 has had 12 or fewer
                 refinance
                 opportunities since
                 the loan age of the
                 single-family
                 mortgage exposure
                 was 6.
                 ``Medium,'' if the
                 single-family
                 mortgage exposure
                 has had between 13
                 and 24 refinance
                 opportunities since
                 the loan age of the
                 single-family
                 mortgage exposure
                 was 6.
                 ``High,'' if the
                 single-family
                 mortgage exposure
                 has had more than
                 24 refinance
                 opportunities since
                 the loan age of the
                 single-family
                 mortgage exposure
                 was 6.
                Coverage percent............ 0 percent If there
                 are credit
                 scores from two
                 repositories,
                 take the lower
                 credit score.
                 If there
                 are credit
                 scores from
                 three
                 repositories,
                 use the middle
                 credit score.
                 If there
                 are credit
                 scores from
                 three
                 repositories and
                 two of the
                 credit scores
                 are identical,
                 use the
                 identical credit
                 score.
                 If there are
                 multiple borrowers,
                 use the following
                 logic to determine
                 a single original
                 credit score:
                 Using
                 the logic above,
                 determine a
                 single credit
                 score for each
                 borrower.
                 Select
                 the lowest
                 single credit
                 score across all
                 borrowers.
                 600 if outside of
                 permissible range
                 or unable to
                 determine.
                Origination channel......... Retail, third-party TPO includes broker
                 origination (TPO). and correspondent
                 channels.
                 TPO if unable to
                 determine.
                Payment change from -80 percent  60% and.. 1.1 1.2 1.1
                 0% 
                 5%.
                ----------------------------------------------------------------------------------------------------------------
                Loan Age...................... Loan age 60 0.75
                 months.
                ----------------------------------------------------------------------------------------------------------------
                Cohort Burnout................ No burnout...... 1.0
                 Low............. 1.2
                 Medium.......... 1.3
                 High............ 1.4
                ----------------------------------------------------------------------------------------------------------------
                Interest-only................. No IO........... 1.0 1.0 1.0
                 Yes IO.......... 1.6 1.4 1.1
                ----------------------------------------------------------------------------------------------------------------
                Loan Documentation............ Full............ 1.0 1.0 1.0
                 None or low..... 1.3 1.3 1.2
                ----------------------------------------------------------------------------------------------------------------
                Streamlined Refi.............. No.............. 1.0 1.0 1.0
                 Yes............. 1.0 1.2 1.1
                ----------------------------------------------------------------------------------------------------------------
                Refreshed Credit Score for Refreshed credit .............. 1.6 1.4
                 Modified RPLs and Non- score = 0%.
                 -20% = 780.
                ----------------------------------------------------------------------------------------------------------------
                 (e) Credit enhancement multiplier--(1) Amount--(i) In general. The
                adjusted credit enhancement multiplier for a single-family mortgage
                exposure that is subject to loan-level credit enhancement is equal to
                1.0 minus the product of:
                 (A) 1.0 minus the credit enhancement multiplier for the single-
                family mortgage exposure as determined under paragraph (e)(2) of this
                section; multiplied by
                 (B) 1.0 minus the counterparty haircut for the loan-level credit
                enhancement as determined under paragraph (e)(3) of this section.
                 (ii) No loan-level credit enhancement. The adjusted credit
                enhancement multiplier for a single-family mortgage exposure that is
                not subject to loan-level credit enhancement is equal to 1.0.
                 (2) Credit enhancement multiplier. (i) The credit enhancement
                multiplier for a single-family mortgage exposure that is subject to a
                participation agreement is 1.0.
                 (ii) The credit enhancement multiplier for a single-family mortgage
                exposure that is subject to a full recourse agreement is 0.
                 (iii) The credit enhancement multiplier for a single-family
                mortgage exposure that is subject to a partial recourse agreement is:
                 (A) 1.0; minus
                 (B) The amount equal to:
                 (1) The coverage percent of the partial recourse agreement;
                multiplied by
                [[Page 39381]]
                 (2) A loss timing adjustment determined under Sec. 1240.44(g) as
                if the partial recourse agreement were a CRT.
                 (iv) Subject to paragraph (e)(2)(v) of this section, the credit
                enhancement multiplier for--
                 (A) A performing loan, non-modified RPL, or modified RPL that is
                subject to non-cancellable mortgage insurance is set forth on Table 7
                to paragraph (e)(2)(v)(E) of this section;
                 (B) A performing loan or non-modified RPL that is subject to
                cancellable mortgage insurance is set forth on Table 8 to paragraph
                (e)(2)(v)(E) of this section;
                 (C) A modified RPL with a 30-year post-modification amortization
                that is subject to cancellable mortgage insurance is set forth on Table
                9 to paragraph (e)(2)(v)(E) of this section;
                 (D) A modified RPL with a 40-year post-modification amortization
                that is subject to cancellable mortgage insurance is set forth on Table
                10 to paragraph (e)(2)(v)(E) of this section; and
                 (E) NPL, whether subject to non-cancellable mortgage insurance or
                cancellable mortgage insurance, is set forth on Table 11 to paragraph
                (e)(2)(v)(E) of this section.
                 (v) Notwithstanding anything to the contrary in this paragraph (e),
                for purposes of paragraph (e)(2)(iv) of this section:
                 (A) The OLTV of a single-family mortgage exposure will be deemed to
                be 80 percent if the single-family mortgage exposure has an OLTV less
                than or equal to 80 percent.
                 (B) If the single-family mortgage exposure has an interest-only
                feature, any cancellable mortgage insurance will be deemed to be non-
                cancellable mortgage insurance.
                 (C) If the coverage percent of the mortgage insurance is greater
                than charter-level coverage and less than guide-level coverage, the
                credit enhancement multiplier is the amount equal to a linear
                interpolation between the credit enhancement multiplier of the single-
                family mortgage exposure for charter-level coverage and the credit
                enhancement multiplier of the single-family mortgage exposure for
                guide-level coverage.
                 (D) If the coverage percent of the mortgage insurance is less than
                charter-level coverage, the credit enhancement multiplier is the amount
                equal to the midpoint of a linear interpolation between a credit
                enhancement multiplier of 1.0 and the credit enhancement multiplier of
                the single-family mortgage exposure for charter-level coverage.
                 (E) If the coverage percent of the mortgage insurance is greater
                than guide-level coverage, the credit enhancement multiplier is
                determined as if the coverage percent were guide-level coverage.
                BILLING CODE 8070-01-P
                [GRAPHIC] [TIFF OMITTED] TP30JN20.054
                [[Page 39382]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.055
                [GRAPHIC] [TIFF OMITTED] TP30JN20.056
                [[Page 39383]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.057
                [[Page 39384]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.058
                BILLING CODE 8070-01-C
                 (3) Credit enhancement counterparty haircut--(i) Definitions. For
                purposes of this paragraph (e)(3), the counterparty rating for a
                counterparty is:
                 (A) 1, if the Enterprise has determined that the counterparty is
                expected to perform all of its contractual obligations under
                foreseeable adverse events.
                 (B) 2, if the Enterprise has determined that there is negligible
                risk the counterparty may not be able to perform all of its contractual
                obligations under foreseeable adverse events.
                 (C) 3, if the Enterprise has determined that there is a slight risk
                the counterparty might not be able to perform all of its contractual
                obligations under foreseeable adverse events.
                 (D) 4, if the Enterprise has determined that foreseeable adverse
                events will have a greater impact on ``4'' rated counterparties than
                higher rated counterparties.
                 (E) 5, if the Enterprise has determined that the counterparty might
                not perform all of its contractual obligations under foreseeable
                adverse events.
                 (F) 6, if the Enterprise has determined that the counterparty is
                not expected to meet its contractual obligations under foreseeable
                adverse events.
                 (G) 7, if the Enterprise has determined that the counterparty's
                ability to perform its contractual obligations is questionable.
                 (H) 8, if the Enterprise has determined that the counterparty is in
                default on a material contractual obligation or is under a resolution
                proceeding or similar regulatory proceeding.
                 (ii) Counterparty haircut. The counterparty haircut is set forth on
                Table 12 to this paragraph (e)(3)(ii). For purposes of this paragraph
                (e)(3)(ii), RPL means either a modified RPL or a non-modified RPL.
                [[Page 39385]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.059
                Sec. 1240.34 Multifamily mortgage exposures.
                 (a) Definitions. Subject to any additional instructions set forth
                on Table 1 to this paragraph (a), for purposes of this section:
                 Acquisition debt-service-coverage ratio (acquisition DSCR) means,
                with respect to a multifamily mortgage exposure, the amount equal to:
                 (i) The net operating income (NOI) (or, if not available, the net
                cash flow) of the multifamily property that secures the multifamily
                mortgage exposure, at the time of the acquisition by the Enterprise
                (or, if not available, at the time of the underwriting or origination)
                of the multifamily mortgage exposure; divided by
                 (ii) The scheduled periodic payment on the multifamily mortgage
                exposure (or, if interest-only, fully amortizing payment), at the time
                of the acquisition by the Enterprise (or, if not available, at the time
                of the origination) of the multifamily mortgage exposure.
                 Acquisition loan-to-value (acquisition LTV) means, with respect to
                a multifamily mortgage exposure, the amount, determined as of the time
                of the acquisition by the Enterprise (or, if not available, at the time
                of the underwriting or origination) of the multifamily mortgage
                exposure, equal to:
                 (i) The unpaid principal balance of the multifamily mortgage
                exposure; divided by
                 (ii) The value of the multifamily property securing the multifamily
                mortgage exposure.
                 Debt-service-coverage ratio (DSCR) means, with respect to a
                multifamily mortgage exposure:
                 (i) The acquisition DSCR of the multifamily mortgage exposure if
                the loan age of the multifamily mortgage exposure is less than 6; or
                 (ii) The MTMDSCR of the multifamily mortgage exposure.
                 Interest-only (IO) means a multifamily mortgage exposure that
                requires only payment of interest without any principal amortization
                during all or part of the loan term.
                 Loan age means the number of scheduled payment dates since the
                origination of the multifamily mortgage exposure.
                 Loan term means the number of years until final loan payment (which
                may be a balloon payment) under the terms of a multifamily mortgage
                exposure.
                 LTV means, with respect to a multifamily mortgage exposure;
                 (i) The acquisition LTV of the multifamily mortgage exposure if the
                loan age of the multifamily mortgage exposure is less than 6, or
                 (ii) The MTMLTV of the multifamily mortgage exposure.
                 Mark-to-market debt-service coverage ratio (MTMDSCR) means, with
                respect to a multifamily mortgage exposure, the amount equal to--
                 (i) The net operating income (or, if not available, the net cash
                flow) of the multifamily property that secures the multifamily mortgage
                exposure, as reported on the most recently available property operating
                statement; divided by
                 (ii) The scheduled periodic payment on the multifamily mortgage
                exposure (or, for interest-only, fully amortizing payment), as reported
                on the most recently available property operating statement.
                 Mark-to-market loan-to-value (MTMLTV) means, with respect to a
                multifamily mortgage exposure, the amount calculated by adjusting the
                acquisition LTV using a multifamily property value index or property
                value estimated based on net operating income and capitalization rate
                indices.
                 Multifamily adjustable-rate exposure means a multifamily mortgage
                exposure that is not, at that time, a multifamily fixed-rate exposure.
                 Multifamily fixed-rate exposure means a multifamily mortgage
                exposure that, at that time, has an interest rate that may not then
                increase or decrease based on a change in a reference index or other
                methodology, including:
                 (i) A multifamily mortgage exposure that has an interest rate that
                is fixed over the life of the loan; and
                 (ii) A multifamily mortgage exposure that has an interest rate that
                may increase or decrease in the future, but is fixed at that time.
                 Net cash flow means, with respect to a multifamily mortgage
                exposure, the amount equal to:
                 (i) The net operating income of the multifamily mortgage exposure;
                minus
                 (ii) Reserves for capital improvements; minus
                 (iii) Other expenses not included in net operating income required
                for the proper operation of the multifamily
                [[Page 39386]]
                property securing the multifamily mortgage exposure, including any
                commissions paid to leasing agents in securing renters and special
                improvements to the property to accommodate the needs of certain
                renters.
                 Net operating income means, with respect to a multifamily mortgage
                exposure, the amount equal to:
                 (i) The rental income generated by the multifamily property
                securing the multifamily mortgage exposure; minus
                 (ii) The vacancy and property operating expenses of the multifamily
                property securing the multifamily mortgage exposure.
                 Original amortization term means the number of years, determined as
                of the time of the origination of a multifamily mortgage exposure, that
                it would take a borrower to pay a multifamily mortgage exposure
                completely if the borrower only makes the scheduled payments, and
                without making any balloon payment.
                 Original loan size means the dollar amount of the unpaid principal
                balance of a multifamily mortgage exposure at origination.
                 Payment performance means the payment status of history of a
                multifamily mortgage exposure, assigned pursuant to the instructions
                set forth on Table 1 to this paragraph (a).
                 Supplemental mortgage exposure means any multifamily fixed-rate
                exposure or multifamily adjustable-rate exposure that is originated
                after the origination of a multifamily mortgage exposure that is
                secured by all or part of the same multifamily property.
                 Unpaid principal balance (UPB) means the outstanding loan amount of
                a multifamily mortgage exposure.
                [[Page 39387]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.060
                 (b) Risk weight--(1) In general. Subject to paragraphs (b)(2) and
                (b)(3) of this section, an Enterprise must assign a risk weight to a
                multifamily mortgage exposure equal to:
                 (i) The base risk weight for the multifamily mortgage exposure as
                determined under paragraph (c) of this section; multiplied by
                 (ii) The combined risk multiplier for the multifamily mortgage
                exposure as determined under paragraph (d) of this section.
                 (2) Minimum risk weight. Notwithstanding the risk weight determined
                under paragraph (b)(1) of this section, the risk weight assigned to a
                multifamily mortgage exposure may not be less than 15 percent.
                 (3) Loan groups. If a multifamily property that secures a
                multifamily mortgage exposure also secures one or more supplemental
                mortgage exposures:
                 (i) A multifamily mortgage exposure-specific base risk weight must
                be determined under paragraph (c) of this section using for each of
                these multifamily mortgage exposures a single DSCR and single LTV, both
                calculated as if all of the multifamily mortgage exposures secured by
                the multifamily
                [[Page 39388]]
                property were consolidated into a single multifamily mortgage exposure;
                and
                 (ii) A multifamily mortgage exposure-specific combined risk
                multiplier must be determined under paragraph (d) of this section based
                on the risk characteristics of the multifamily mortgage exposure
                (except with respect to the loan size multiplier, which would be
                determined using the aggregate unpaid principal balance of these
                multifamily mortgage exposures).
                 (c) Base risk weight--(1) Multifamily fixed-rate exposure. The base
                risk weight for a multifamily fixed-rate exposure is set forth on Table
                2 to this paragraph (c)(1).
                BILLING CODE 8070-01-P
                [GRAPHIC] [TIFF OMITTED] TP30JN20.061
                 (2) Multifamily adjustable-rate exposure. The base risk weight for
                a multifamily adjustable-rate exposure is set forth on Table 3 to this
                paragraph (c)(2).
                [GRAPHIC] [TIFF OMITTED] TP30JN20.062
                 (d) Combined risk multiplier. The combined risk multiplier for a
                multifamily mortgage exposure is equal to the product of each of the
                applicable risk multipliers set forth on Table 4 to this paragraph (d).
                [[Page 39389]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.063
                BILLING CODE 8070-01-C
                Sec. 1240.35 Off-balance sheet exposures.
                 (a) General. (1) An Enterprise must calculate the exposure amount
                of an off-balance sheet exposure using the credit conversion factors
                (CCFs) in paragraph (b) of this section.
                [[Page 39390]]
                 (2) Where an Enterprise commits to provide a commitment, the
                Enterprise may apply the lower of the two applicable CCFs.
                 (3) Where an Enterprise provides a commitment structured as a
                syndication or participation, the Enterprise is only required to
                calculate the exposure amount for its pro rata share of the commitment.
                 (4) Where an Enterprise provides a commitment or enters into a
                repurchase agreement and such commitment or repurchase agreement, the
                exposure amount shall be no greater than the maximum contractual amount
                of the commitment, repurchase agreement, or credit-enhancing
                representation and warranty, as applicable.
                 (b) Credit conversion factors--(1) Zero percent CCF. An Enterprise
                must apply a zero percent CCF to the unused portion of a commitment
                that is unconditionally cancelable by the Enterprise.
                 (2) 20 percent CCF. An Enterprise must apply a 20 percent CCF to
                the amount of commitments with an original maturity of one year or less
                that are not unconditionally cancelable by the Enterprise.
                 (3) 50 percent CCF. An Enterprise must apply a 50 percent CCF to
                the amount of commitments with an original maturity of more than one
                year that are not unconditionally cancelable by the Enterprise.
                 (4) 100 percent CCF. An Enterprise must apply a 100 percent CCF to
                the amount of the following off-balance sheet items and other similar
                transactions:
                 (i) Guarantees;
                 (ii) Repurchase agreements (the off-balance sheet component of
                which equals the sum of the current fair values of all positions the
                Enterprise has sold subject to repurchase);
                 (iii) Off-balance sheet securities lending transactions (the off-
                balance sheet component of which equals the sum of the current fair
                values of all positions the Enterprise has lent under the transaction);
                 (iv) Off-balance sheet securities borrowing transactions (the off-
                balance sheet component of which equals the sum of the current fair
                values of all non-cash positions the Enterprise has posted as
                collateral under the transaction); and
                 (v) Forward agreements.
                Sec. 1240.36 Derivative contracts.
                 An Enterprise must determine its risk-weighted assets for OTC
                derivative contracts as provided under 12 CFR 217.34, substituting
                ``Enterprise'' for ``Board-regulated institution''.
                Sec. 1240.37 Cleared transactions.
                 An Enterprise must determine its risk-weighted assets for cleared
                transactions as provided under 12 CFR 217.35, substituting
                ``Enterprise'' for ``Board-regulated institution.''
                Sec. 1240.38 Guarantees and credit derivatives: Substitution
                treatment.
                 An Enterprise may recognize the credit risk mitigation benefits of
                an eligible guarantee or eligible credit derivative by substituting the
                risk weight associated with the protection provider for the risk weight
                assigned to an exposure, as provided under 12 CFR 217.36, substituting
                ``Enterprise'' for ``Board-regulated institution.''
                Sec. 1240.39 Collateralized transactions.
                 An Enterprise may recognize the risk-mitigating effects of
                financial collateral as provided under 12 CFR 217.37, substituting
                ``Enterprise'' for ``Board-regulated institution.''
                Risk-Weighted Assets for Unsettled Transactions
                Sec. 1240.40 Unsettled transactions.
                 An Enterprise must determine its risk-weighted assets for unsettled
                transactions under 12 CFR 217.38, substituting ``Enterprise'' for
                ``Board-regulated institution.''
                Risk-Weighted Assets for CRT and Other Securitization Exposures
                Sec. 1240.41 Operational requirements for CRT and other
                securitization exposures.
                 (a) Operational criteria for traditional securitizations. An
                Enterprise that transfers exposures it has purchased or otherwise
                acquired to a securitization SPE or other third party in connection
                with a traditional securitization may exclude the exposures from the
                calculation of its risk-weighted assets only if each condition in this
                section is satisfied. An Enterprise that meets these conditions must
                hold risk-based capital against any credit risk it retains in
                connection with the securitization. An Enterprise that fails to meet
                these conditions must hold risk-based capital against the transferred
                exposures as if they had not been securitized and must deduct from
                common equity tier 1 capital any after-tax gain-on-sale resulting from
                the transaction. The conditions are:
                 (1) The exposures are not reported on the Enterprise's consolidated
                balance sheet under GAAP;
                 (2) The Enterprise has transferred to one or more third parties
                credit risk associated with the underlying exposures;
                 (3) Any clean-up calls relating to the securitization are eligible
                clean-up calls; and
                 (4) The securitization does not:
                 (i) Include one or more underlying exposures in which the borrower
                is permitted to vary the drawn amount within an agreed limit under a
                line of credit; and
                 (ii) Contain an early amortization provision.
                 (b) Operational criteria for synthetic securitizations. For
                synthetic securitizations, an Enterprise may recognize for risk-based
                capital purposes the use of a credit risk mitigant to hedge underlying
                exposures only if each condition in this paragraph (b) is satisfied. An
                Enterprise that meets these conditions must hold risk-based capital
                against any credit risk of the exposures it retains in connection with
                the synthetic securitization. An Enterprise that fails to meet these
                conditions or chooses not to recognize the credit risk mitigant for
                purposes of this section must instead hold risk-based capital against
                the underlying exposures as if they had not been synthetically
                securitized. The conditions are:
                 (1) The credit risk mitigant is:
                 (i) Financial collateral;
                 (ii) A guarantee that meets all criteria as set forth in the
                definition of ``eligible guarantee'' in Sec. 1240.2, except for the
                criteria in paragraph (3) of that definition; or
                 (iii) A credit derivative that meets all criteria as set forth in
                the definition of ``eligible credit derivative'' in Sec. 1240.2,
                except for the criteria in paragraph (3) of the definition of
                ``eligible guarantee'' in Sec. 1240.2.
                 (2) The Enterprise transfers credit risk associated with the
                underlying exposures to one or more third parties, and the terms and
                conditions in the credit risk mitigants employed do not include
                provisions that:
                 (i) Allow for the termination of the credit protection due to
                deterioration in the credit quality of the underlying exposures;
                 (ii) Require the Enterprise to alter or replace the underlying
                exposures to improve the credit quality of the underlying exposures;
                 (iii) Increase the Enterprise's cost of credit protection in
                response to deterioration in the credit quality of the underlying
                exposures;
                 (iv) Increase the yield payable to parties other than the
                Enterprise in response to a deterioration in the credit quality of the
                underlying exposures; or
                 (v) Provide for increases in a retained first loss position or
                credit enhancement
                [[Page 39391]]
                provided by the Enterprise after the inception of the securitization;
                 (3) The Enterprise obtains a well-reasoned opinion from legal
                counsel that confirms the enforceability of the credit risk mitigant in
                all relevant jurisdictions; and
                 (4) Any clean-up calls relating to the securitization are eligible
                clean-up calls.
                 (c) Operational criteria for credit risk transfers. For credit risk
                transfers, an Enterprise may recognize for risk-based capital purposes,
                the use of a credit risk transfer only if each condition in this
                paragraph (c) is satisfied. An Enterprise that meets these conditions
                must hold risk-based capital against any credit risk of the exposures
                it retains in connection with the credit risk transfer. An Enterprise
                that fails to meet these conditions or chooses not to recognize the
                credit risk transfer for purposes of this section must instead hold
                risk-based capital against the underlying exposures as if they had not
                been subject to the credit risk transfer. The conditions are:
                 (1) The credit risk transfer is an eligible CRT structure.
                 (2) The Enterprise transfers credit risk associated with the
                underlying exposures to one or more third parties, and the terms and
                conditions in the credit risk transfer employed do not include
                provisions that:
                 (i) Allow for the termination of the credit risk transfer due to
                deterioration in the credit quality of the underlying exposures;
                 (ii) Require the Enterprise to alter or replace the underlying
                exposures to improve the credit quality of the underlying exposures;
                 (iii) Increase the Enterprise's cost of credit protection in
                response to deterioration in the credit quality of the underlying
                exposures;
                 (iv) Increase the yield payable to parties other than the
                Enterprise in response to a deterioration in the credit quality of the
                underlying exposures; or
                 (v) Provide for increases in a retained first loss position or
                credit enhancement provided by the Enterprise after the inception of
                the credit risk transfer;
                 (3) The Enterprise obtains a well-reasoned opinion from legal
                counsel that confirms the enforceability of the credit risk transfer in
                all relevant jurisdictions; and
                 (4) Any clean-up calls relating to the credit risk transfer are
                eligible clean-up calls.
                 (5) The Enterprise includes in its periodic disclosures under the
                Federal securities laws, or in other appropriate public disclosures, a
                reasonably detailed description of--
                 (i) The material recourse or other risks that might reduce the
                effectiveness of the credit risk transfer in transferring the credit
                risk on the underlying exposures to third parties; and
                 (ii) Each condition under paragraph (a) of this section (governing
                traditional securitizations) or paragraph (b) of this section
                (governing synthetic securitizations) that is not satisfied by the
                credit risk transfer and the reasons that each such condition is not
                satisfied.
                 (d) Due diligence requirements for securitization exposures. (1)
                Except for exposures that are deducted from common equity tier 1
                capital and exposures subject to Sec. 1240.42(h), if an Enterprise is
                unable to demonstrate to the satisfaction of FHFA a comprehensive
                understanding of the features of a securitization exposure that would
                materially affect the performance of the exposure, the Enterprise must
                assign the securitization exposure a risk weight of 1,250 percent. The
                Enterprise's analysis must be commensurate with the complexity of the
                securitization exposure and the materiality of the exposure in relation
                to its capital.
                 (2) An Enterprise must demonstrate its comprehensive understanding
                of a securitization exposure under paragraph (c)(1) of this section,
                for each securitization exposure by:
                 (i) Conducting an analysis of the risk characteristics of a
                securitization exposure prior to acquiring the exposure, and
                documenting such analysis within three business days after acquiring
                the exposure, considering:
                 (A) Structural features of the securitization that would materially
                impact the performance of the exposure, for example, the contractual
                cash flow waterfall, waterfall-related triggers, credit enhancements,
                liquidity enhancements, fair value triggers, the performance of
                organizations that service the exposure, and deal-specific definitions
                of default;
                 (B) Relevant information regarding the performance of the
                underlying credit exposure(s), for example, the percentage of loans 30,
                60, and 90 days past due; default rates; prepayment rates; loans in
                foreclosure; property types; occupancy; average credit score or other
                measures of creditworthiness; average LTV ratio; and industry and
                geographic diversification data on the underlying exposure(s);
                 (C) Relevant market data of the securitization, for example, bid-
                ask spread, most recent sales price and historic price volatility,
                trading volume, implied market rating, and size, depth and
                concentration level of the market for the securitization; and
                 (D) For resecuritization exposures, performance information on the
                underlying securitization exposures, for example, the issuer name and
                credit quality, and the characteristics and performance of the
                exposures underlying the securitization exposures; and
                 (ii) On an on-going basis (no less frequently than quarterly),
                evaluating, reviewing, and updating as appropriate the analysis
                required under paragraph (c)(1) of this section for each securitization
                exposure.
                Sec. 1240.42 Risk-weighted assets for CRT and other securitization
                exposures.
                 (a) Securitization risk weight approaches. Except as provided
                elsewhere in this section or in Sec. 1240.41:
                 (1) An Enterprise must deduct from common equity tier 1 capital any
                after-tax gain-on-sale resulting from a securitization and apply a
                1,250 percent risk weight to the portion of a CEIO that does not
                constitute after-tax gain-on-sale.
                 (2) If a securitization exposure does not require deduction under
                paragraph (a)(1) of this section, an Enterprise may assign a risk
                weight to the securitization exposure either using the simplified
                supervisory formula approach (SSFA) in accordance with Sec. Sec.
                1240.43(a) through 1240.43(d) for a securitization exposure that is not
                a retained CRT exposure or an acquired CRT exposure or using the credit
                risk transfer approach (CRTA) in accordance with Sec. 1240.44 for a
                retained CRT exposure, and in either case, subject to the limitation
                under paragraph (e) of this section.
                 (3) If a securitization exposure does not require deduction under
                paragraph (a)(1) of this section and the Enterprise cannot, or chooses
                not to apply the SSFA or the CRTA to the exposure, the Enterprise must
                assign a risk weight to the exposure as described in Sec. 1240.45.
                 (4) If a securitization exposure is a derivative contract (other
                than protection provided by an Enterprise in the form of a credit
                derivative) that has a first priority claim on the cash flows from the
                underlying exposures (notwithstanding amounts due under interest rate
                or currency derivative contracts, fees due, or other similar payments),
                an Enterprise may choose to set the risk-weighted asset amount of the
                exposure equal to the amount of the exposure as determined in paragraph
                (c) of this section.
                 (b) Total risk-weighted assets for securitization exposures. An
                Enterprise's total risk-weighted assets for securitization exposures
                equals the sum of the risk-weighted asset amount
                [[Page 39392]]
                for securitization exposures that the Enterprise risk weights under
                Sec. Sec. 1240.41(d), 1240.42(a)(1), 1240.43, 1240.44, or 1240.45, and
                paragraphs (e) through (h) of this section, as applicable.
                 (c) Exposure amount of a CRT or other securitization exposure--(1)
                On-balance sheet securitization exposures. Except as provided for
                retained CRT exposures in Sec. 1240.44(f), the exposure amount of an
                on-balance sheet securitization exposure (excluding a repo-style
                transaction, eligible margin loan, OTC derivative contract, or cleared
                transaction) is equal to the carrying value of the exposure.
                 (2) Off-balance sheet securitization exposures. Except as provided
                in paragraph (h) of this section or as provided for retained CRT
                exposures in Sec. 1240.44(f), the exposure amount of an off-balance
                sheet securitization exposure that is not a repo-style transaction,
                eligible margin loan, cleared transaction (other than a credit
                derivative), or an OTC derivative contract (other than a credit
                derivative) is the notional amount of the exposure.
                 (3) Repo-style transactions, eligible margin loans, and derivative
                contracts. The exposure amount of a securitization exposure that is a
                repo-style transaction, eligible margin loan, or derivative contract
                (other than a credit derivative) is the exposure amount of the
                transaction as calculated under Sec. 1240.36 or Sec. 1240.39, as
                applicable.
                 (d) Overlapping exposures. If an Enterprise has multiple
                securitization exposures that provide duplicative coverage to the
                underlying exposures of a securitization, the Enterprise is not
                required to hold duplicative risk-based capital against the overlapping
                position. Instead, the Enterprise may apply to the overlapping position
                the applicable risk-based capital treatment that results in the highest
                risk-based capital requirement.
                 (e) Implicit support. If an Enterprise provides support to a
                securitization (including a CRT) in excess of the Enterprise's
                contractual obligation to provide credit support to the securitization
                (implicit support):
                 (1) The Enterprise must include in risk-weighted assets all of the
                underlying exposures associated with the securitization as if the
                exposures had not been securitized and must deduct from common equity
                tier 1 capital any after-tax gain-on-sale resulting from the
                securitization; and
                 (2) The Enterprise must disclose publicly:
                 (i) That it has provided implicit support to the securitization;
                and
                 (ii) The risk-based capital impact to the Enterprise of providing
                such implicit support.
                 (f) Interest-only mortgage-backed securities. Regardless of any
                other provisions in this subpart, the risk weight for a non-credit-
                enhancing interest-only mortgage-backed security may not be less than
                100 percent.
                 (g) Nth-to-default credit derivatives--(1) Protection provider. An
                Enterprise may assign a risk weight using the SSFA in Sec. 1240.43 to
                an nth-to-default credit derivative in accordance with this paragraph
                (g). An Enterprise must determine its exposure in the nth-to-default
                credit derivative as the largest notional amount of all the underlying
                exposures.
                 (2) Attachment and detachment points. For purposes of determining
                the risk weight for an nth-to-default credit derivative using the SSFA,
                the Enterprise must calculate the attachment point and detachment point
                of its exposure as follows:
                 (i) The attachment point (parameter A) is the ratio of the sum of
                the notional amounts of all underlying exposures that are subordinated
                to the Enterprise's exposure to the total notional amount of all
                underlying exposures. The ratio is expressed as a decimal value between
                zero and one. In the case of a first-to-default credit derivative,
                there are no underlying exposures that are subordinated to the
                Enterprise's exposure. In the case of a second-or-subsequent-to-default
                credit derivative, the smallest (n-1) notional amounts of the
                underlying exposure(s) are subordinated to the Enterprise's exposure.
                 (ii) The detachment point (parameter D) equals the sum of parameter
                A plus the ratio of the notional amount of the Enterprise's exposure in
                the nth-to-default credit derivative to the total notional amount of
                all underlying exposures. The ratio is expressed as a decimal value
                between zero and one.
                 (3) Risk weights. An Enterprise that does not use the SSFA to
                determine a risk weight for its nth-to-default credit derivative must
                assign a risk weight of 1,250 percent to the exposure.
                 (4) Protection purchaser--(i) First-to-default credit derivatives.
                An Enterprise that obtains credit protection on a group of underlying
                exposures through a first-to-default credit derivative that meets the
                rules of recognition of 12 CFR 217.36(b) must determine its risk-based
                capital requirement for the underlying exposures as if the Enterprise
                synthetically securitized the underlying exposure with the smallest
                risk-weighted asset amount and had obtained no credit risk mitigant on
                the other underlying exposures. An Enterprise must calculate a risk-
                based capital requirement for counterparty credit risk according to 12
                CFR 217.34 for a first-to-default credit derivative that does not meet
                the rules of recognition of 12 CFR 217.36(b).
                 (ii) Second-or-subsequent-to-default credit derivatives. (A) An
                Enterprise that obtains credit protection on a group of underlying
                exposures through a nth-to-default credit derivative that meets the
                rules of recognition of 12 CFR 217.36(b) (other than a first-to-default
                credit derivative) may recognize the credit risk mitigation benefits of
                the derivative only if:
                 (1) The Enterprise also has obtained credit protection on the same
                underlying exposures in the form of first-through-(n-1)-to-default
                credit derivatives; or
                 (2) If n-1 of the underlying exposures have already defaulted.
                 (B) If an Enterprise satisfies the requirements of paragraph
                (i)(4)(ii)(A) of this section, the Enterprise must determine its risk-
                based capital requirement for the underlying exposures as if the
                Enterprise had only synthetically securitized the underlying exposure
                with the nth smallest risk-weighted asset amount and had obtained no
                credit risk mitigant on the other underlying exposures.
                 (C) An Enterprise must calculate a risk-based capital requirement
                for counterparty credit risk according to 12 CFR 217.34 for a nth-to-
                default credit derivative that does not meet the rules of recognition
                of 12 CFR 217.36(b).
                 (h) Guarantees and credit derivatives other than nth-to-default
                credit derivatives--(1) Protection provider. For a guarantee or credit
                derivative (other than an nth-to-default credit derivative) provided by
                an Enterprise that covers the full amount or a pro rata share of a
                securitization exposure's principal and interest, the Enterprise must
                risk weight the guarantee or credit derivative as if it holds the
                portion of the reference exposure covered by the guarantee or credit
                derivative.
                 (2) Protection purchaser. (i) An Enterprise that purchases a
                guarantee or OTC credit derivative (other than an nth-to-default credit
                derivative) that is recognized under Sec. 1240.46 as a credit risk
                mitigant (including via collateral recognized under Sec. 1240.39) is
                not required to compute a separate counterparty credit risk capital
                requirement under Sec. 1240.31, in accordance with 12 CFR 217.34(c).
                 (ii) If an Enterprise cannot, or chooses not to, recognize a
                purchased credit derivative as a credit risk mitigant under Sec.
                1240.46, the Enterprise must
                [[Page 39393]]
                determine the exposure amount of the credit derivative under Sec.
                1240.36.
                 (A) If the Enterprise purchases credit protection from a
                counterparty that is not a securitization SPE, the Enterprise must
                determine the risk weight for the exposure according to this subpart D.
                 (B) If the Enterprise purchases the credit protection from a
                counterparty that is a securitization SPE, the Enterprise must
                determine the risk weight for the exposure according to section Sec.
                1240.42, including Sec. 1240.42(a)(4) for a credit derivative that has
                a first priority claim on the cash flows from the underlying exposures
                of the securitization SPE (notwithstanding amounts due under interest
                rate or currency derivative contracts, fees due, or other similar
                payments).
                Sec. 1240.43 Simplified supervisory formula approach (SSFA).
                 (a) General requirements for the SSFA. To use the SSFA to determine
                the risk weight for a securitization exposure, an Enterprise must have
                data that enables it to assign accurately the parameters described in
                paragraph (b) of this section. Data used to assign the parameters
                described in paragraph (b) of this section must be the most currently
                available data; if the contracts governing the underlying exposures of
                the securitization require payments on a monthly or quarterly basis,
                the data used to assign the parameters described in paragraph (b) of
                this section must be no more than 91 calendar days old. An Enterprise
                that does not have the appropriate data to assign the parameters
                described in paragraph (b) of this section must assign a risk weight of
                1,250 percent to the exposure.
                 (b) SSFA parameters. To calculate the risk weight for a
                securitization exposure using the SSFA, an Enterprise must have
                accurate information on the following five inputs to the SSFA
                calculation:
                 (1) KG is the weighted-average (with unpaid principal
                used as the weight for each exposure) adjusted total capital
                requirement of the underlying exposures calculated using this subpart.
                KG is expressed as a decimal value between zero and one
                (that is, an average risk weight of 100 percent represents a value of
                KG equal to 0.08).
                 (2) Parameter W is expressed as a decimal value between zero and
                one. Parameter W is the ratio of the sum of the dollar amounts of any
                underlying exposures of the securitization that meet any of the
                criteria as set forth in paragraphs (b)(2)(i) through (vi) of this
                section to the balance, measured in dollars, of underlying exposures:
                 (i) Ninety days or more past due;
                 (ii) Subject to a bankruptcy or insolvency proceeding;
                 (iii) In the process of foreclosure;
                 (iv) Held as real estate owned;
                 (v) Has contractually deferred payments for 90 days or more, other
                than principal or interest payments deferred on:
                 (A) Federally-guaranteed student loans, in accordance with the
                terms of those guarantee programs; or
                 (B) Consumer loans, including non-federally-guaranteed student
                loans, provided that such payments are deferred pursuant to provisions
                included in the contract at the time funds are disbursed that provide
                for period(s) of deferral that are not initiated based on changes in
                the creditworthiness of the borrower; or
                 (vi) Is in default.
                 (3) Parameter A is the attachment point for the exposure, which
                represents the threshold at which credit losses will first be allocated
                to the exposure. Except as provided in Sec. 1240.42(g) for nth-to-
                default credit derivatives, parameter A equals the ratio of the current
                dollar amount of underlying exposures that are subordinated to the
                exposure of the Enterprise to the current dollar amount of underlying
                exposures. Any reserve account funded by the accumulated cash flows
                from the underlying exposures that is subordinated to the Enterprise's
                securitization exposure may be included in the calculation of parameter
                A to the extent that cash is present in the account. Parameter A is
                expressed as a decimal value between zero and one.
                 (4) Parameter D is the detachment point for the exposure, which
                represents the threshold at which credit losses of principal allocated
                to the exposure would result in a total loss of principal. Except as
                provided in Sec. 1240.42(g) for nth-to-default credit derivatives,
                parameter D equals parameter A plus the ratio of the current dollar
                amount of the securitization exposures that are pari passu with the
                exposure (that is, have equal seniority with respect to credit risk) to
                the current dollar amount of the underlying exposures. Parameter D is
                expressed as a decimal value between zero and one.
                 (5) A supervisory calibration parameter, p, is equal to 0.5 for
                securitization exposures that are not resecuritization exposures and
                equal to 1.5 for resecuritization exposures (except p is equal to 0.5
                for resecuritization exposures secured by MBS guaranteed by an
                Enterprise).
                 (c) Mechanics of the SSFA. KG and W are used to
                calculate KA, the augmented value of KG, which
                reflects the observed credit quality of the underlying exposures.
                KA is defined in paragraph (d) of this section. The values
                of parameters A and D, relative to KA determine the risk
                weight assigned to a securitization exposure as described in paragraph
                (d) of this section. The risk weight assigned to a securitization
                exposure, or portion of a securitization exposure, as appropriate, is
                the larger of the risk weight determined in accordance with this
                paragraph (c) or paragraph (d) of this section and a risk weight of 20
                percent.
                 (1) When the detachment point, parameter D, for a securitization
                exposure is less than or equal to KA, the exposure must be
                assigned a risk weight of 1,250 percent.
                 (2) When the attachment point, parameter A, for a securitization
                exposure is greater than or equal to KA, the
                Enterprise must calculate the risk weight in accordance with paragraph
                (d) of this section.
                 (3) When A is less than KA and D is greater than
                KA, the risk weight is a weighted-average of 1,250 percent
                and 1,250 percent times KSSFA calculated in accordance with
                paragraph (d) of this section. For the purpose of this weighted-average
                calculation:
                 (i) The weight assigned to 1,250 percent equals
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.064
                
                 (ii) The weight assigned to 1,250 percent times KSSFA
                equals
                [GRAPHIC] [TIFF OMITTED] TP30JN20.065
                 (iii) The risk weight will be set equal to:
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.066
                
                 (d) SFA equation. (1) The Enterprise must define the following
                parameters:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.087
                e = 2.71828, the base of the natural logarithms.
                 (2) Then the Enterprise must calculate according to the following
                equation:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.067
                [[Page 39394]]
                 (3) The risk weight for the exposure (expressed as a percent) is
                equal to KSSFA * 1,250.
                 (e) Limitations. Notwithstanding any other provision of this
                section, an Enterprise must assign a risk weight of not less than 20
                percent to a securitization exposure.
                Sec. 1240.44 Credit risk transfer approach (CRTA).
                 (a) General requirements for the CRTA. To use the CRTA to determine
                the risk weighted assets for a retained CRT exposure, an Enterprise
                must have data that enables it to assign accurately the parameters
                described in paragraph (b) of this section. Data used to assign the
                parameters described in paragraph (b) of this section must be the most
                currently available data; if the contracts governing the underlying
                exposures of the credit risk transfer require payments on a monthly or
                quarterly basis, the data used to assign the parameters described in
                paragraph (b) of this section must be no more than 91 calendar days
                old. An Enterprise that does not have the appropriate data to assign
                the parameters described in paragraph (b) of this section must assign a
                risk weight of 1,250 percent to the retained CRT exposure.
                 (b) CRTA parameters. To calculate the risk weighted assets for a
                retained CRT exposure, an Enterprise must have accurate information on
                the following ten inputs to the CRTA calculation.
                 (1) Parameter A is the attachment point for the exposure, which
                represents the threshold at which credit losses will first be allocated
                to the exposure. Parameter A equals the ratio of the current dollar
                amount of underlying exposures that are subordinated to the exposure of
                the Enterprise to the current dollar amount of underlying exposures.
                Any reserve account funded by the accumulated cash flows from the
                underlying exposures that is subordinated to the Enterprise's exposure
                may be included in the calculation of parameter A to the extent that
                cash is present in the account. Parameter A is expressed as a value
                between 0 and 100 percent.
                 (2) Parameter AggUPB$ is the aggregate unpaid principal balance of
                the underlying mortgage exposures.
                 (3) Parameter CM% is the percentage of a tranche sold in the
                capital markets. CM% is expressed as a value between 0 and 100 percent.
                 (4) Parameter Collat%RIF is the amount of financial collateral
                posted by a counterparty under a loss sharing contract expressed as a
                percentage of the risk in force. For multifamily lender loss sharing
                transactions where an Enterprise has the contractual right to receive
                future lender guarantee-fee revenue, the Enterprise may include up to
                12 months of expected guarantee-fee revenue in collateral. Collat%RIF
                is expressed as a value between 0 and 100 percent.
                 (5) Parameter D is the detachment point for the exposure, which
                represents the threshold at which credit losses of principal allocated
                to the exposure would result in a total loss of principal. Parameter D
                equals parameter A plus the ratio of the current dollar amount of the
                exposures that are pari passu with the exposure (that is, have equal
                seniority with respect to credit risk) to the current dollar amount of
                the underlying exposures. Parameter D is expressed as a value between 0
                and 100 percent.
                 (6) Parameter EL$ is the remaining lifetime net expected credit
                risk losses of the underlying mortgage exposures. EL$ must be
                calculated internally by an Enterprise. If the contractual terms of the
                CRT do not provide for the transfer of the counterparty credit risk
                associated with any loan-level credit enhancement or other loss sharing
                on the underlying mortgage exposures, then the Enterprise must
                calculate EL$ assuming no counterparty haircuts. Parameter EL$ is
                expressed in dollars.
                 (7) Parameter HC is the haircut for the counterparty in contractual
                loss sharing transactions.
                 (i) For a CRT with respect to single-family mortgage exposures, the
                counterparty haircut is set forth on Table 12 to paragraph (e)(3)(ii)
                of Sec. 1240.33, determined as if the counterparty to the CRT were a
                counterparty to loan-level credit enhancement (as defined in Sec.
                1240.33(a)) and considering the counterparty rating and mortgage
                concentration risk of the counterparty to the CRT and the single-family
                segment and product of the underlying single-family mortgage exposures.
                 (ii) For a CRT with respect to multifamily mortgage exposures, the
                counterparty haircut is set forth on Table 1 to this paragraph
                (b)(7)(ii), with counterparty rating and mortgage concentration risk
                having the meaning given in Sec. 1240.33(a).
                [GRAPHIC] [TIFF OMITTED] TP30JN20.068
                [[Page 39395]]
                 (8) Parameter LS is the percentage of a tranche that is
                either insured, reinsured, or afforded coverage through lender
                reimbursement of credit losses of principal. LS is expressed as
                a value between 0 and 100 percent.
                 (9) Parameter LTF is the loss timing factor which accounts
                for maturity differences between the CRT and the underlying mortgage
                exposures. Maturity differences arise when the maturity date of the CRT
                is before the maturity dates of the underlying mortgage exposures.
                LTF is expressed as a value between 0 and 100 percent.
                 (i) An Enterprise must have the following information to calculate
                LTF for a CRT with respect to multifamily mortgage exposures:
                 (A) The remaining months to the contractual maturity of the CRT
                (CRTRMM).
                 (B) The remaining months to maturity of the underlying multifamily
                mortgage exposures (MMERMM). If the underlying multifamily mortgage
                exposures have different maturity dates, MMERMM should reflect the
                multifamily mortgage exposure with the longest maturity.
                 (C) An Enterprise must use the following method to calculate
                LTF for multifamily CRTs:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.069
                 (ii) An Enterprise must have the following information to calculate
                LTF for a newly issued CRT with respect to single-family
                mortgage exposures:
                 (A) The original closing date (or effective date) of the CRT and
                the maturity date on the CRT.
                 (B) UPB share of single-family mortgage exposures that have
                original amortization terms of less than or equal to 189 months
                (CRTF15).
                 (C) UPB share of single-family mortgage exposures that have
                original amortization terms greater than 189 months and OLTVs of less
                than or equal to 80 percent (CRT80NotF15).
                 (D) The duration of seasoning.
                 (E) An Enterprise must use the following method to calculate
                LTF for single-family CRTs: Calculate CRT months to maturity
                (CRTMthstoMaturity) using one of the following methods:
                 (1) For single-family CRTs with reimbursement based upon occurrence
                or resolution of delinquency, CRTMthstoMaturity is the difference
                between the CRT's maturity date and original closing date, except for
                the following:
                 (i) If the coverage based upon delinquency is between one and three
                months, add 24 months to the difference between the CRT's maturity date
                and original closing date; and
                 (ii) If the coverage based upon delinquency is between four and six
                months, add 18 months to the difference between the CRT's maturity date
                and original closing date.
                 (2) For all other single-family CRTs, CRTMthstoMaturity is the
                difference between the CRT's maturity date and original closing date.
                 (i) If CRTMthstoMaturity is a multiple of 12, then an Enterprise
                must use the first column of Table 2 to paragraph (b)(9)(ii)(E)(2)(iii)
                of this section to identify the row matching CRTMthstoMaturity and take
                a weighted average of the three loss timing factors in columns 2, 3,
                and 4 as follows:
                LTF% = (CRTLT15 * CRTF15) + (CRTLT80Not15 *
                CRT80NotF15) + (CRTLTGT80Not15 * CRT80NotF15) +
                (CRTLTGT80Not15 * (1-CRT80NotF15 -CRTF15))
                 (ii) If CRTMthstoMaturity is not a multiple of 12, an Enterprise
                must use the first column of Table 2 to paragraph (b)(9)(ii)(E)(2)(iii)
                of this section to identify the two rows that are closest to
                CRTMthstoMaturity and take a weighted average between the two rows of
                loss timing factors using linear interpolation, where the weights
                reflect CRTMthstoMaturity.
                 (iii) For seasoned single-family CRTs, the LTF is
                calculated:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.070
                where
                CRTLTM is the loss timing factor calculated under (ii) of
                this subsection.
                CRTLTS is the loss timing factor calculated under (ii) of
                this subsection replacing
                CRTMthstoMaturity with the duration of seasoning.
                [[Page 39396]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.071
                BILLING CODE 8070-01-P
                 (10) Parameter RWA$ is the aggregate credit risk-weighted assets
                associated with the underlying mortgage exposures.
                 (11) Parameter CntptyRWA$ is the aggregate credit risk-weighted
                assets due to counterparty haircuts from loan-level credit
                enhancements. CntptyRWA$ is the difference between:
                 (i) Parameter RWA$; and
                 (ii) Aggregate credit risk-weighted assets associated with the
                underlying mortgage exposures where the counterparty haircuts for loan-
                level credit enhancements are set to zero.
                 (c) Mechanics of the CRTA. The risk weight assigned to a retained
                CRT exposure, or portion of a retained CRT
                [[Page 39397]]
                exposure, as appropriate, is the larger of RW determined in
                accordance with paragraph (d) of this section and a risk weight of 10
                percent.
                 (1) When the detachment point, parameter D, for a retained CRT
                exposure is less than or equal to the sum of KA and AggEL, the
                exposure must be assigned a risk weight of 1,250 percent.
                 (2) When the attachment point, parameter A, for a retained CRT
                exposure is greater than or equal to or equal to the sum of KA and
                AggEL, determined in accordance with paragraph (d) of this
                section, the exposure must be assigned a risk weight of 10 percent.
                 (3) When parameter A is less than or equal to the sum of KA and
                AggEL, and parameter D is greater than the sum of KA and
                AggEL, the Enterprise must calculate the risk weight as 1,250%
                multiplied by the ratio of (i) the sum of KA and AggEL less
                parameter A to (ii) the difference between parameter D and parameter A.
                 (d) CRTA equations.
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.072
                
                 If the contractual terms of the CRT do not provide for the transfer
                of the counterparty credit risk associated with any loan-level credit
                enhancement or other loss sharing on the underlying mortgage exposures,
                then the Enterprise shall calculate KA as follows:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.073
                 Otherwise the Enterprise shall calculate KA as follows:
                 [GRAPHIC] [TIFF OMITTED] TP30JN20.074
                
                 (e) Limitations. Notwithstanding any other provision of this
                section, an Enterprise must assign an overall risk weight of not less
                than 10 percent to a retained CRT exposure.
                 (f) Adjusted exposure amount (AEA)--(1) In general. The adjusted
                exposure amount (AEA) of a retained CRT exposure is equal to:
                [GRAPHIC] [TIFF OMITTED] TP30JN20.075
                 (2) Inputs--(i) Enterprise Adjusted Exposure. The adjusted exposure
                (EAE) of an Enterprise with respect to a retained CRT exposure is as
                follows:
                EAE,Tranche = 100% - (CM,Tranche
                * LTEA,Tranche,CM * OEA%) -
                (LS,Tranche * LSEA,Tranche,LS *
                LTEA,Tranche,LS * OEA%),
                Where the loss timing effectiveness adjustments (LTEA) for a retained
                CRT exposure are determined under paragraph (g) of this section, the
                loss sharing effectiveness adjustment (LSEA) for a retained CRT
                exposure is determine under paragraph (h) of this section, and the
                overall effectiveness adjustment (OEA) is determined under paragraph
                (i) of this section.
                 (ii) Expected Loss Share. The expected loss share is the share of a
                tranche that is covered by expected loss (ELS):
                [GRAPHIC] [TIFF OMITTED] TP30JN20.076
                [[Page 39398]]
                 (iii) Risk weight. The risk weight of a retained CRT exposure is
                determined under paragraph (d) of this section.
                 (g) Loss timing effectiveness adjustments. The loss timing
                effectiveness adjustments (LTEA) for a retained CRT exposure is
                calculated according to the following calculation:
                if (SLS,Tranche - ELS,Tranche) >
                0 then
                [GRAPHIC] [TIFF OMITTED] TP30JN20.077
                [GRAPHIC] [TIFF OMITTED] TP30JN20.078
                 Otherwise LTEA,Tranche,CM = 100% and
                LTEA,Tranche,LS = 100% where KA adjusted
                for loss timing (LTKA) is as follows:
                LTKA,CM = max ((KA + AggEL) * LTF,CM
                LTKA,LS = max ((KA + AggEL) * LTF,LS;
                 and
                LTF,CM is LTF calculated for the capital
                markets component of the tranche,
                LTF,LS is LTF calculated for the loss
                sharing component of the tranche, and the share of the tranche that is
                covered by expected loss (ELS) and the share of the tranche that is
                covered by stress loss (SLS) are
                [GRAPHIC] [TIFF OMITTED] TP30JN20.079
                 (h) Loss sharing effectiveness adjustment. The loss sharing
                effectiveness adjustment (LSEA) for a retained CRT exposure is
                calculated according to the following calculation:
                if (RW,Tranche - ELS,Tranche *
                1250%) > 0 then
                [GRAPHIC] [TIFF OMITTED] TP30JN20.080
                Otherwise
                LESA,Tranche = 100%
                where
                UnCollatUL,Tranche = max (0%,
                SLS,Tranche - max (CollatRIF,Tranche,
                ELS,Tranche))
                SRIF,Tranche = 100% - max
                (SLS,Tranche, CollatRIF,Tranche)
                and the share of the tranche that is covered by expected loss (ELS) and
                the share of the tranche that is covered by stress loss (SLS) are
                [[Page 39399]]
                [GRAPHIC] [TIFF OMITTED] TP30JN20.081
                 (i) Overall effectiveness adjustment. The overall effectiveness
                adjustment (OEA) for a retained CRT exposure is calculated according to
                the following calculation:
                OEA = 90%
                 (j) RWA supplement for retained loan-level counterparty credit
                risk. If the Enterprise elects to use the CRTA for a retained CRT
                exposure and if the contractual terms of the CRT do not provide for the
                transfer of the counterparty credit risk associated with any loan-level
                credit enhancement or other loss sharing on the underlying mortgage
                exposures, then the Enterprise must add the following risk-weighted
                assets supplement (RWASup$) to risk weighted assets for the
                retained CRT exposure.
                RWASup$,Tranche = CntptyRWA$ * (D - A)
                 Otherwise the Enterprise shall add an RWASup$ of $0.
                 (k) Credit risk-weighted assets for the retained CRT exposure are
                as follows:
                RWA$,Tranche = AEA$,Tranche * RW,Tranche
                + RWASup$,Tranche
                [Alternative: Modified SSFA]
                 (a) General requirements. To use the CRT approach to determine the
                risk weight for a CRT exposure, an Enterprise must have data that
                enables it to assign accurately the parameters described in paragraph
                (b) of this section. Data used to assign the parameters described in
                paragraph (b) of this section must be the most currently available
                data; if the contracts governing the underlying exposures of the CRT
                require payments on a monthly or quarterly basis, the data used to
                assign the parameters described in paragraph (b) of this section must
                be no more than 91 calendar days old. An Enterprise that does not have
                the appropriate data to assign the parameters described in paragraph
                (b) of this section must assign a risk weight of 1,250 percent to the
                exposure.
                 (b) CRTA parameters. To calculate the risk weight for a CRT
                exposure using the CRTA, an Enterprise must have accurate information
                on the following five inputs to the CRTA calculation, each as defined
                and calculated under Sec. 1240.43(b): KG; W; A; D; and p.
                 (c) Mechanics of the CRTA. The risk weight assigned to a CRT
                exposure, or portion of a CRT exposure, as appropriate, is the larger
                of the risk weight determined in accordance with this paragraph (c) or
                paragraph (d) of Sec. 1240.43 and a risk weight of 10 percent.
                 (d) Limitations. Notwithstanding any other provision of this
                section, an Enterprise must assign a risk weight of not less than 10
                percent to a CRT exposure.
                 (e) Adjusted exposure amount. The exposure amount for a CRT
                exposure is not subject to an adjustment under this section.
                 (f) RWA adjustment for retained loan-level counterparty credit
                risk. If the Enterprise elects to use the CRTA for a retained CRT
                exposure and if the contractual terms of the CRT do not provide for the
                transfer of the counterparty credit risk associated with any loan-level
                credit enhancement or other loss sharing on the underlying mortgage
                exposures, then the Enterprise must increase the risk-weighted assets
                of the retained CRT exposure by the amount equal to the portion of
                aggregate RWAs on the underlying mortgage exposures associated with
                counterparty credit risk.
                Sec. 1240.45 Securitization exposures to which the SSFA and the CRTA
                do not apply.
                 An Enterprise must assign a 1,250 percent risk weight to any
                acquired CRT exposure and all securitization exposures to which the
                Enterprise does not apply the SSFA under Sec. 1240.43 or the CRTA
                under Sec. 1240.44.
                Sec. 1240.46 Recognition of credit risk mitigants for securitization
                exposures.
                 (a) General. (1) An originating Enterprise that has obtained a
                credit risk mitigant to hedge its exposure to a synthetic or
                traditional securitization that satisfies the operational criteria
                provided in Sec. 1240.41 may recognize the credit risk mitigant under
                Sec. Sec. 1240.38 or 1240.39, but only as provided in this section.
                 (2) An investing Enterprise that has obtained a credit risk
                mitigant to hedge a securitization exposure may recognize the credit
                risk mitigant under Sec. Sec. 1240.38 or 1240.39, but only as provided
                in this section.
                 (b) Mismatches. An Enterprise must make any applicable adjustment
                to the protection amount of an eligible guarantee or credit derivative
                as required in 12 CFR 217.36(d) through (f) for any hedged
                securitization exposure. In the context of a synthetic securitization,
                when an eligible guarantee or eligible credit derivative covers
                multiple hedged exposures that have different residual maturities, the
                Enterprise must use the longest residual maturity of any of the hedged
                exposures as the residual maturity of all hedged exposures.
                Risk-Weighted Assets for Equity Exposures
                Sec. 1240.51 Exposure measurement.
                 An Enterprise must calculate its risk-weighted assets for any
                equity exposures that are permissible under the Enterprise's
                authorizing statute under 12 CFR 217.51 through 217.53 of this title,
                substituting ``Enterprise for ``Board-regulated institution.''
                Subpart E--Risk-Weighted Assets--Internal Ratings-Based and
                Advanced Measurement Approaches
                Sec. 1240.100 Purpose, applicability, and principle of conservatism.
                 (a) Purpose. This subpart E establishes:
                 (1) Minimum requirements for using Enterprise-specific internal
                risk measurement and management processes for calculating risk-based
                capital requirements; and
                 (2) Methodologies for the Enterprises to calculate their advanced
                approaches total risk-weighted assets.
                [[Page 39400]]
                 (b) Applicability. (1) This subpart applies to each Enterprise.
                 (2) An Enterprise must also include in its calculation of advanced
                credit risk-weighted assets under this subpart all covered positions,
                as defined in subpart F of this part.
                 (c) Principle of conservatism. Notwithstanding the requirements of
                this subpart, an Enterprise may choose not to apply a provision of this
                subpart to one or more exposures provided that:
                 (1) The Enterprise can demonstrate on an ongoing basis to the
                satisfaction of FHFA that not applying the provision would, in all
                circumstances, unambiguously generate a risk-based capital requirement
                for each such exposure greater than that which would otherwise be
                required under this subpart;
                 (2) The Enterprise appropriately manages the risk of each such
                exposure;
                 (3) The Enterprise notifies FHFA in writing prior to applying this
                principle to each such exposure; and
                 (4) The exposures to which the Enterprise applies this principle
                are not, in the aggregate, material to the Enterprise.
                Sec. 1240.101 Definitions.
                 (a) Terms that are set forth in Sec. 1240.2 and used in this
                subpart have the definitions assigned thereto in Sec. 1240.2.
                 (b) For the purposes of this subpart, the following terms are
                defined as follows:
                 Advanced internal ratings-based (IRB) systems means an Enterprise's
                internal risk rating and segmentation system; risk parameter
                quantification system; data management and maintenance system; and
                control, oversight, and validation system for credit risk of exposures.
                 Advanced systems means an Enterprise's advanced IRB systems,
                operational risk management processes, operational risk data and
                assessment systems, operational risk quantification systems, and, to
                the extent used by the Enterprise, the internal models methodology,
                advanced CVA approach, double default excessive correlation detection
                process, and internal models approach (IMA) for equity exposures.
                 Backtesting means the comparison of an Enterprise's internal
                estimates with actual outcomes during a sample period not used in model
                development. In this context, backtesting is one form of out-of-sample
                testing.
                 Benchmarking means the comparison of an Enterprise's internal
                estimates with relevant internal and external data or with estimates
                based on other estimation techniques.
                 Business environment and internal control factors means the
                indicators of an Enterprise's operational risk profile that reflect a
                current and forward-looking assessment of the Enterprise's underlying
                business risk factors and internal control environment.
                 Dependence means a measure of the association among operational
                losses across and within units of measure.
                 Economic downturn conditions means, with respect to an exposure
                held by the Enterprise, those conditions in which the aggregate default
                rates for that exposure's exposure subcategory (or subdivision of such
                subcategory selected by the Enterprise) in the exposure's jurisdiction
                (or subdivision of such jurisdiction selected by the Enterprise) are
                significantly higher than average.
                 Eligible operational risk offsets means amounts, not to exceed
                expected operational loss, that:
                 (i) Are generated by internal business practices to absorb highly
                predictable and reasonably stable operational losses, including
                reserves calculated consistent with GAAP; and
                 (ii) Are available to cover expected operational losses with a high
                degree of certainty over a one-year horizon.
                 Expected operational loss (EOL) means the expected value of the
                distribution of potential aggregate operational losses, as generated by
                the Enterprise's operational risk quantification system using a one-
                year horizon.
                 External operational loss event data means, with respect to an
                Enterprise, gross operational loss amounts, dates, recoveries, and
                relevant causal information for operational loss events occurring at
                organizations other than the Enterprise.
                 Internal operational loss event data means, with respect to an
                Enterprise, gross operational loss amounts, dates, recoveries, and
                relevant causal information for operational loss events occurring at
                the Enterprise.
                 Operational loss means a loss (excluding insurance or tax effects)
                resulting from an operational loss event. Operational loss includes all
                expenses associated with an operational loss event except for
                opportunity costs, forgone revenue, and costs related to risk
                management and control enhancements implemented to prevent future
                operational losses.
                 Operational loss event means an event that results in loss and is
                associated with any of the following seven operational loss event type
                categories:
                 (i) Internal fraud, which means the operational loss event type
                category that comprises operational losses resulting from an act
                involving at least one internal party of a type intended to defraud,
                misappropriate property, or circumvent regulations, the law, or company
                policy excluding diversity- and discrimination-type events.
                 (ii) External fraud, which means the operational loss event type
                category that comprises operational losses resulting from an act by a
                third party of a type intended to defraud, misappropriate property, or
                circumvent the law. All third-party-initiated credit losses are to be
                treated as credit risk losses.
                 (iii) Employment practices and workplace safety, which means the
                operational loss event type category that comprises operational losses
                resulting from an act inconsistent with employment, health, or safety
                laws or agreements, payment of personal injury claims, or payment
                arising from diversity- and discrimination-type events.
                 (iv) Clients, products, and business practices, which means the
                operational loss event type category that comprises operational losses
                resulting from the nature or design of a product or from an
                unintentional or negligent failure to meet a professional obligation to
                specific clients (including fiduciary and suitability requirements).
                 (v) Damage to physical assets, which means the operational loss
                event type category that comprises operational losses resulting from
                the loss of or damage to physical assets from natural disaster or other
                events.
                 (vi) Business disruption and system failures, which means the
                operational loss event type category that comprises operational losses
                resulting from disruption of business or system failures.
                 (vii) Execution, delivery, and process management, which means the
                operational loss event type category that comprises operational losses
                resulting from failed transaction processing or process management or
                losses arising from relations with trade counterparties and vendors.
                 Operational risk means the risk of loss resulting from inadequate
                or failed internal processes, people, and systems or from external
                events (including legal risk but excluding strategic and reputational
                risk).
                 Operational risk exposure means the 99.9th percentile of the
                distribution of potential aggregate operational losses, as generated by
                the Enterprise's operational risk quantification system over a one-year
                horizon (and not incorporating eligible operational risk offsets or
                qualifying operational risk mitigants).
                 Risk parameter means a variable used in determining risk-based
                capital requirements for exposures, such as
                [[Page 39401]]
                probability of default, loss given default, exposure at default, or
                effective maturity.
                 Scenario analysis means a systematic process of obtaining expert
                opinions from business managers and risk management experts to derive
                reasoned assessments of the likelihood and loss impact of plausible
                high-severity operational losses. Scenario analysis may include the
                well-reasoned evaluation and use of external operational loss event
                data, adjusted as appropriate to ensure relevance to an Enterprise's
                operational risk profile and control structure.
                 Unexpected operational loss (UOL) means the difference between the
                Enterprise's operational risk exposure and the Enterprise's expected
                operational loss.
                 Unit of measure means the level (for example, organizational unit
                or operational loss event type) at which the Enterprise's operational
                risk quantification system generates a separate distribution of
                potential operational losses.
                Sec. 1240.121 Minimum requirements.
                 (a) Process and systems requirements. (1) An Enterprise must have a
                rigorous process for assessing its overall capital adequacy in relation
                to its risk profile and a comprehensive strategy for maintaining an
                appropriate level of capital.
                 (2) The systems and processes used by an Enterprise for risk-based
                capital purposes under this subpart must be consistent with the
                Enterprise's internal risk management processes and management
                information reporting systems.
                 (3) Each Enterprise must have an appropriate infrastructure with
                risk measurement and management processes that meet the requirements of
                this section and are appropriate given the Enterprise's size and level
                of complexity. The Enterprise must ensure that the risk parameters and
                reference data used to determine its risk-based capital requirements
                are representative of long run experience with respect to its credit
                risk and operational risk exposures.
                 (b) Risk rating and segmentation systems for exposures. (1) An
                Enterprise must have an internal risk rating and segmentation system
                that accurately, reliably, and meaningfully differentiates among
                degrees of credit risk for the Enterprise's exposures. When assigning
                an internal risk rating, an Enterprise may consider a third-party
                assessment of credit risk, provided that the Enterprise's internal risk
                rating assignment does not rely solely on the external assessment.
                 (2) If an Enterprise uses multiple rating or segmentation systems,
                the Enterprise's rationale for assigning an exposure to a particular
                system must be documented and applied in a manner that best reflects
                the obligor or exposure's level of risk. An Enterprise must not
                inappropriately allocate exposures across systems to minimize
                regulatory capital requirements.
                 (3) In assigning ratings to exposures, an Enterprise must use all
                relevant and material information and ensure that the information is
                current.
                 (c) Quantification of risk parameters for exposures. (1) The
                Enterprise must have a comprehensive risk parameter quantification
                process that produces accurate, timely, and reliable estimates of the
                risk parameters on a consistent basis for the Enterprise's exposures.
                 (2) An Enterprise's estimates of risk parameters must incorporate
                all relevant, material, and available data that is reflective of the
                Enterprise's actual exposures and of sufficient quality to support the
                determination of risk-based capital requirements for the exposures. In
                particular, the population of exposures in the data used for estimation
                purposes, the underwriting standards in use when the data were
                generated, and other relevant characteristics, should closely match or
                be comparable to the Enterprise's exposures and standards. In addition,
                an Enterprise must:
                 (i) Demonstrate that its estimates are representative of long run
                experience, including periods of economic downturn conditions, whether
                internal or external data are used;
                 (ii) Take into account any changes in underwriting practice or the
                process for pursuing recoveries over the observation period;
                 (iii) Promptly reflect technical advances, new data, and other
                information as they become available;
                 (iv) Demonstrate that the data used to estimate risk parameters
                support the accuracy and robustness of those estimates; and
                 (v) Demonstrate that its estimation technique performs well in out-
                of-sample tests whenever possible.
                 (3) The Enterprise's risk parameter quantification process must
                produce appropriately conservative risk parameter estimates where the
                Enterprise has limited relevant data, and any adjustments that are part
                of the quantification process must not result in a pattern of bias
                toward lower risk parameter estimates.
                 (4) The Enterprise's risk parameter estimation process should not
                rely on the possibility of U.S. government financial assistance.
                 (5) Default, loss severity, and exposure amount data must include
                periods of economic downturn conditions, or the Enterprise must adjust
                its estimates of risk parameters to compensate for the lack of data
                from periods of economic downturn conditions.
                 (6) If an Enterprise uses internal data obtained prior to becoming
                subject to this subpart E or external data to arrive at risk parameter
                estimates, the Enterprise must demonstrate to FHFA that the Enterprise
                has made appropriate adjustments if necessary to be consistent with the
                Enterprise's definition of default. Internal data obtained after the
                Enterprise becomes subject to this subpart E must be consistent with
                the Enterprise's definition of default.
                 (7) The Enterprise must review and update (as appropriate) its risk
                parameters and its risk parameter quantification process at least
                annually.
                 (8) The Enterprise must, at least annually, conduct a comprehensive
                review and analysis of reference data to determine relevance of the
                reference data to the Enterprise's exposures, quality of reference data
                to support risk parameter estimates, and consistency of reference data
                to the Enterprise's definition of default.
                 (d) Operational risk--(1) Operational risk management processes. An
                Enterprise must:
                 (i) Have an operational risk management function that:
                 (A) Is independent of business line management; and
                 (B) Is responsible for designing, implementing, and overseeing the
                Enterprise's operational risk data and assessment systems, operational
                risk quantification systems, and related processes;
                 (ii) Have and document a process (which must capture business
                environment and internal control factors affecting the Enterprise's
                operational risk profile) to identify, measure, monitor, and control
                operational risk in the Enterprise's products, activities, processes,
                and systems; and
                 (iii) Report operational risk exposures, operational loss events,
                and other relevant operational risk information to business unit
                management, senior management, and the board of directors (or a
                designated committee of the board).
                 (2) Operational risk data and assessment systems. An Enterprise
                must have operational risk data and assessment systems that capture
                operational risks to which the
                [[Page 39402]]
                Enterprise is exposed. The Enterprise's operational risk data and
                assessment systems must:
                 (i) Be structured in a manner consistent with the Enterprise's
                current business activities, risk profile, technological processes, and
                risk management processes; and
                 (ii) Include credible, transparent, systematic, and verifiable
                processes that incorporate the following elements on an ongoing basis:
                 (A) Internal operational loss event data. The Enterprise must have
                a systematic process for capturing and using internal operational loss
                event data in its operational risk data and assessment systems.
                 (1) The Enterprise's operational risk data and assessment systems
                must include a historical observation period of at least five years for
                internal operational loss event data (or such shorter period approved
                by FHFA to address transitional situations, such as integrating a new
                business line).
                 (2) The Enterprise must be able to map its internal operational
                loss event data into the seven operational loss event type categories.
                 (3) The Enterprise may refrain from collecting internal operational
                loss event data for individual operational losses below established
                dollar threshold amounts if the Enterprise can demonstrate to the
                satisfaction of FHFA that the thresholds are reasonable, do not exclude
                important internal operational loss event data, and permit the
                Enterprise to capture substantially all the dollar value of the
                Enterprise's operational losses.
                 (B) External operational loss event data. The Enterprise must have
                a systematic process for determining its methodologies for
                incorporating external operational loss event data into its operational
                risk data and assessment systems.
                 (C) Scenario analysis. The Enterprise must have a systematic
                process for determining its methodologies for incorporating scenario
                analysis into its operational risk data and assessment systems.
                 (D) Business environment and internal control factors. The
                Enterprise must incorporate business environment and internal control
                factors into its operational risk data and assessment systems. The
                Enterprise must also periodically compare the results of its prior
                business environment and internal control factor assessments against
                its actual operational losses incurred in the intervening period.
                 (3) Operational risk quantification systems. The Enterprise's
                operational risk quantification systems:
                 (i) Must generate estimates of the Enterprise's operational risk
                exposure using its operational risk data and assessment systems;
                 (ii) Must employ a unit of measure that is appropriate for the
                Enterprise's range of business activities and the variety of
                operational loss events to which it is exposed, and that does not
                combine business activities or operational loss events with
                demonstrably different risk profiles within the same loss distribution;
                 (iii) Must include a credible, transparent, systematic, and
                verifiable approach for weighting each of the four elements, described
                in paragraph (d)(2)(ii) of this section, that an Enterprise is required
                to incorporate into its operational risk data and assessment systems;
                 (iv) May use internal estimates of dependence among operational
                losses across and within units of measure if the Enterprise can
                demonstrate to the satisfaction of FHFA that its process for estimating
                dependence is sound, robust to a variety of scenarios, and implemented
                with integrity, and allows for uncertainty surrounding the estimates.
                If the Enterprise has not made such a demonstration, it must sum
                operational risk exposure estimates across units of measure to
                calculate its total operational risk exposure; and
                 (v) Must be reviewed and updated (as appropriate) whenever the
                Enterprise becomes aware of information that may have a material effect
                on the Enterprise's estimate of operational risk exposure, but the
                review and update must occur no less frequently than annually.
                 (e) Data management and maintenance. (1) An Enterprise must have
                data management and maintenance systems that adequately support all
                aspects of its advanced systems and the timely and accurate reporting
                of risk-based capital requirements.
                 (2) An Enterprise must retain data using an electronic format that
                allows timely retrieval of data for analysis, validation, reporting,
                and disclosure purposes.
                 (3) An Enterprise must retain sufficient data elements related to
                key risk drivers to permit adequate monitoring, validation, and
                refinement of its advanced systems.
                 (f) Control, oversight, and validation mechanisms. (1) The
                Enterprise's senior management must ensure that all components of the
                Enterprise's advanced systems function effectively and comply with the
                minimum requirements in this section.
                 (2) The Enterprise's board of directors (or a designated committee
                of the board) must at least annually review the effectiveness of, and
                approve, the Enterprise's advanced systems.
                 (3) An Enterprise must have an effective system of controls and
                oversight that:
                 (i) Ensures ongoing compliance with the minimum requirements in
                this section;
                 (ii) Maintains the integrity, reliability, and accuracy of the
                Enterprise's advanced systems; and
                 (iii) Includes adequate governance and project management
                processes.
                 (4) The Enterprise must validate, on an ongoing basis, its advanced
                systems. The Enterprise's validation process must be independent of the
                advanced systems' development, implementation, and operation, or the
                validation process must be subjected to an independent review of its
                adequacy and effectiveness. Validation must include:
                 (i) An evaluation of the conceptual soundness of (including
                developmental evidence supporting) the advanced systems;
                 (ii) An ongoing monitoring process that includes verification of
                processes and benchmarking; and
                 (iii) An outcomes analysis process that includes backtesting.
                 (5) The Enterprise must have an internal audit function or
                equivalent function that is independent of business-line management
                that at least annually:
                 (i) Reviews the Enterprise's advanced systems and associated
                operations, including the operations of its credit function and
                estimations of risk parameters;
                 (ii) Assesses the effectiveness of the controls supporting the
                Enterprise's advanced systems; and
                 (iii) Documents and reports its findings to the Enterprise's board
                of directors (or a committee thereof).
                 (6) The Enterprise must periodically stress test its advanced
                systems. The stress testing must include a consideration of how
                economic cycles, especially downturns, affect risk-based capital
                requirements (including migration across rating grades and segments and
                the credit risk mitigation benefits of double default treatment).
                 (g) Documentation. The Enterprise must adequately document all
                material aspects of its advanced systems.
                Sec. 1240.122 Ongoing qualification.
                 (a) Changes to advanced systems. An Enterprise must meet all the
                minimum requirements in Sec. 1240.121 on an ongoing basis. An
                Enterprise must notify FHFA when the Enterprise makes any change to an
                advanced system that would result in a material change in the
                Enterprise's advanced approaches total
                [[Page 39403]]
                risk-weighted asset amount for an exposure type or when the Enterprise
                makes any significant change to its modeling assumptions.
                 (b) Failure to comply with qualification requirements. (1) If FHFA
                determines that an Enterprise fails to comply with the requirements in
                Sec. 1240.121, FHFA will notify the Enterprise in writing of the
                Enterprise's failure to comply.
                 (2) The Enterprise must establish and submit a plan satisfactory to
                FHFA to return to compliance with the qualification requirements.
                 (3) In addition, if FHFA determines that the Enterprise's advanced
                approaches total risk-weighted assets are not commensurate with the
                Enterprise's credit, market, operational, or other risks, FHFA may
                require such an Enterprise to calculate its advanced approaches total
                risk-weighted assets with any modifications provided by FHFA.
                Sec. 1240.123 Advanced approaches credit risk-weighted asset
                calculations.
                 (a) An Enterprise must use its advanced systems to determine its
                credit risk capital requirements for each of the following exposures:
                 (1) General credit risk (including for mortgage exposures);
                 (2) Cleared transactions;
                 (3) Default fund contributions;
                 (4) Unsettled transactions;
                 (5) Securitization exposures;
                 (6) Equity exposures; and
                 (7) The fair value adjustment to reflect counterparty credit risk
                in valuation of OTC derivative contracts.
                 (b) The credit-risk-weighted assets calculated under this subpart E
                equals the aggregate credit risk capital requirement under paragraph
                (a) of this section multiplied by 12.5.
                Sec. 1240.161 Qualification requirements for incorporation of
                operational risk mitigants.
                 (a) Qualification to use operational risk mitigants. An Enterprise
                may adjust its estimate of operational risk exposure to reflect
                qualifying operational risk mitigants if:
                 (1) The Enterprise's operational risk quantification system is able
                to generate an estimate of the Enterprise's operational risk exposure
                (which does not incorporate qualifying operational risk mitigants) and
                an estimate of the Enterprise's operational risk exposure adjusted to
                incorporate qualifying operational risk mitigants; and
                 (2) The Enterprise's methodology for incorporating the effects of
                insurance, if the Enterprise uses insurance as an operational risk
                mitigant, captures through appropriate discounts to the amount of risk
                mitigation:
                 (i) The residual term of the policy, where less than one year;
                 (ii) The cancellation terms of the policy, where less than one
                year;
                 (iii) The policy's timeliness of payment;
                 (iv) The uncertainty of payment by the provider of the policy; and
                 (v) Mismatches in coverage between the policy and the hedged
                operational loss event.
                 (b) Qualifying operational risk mitigants. Qualifying operational
                risk mitigants are:
                 (1) Insurance that:
                 (i) Is provided by an unaffiliated company that the Enterprise
                deems to have strong capacity to meet its claims payment obligations
                and the Enterprise assigns the company a probability of default equal
                to or less than 10 basis points;
                 (ii) Has an initial term of at least one year and a residual term
                of more than 90 days;
                 (iii) Has a minimum notice period for cancellation by the provider
                of 90 days;
                 (iv) Has no exclusions or limitations based upon regulatory action
                or for the receiver or liquidator of a failed depository institution;
                and
                 (v) Is explicitly mapped to a potential operational loss event;
                 (2) In evaluating an operational risk mitigant other than
                insurance, FHFA will consider whether the operational risk mitigant
                covers potential operational losses in a manner equivalent to holding
                total capital.
                Sec. 1240.162 Mechanics of operational risk risk-weighted asset
                calculation.
                 (a) If an Enterprise does not qualify to use or does not have
                qualifying operational risk mitigants, the Enterprise's dollar risk-
                based capital requirement for operational risk is its operational risk
                exposure minus eligible operational risk offsets (if any).
                 (b) If an Enterprise qualifies to use operational risk mitigants
                and has qualifying operational risk mitigants, the Enterprise's dollar
                risk-based capital requirement for operational risk is the greater of:
                 (1) The Enterprise's operational risk exposure adjusted for
                qualifying operational risk mitigants minus eligible operational risk
                offsets (if any); or
                 (2) 0.8 multiplied by the difference between:
                 (i) The Enterprise's operational risk exposure; and
                 (ii) Eligible operational risk offsets (if any).
                 (c) The Enterprise's risk-weighted asset amount for operational
                risk equals the greater of:
                 (1) The Enterprise's dollar risk-based capital requirement for
                operational risk determined under paragraphs (a) or (b) multiplied by
                12.5; and
                 (2) The Enterprise's adjusted total assets multiplied by 0.0015
                multiplied by 12.5.
                Subpart F--Risk-Weighted Assets--Market Risk
                Sec. 1240.201 Purpose, applicability, and reservation of authority.
                 (a) Purpose. This subpart F establishes risk-based capital
                requirements for spread risk and provides methods for the Enterprises
                to calculate their measure for spread risk.
                 (b) Applicability. This subpart applies to each Enterprise.
                 (c) Reservation of authority. Subject to applicable provisions of
                the Safety and Soundness Act:
                 (1) FHFA may require an Enterprise to hold an amount of capital
                greater than otherwise required under this subpart if FHFA determines
                that the Enterprise's capital requirement for spread risk as calculated
                under this subpart is not commensurate with the spread risk of the
                Enterprise's covered positions.
                 (2) If FHFA determines that the risk-based capital requirement
                calculated under this subpart by the Enterprise for one or more covered
                positions or portfolios of covered positions is not commensurate with
                the risks associated with those positions or portfolios, FHFA may
                require the Enterprise to assign a different risk-based capital
                requirement to the positions or portfolios that more accurately
                reflects the risk of the positions or portfolios.
                 (3) In addition to calculating risk-based capital requirements for
                specific positions or portfolios under this subpart, the Enterprise
                must also calculate risk-based capital requirements for covered
                positions under subpart D or subpart E of this part, as appropriate.
                 (4) Nothing in this subpart limits the authority of FHFA under any
                other provision of law or regulation to take supervisory or enforcement
                action, including action to address unsafe or unsound practices or
                conditions, deficient capital levels, or violations of law.
                Sec. 1240.202 Definitions.
                 (a) Terms set forth in Sec. 1240.2 and used in this subpart have
                the definitions assigned in Sec. 1240.2.
                 (b) For the purposes of this subpart, the following terms are
                defined as follows:
                 Backtesting means the comparison of an Enterprise's internal
                estimates with actual outcomes during a sample period not used in model
                development. For
                [[Page 39404]]
                purposes of this subpart, backtesting is one form of out-of-sample
                testing.
                 Covered position means, any asset that has more than de minimis
                spread risk (other than any intangible asset, such as any servicing
                asset), including:
                 (i) Any NPL, RPL, reverse mortgage loan, or other mortgage exposure
                that, in any case, does not secure an MBS guaranteed by the Enterprise;
                 (ii) Any MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie
                Mae, reverse mortgage security, PLS, commercial MBS, CRT exposure, or
                other securitization exposure, regardless of whether the position is
                held by the Enterprise for the purpose of short-term resale or with the
                intent of benefiting from actual or expected short-term price
                movements, or to lock in arbitrage profits; and
                 (iii) Any other trading asset or trading liability (whether on- or
                off-balance sheet).\12\
                ---------------------------------------------------------------------------
                 \12\ Securities subject to repurchase and lending agreements are
                included as if they are still owned by the Enterprise.
                ---------------------------------------------------------------------------
                 Market risk means the risk of loss on a position that could result
                from movements in market prices, including spread risk.
                 Private label security (PLS) means any MBS that is collateralized
                by a pool or pools of single-family mortgage exposures and that is not
                guaranteed by an Enterprise or by Ginnie Mae.
                 Reverse mortgage means a mortgage loan secured by a residential
                property in which a homeowner relinquishes equity in their home in
                exchange for regular payments.
                 Reverse mortgage security means a security collateralized by
                reverse mortgages.
                 Spread risk means the risk of loss on a position that could result
                from a change in the bid or offer price of such position relative to a
                risk free or funding benchmark, including when due to a change in
                perceptions of performance or liquidity of the position.
                Sec. 1240.203 Requirements for managing market risk.
                 (a) Management of covered positions--(1) Active management. An
                Enterprise must have clearly defined policies and procedures for
                actively managing all covered positions. At a minimum, these policies
                and procedures must require:
                 (i) Marking covered positions to market or to model on a daily
                basis;
                 (ii) Daily assessment of the Enterprise's ability to hedge position
                and portfolio risks, and of the extent of market liquidity;
                 (iii) Establishment and daily monitoring of limits on covered
                positions by a risk control unit independent of the business unit;
                 (iv) Routine monitoring by senior management of information
                described in paragraphs (a)(1)(i) through (a)(1)(iii) of this section;
                 (v) At least annual reassessment of established limits on positions
                by senior management; and
                 (vi) At least annual assessments by qualified personnel of the
                quality of market inputs to the valuation process, the soundness of key
                assumptions, the reliability of parameter estimation in pricing models,
                and the stability and accuracy of model calibration under alternative
                market scenarios.
                 (2) Valuation of covered positions. The Enterprise must have a
                process for prudent valuation of its covered positions that includes
                policies and procedures on the valuation of positions, marking
                positions to market or to model, independent price verification, and
                valuation adjustments or reserves. The valuation process must consider,
                as appropriate, unearned credit spreads, close-out costs, early
                termination costs, investing and funding costs, liquidity, and model
                risk.
                 (b) Requirements for internal models. (1) A risk control unit
                independent of the business unit must approve any internal model to
                calculate its risk-based capital requirement under this subpart.
                 (2) An Enterprise must meet all of the requirements of this section
                on an ongoing basis. The Enterprise must promptly notify FHFA when:
                 (i) The Enterprise plans to extend the use of a model to an
                additional business line or product type;
                 (ii) The Enterprise makes any change to an internal model that
                would result in a material change in the Enterprise's risk-weighted
                asset amount for a portfolio of covered positions; or
                 (iii) The Enterprise makes any material change to its modeling
                assumptions.
                 (3) FHFA may determine an appropriate capital requirement for the
                covered positions to which a model would apply, if FHFA determines that
                the model no longer complies with this subpart or fails to reflect
                accurately the risks of the Enterprise's covered positions.
                 (4) The Enterprise must periodically, but no less frequently than
                annually, review its internal models in light of developments in
                financial markets and modeling technologies, and enhance those models
                as appropriate to ensure that they continue to meet the Enterprise's
                standards for model approval and employ risk measurement methodologies
                that are most appropriate for the Enterprise's covered positions.
                 (5) The Enterprise must incorporate its internal models into its
                risk management process and integrate the internal models used for
                calculating its market risk measure into its daily risk management
                process.
                 (6) The level of sophistication of an Enterprise's internal models
                must be commensurate with the complexity and amount of its covered
                positions. An Enterprise's internal models may use any of the generally
                accepted approaches, including variance-covariance models, historical
                simulations, or Monte Carlo simulations, to measure market risk.
                 (7) The Enterprise's internal models must properly measure all the
                material risks in the covered positions to which they are applied.
                 (8) The Enterprise's internal models must conservatively assess the
                risks arising from less liquid positions and positions with limited
                price transparency under realistic market scenarios.
                 (9) The Enterprise must have a rigorous and well-defined process
                for re-estimating, re-evaluating, and updating its internal models to
                ensure continued applicability and relevance.
                 (c) Control, oversight, and validation mechanisms. (1) The
                Enterprise must have a risk control unit that reports directly to
                senior management and is independent from the business units.
                 (2) The Enterprise must validate its internal models initially and
                on an ongoing basis. The Enterprise's validation process must be
                independent of the internal models' development, implementation, and
                operation, or the validation process must be subjected to an
                independent review of its adequacy and effectiveness. Validation must
                include:
                 (i) An evaluation of the conceptual soundness of (including
                developmental evidence supporting) the internal models;
                 (ii) An ongoing monitoring process that includes verification of
                processes and the comparison of the Enterprise's model outputs with
                relevant internal and external data sources or estimation techniques;
                and
                 (iii) An outcomes analysis process that includes backtesting.
                 (3) The Enterprise must stress test the market risk of its covered
                positions at a frequency appropriate to each portfolio, and in no case
                less frequently than quarterly. The stress tests must take into account
                concentration risk (including concentrations in single issuers,
                industries, sectors, or markets), illiquidity under stressed market
                conditions, and risks arising from the Enterprise's trading activities
                that may
                [[Page 39405]]
                not be adequately captured in its internal models.
                 (4) The Enterprise must have an internal audit function independent
                of business-line management that at least annually assesses the
                effectiveness of the controls supporting the Enterprise's market risk
                measurement systems, including the activities of the business units and
                independent risk control unit, compliance with policies and procedures,
                and calculation of the Enterprise's measures for spread risk under this
                subpart. At least annually, the internal audit function must report its
                findings to the Enterprise's board of directors (or a committee
                thereof).
                 (d) Internal assessment of capital adequacy. The Enterprise must
                have a rigorous process for assessing its overall capital adequacy in
                relation to its market risk.
                 (e) Documentation. The Enterprise must adequately document all
                material aspects of its internal models, management and valuation of
                covered positions, control, oversight, validation and review processes
                and results, and internal assessment of capital adequacy.
                Sec. 1240.204 Measure for spread risk.
                 (a) General requirement--(1) In general. An Enterprise must
                calculate its standardized measure for spread risk by following the
                steps described in paragraph (a)(2) of this section. An Enterprise also
                must calculate an advanced measure for spread risk by following the
                steps in paragraph (a)(2) of this section.
                 (2) Measure for spread risk. An Enterprise must calculate the
                standardized measure for spread risk, which equals the sum of the
                spread risk capital requirements of all covered positions using one or
                more of its internal models except as contemplated by paragraphs (b) or
                (c) of this section. An Enterprise also must calculate the advanced
                measure for spread risk, which equals the sum of the spread risk
                capital requirements of all covered positions calculated using one or
                more of its internal models.
                 (b) Single point approach--(1) General. For purposes of the
                standardized measure for spread risk, the spread risk capital
                requirement for a covered position that is an RPL, an NPL, a reverse
                mortgage loan, or a reverse mortgage security is the amount equal to:
                 (i) The market value of the covered position; multiplied by
                 (ii) The applicable single point shock assumption for the covered
                position under paragraph (b)(2) of this section.
                 (2) Applicable single point shock assumption. The applicable single
                point shock assumption is:
                 (i) 0.0475 for an RPL or an NPL;
                 (ii) 0.0160 for a reverse mortgage loan; and
                 (iii) 0.0410 for a reverse mortgage security.
                 (c) Spread duration approach--(1) General. For purposes of the
                standardized measure for spread risk, the spread risk capital
                requirement for a covered position that is a multifamily mortgage
                exposure, a PLS, or an MBS guaranteed by an Enterprise or Ginnie Mae
                and secured by multifamily mortgage exposures is the amount equal to:
                 (i) The market value of the covered position; multiplied by
                 (ii) The spread duration of the covered position determined by the
                Enterprise using one or more of its internal models; multiplied by
                 (iii) The applicable spread shock assumption under paragraph (c)(2)
                of this section.
                 (2) Applicable spread shock assumption. The applicable spread shock
                is:
                 (i) 0.0015 for a multifamily mortgage exposure;
                 (ii) 0.0265 for a PLS; and
                 (iii) 0.0100 for an MBS guaranteed by an Enterprise or by Ginnie
                Mae and secured by multifamily mortgage exposures (other than IO
                securities guaranteed by an Enterprise or Ginnie Mae).
                Subpart G--Stability Capital Buffer
                Sec. 1240.400 Stability capital buffer.
                 (a) Definitions. For purposes of this subpart:
                 (1) Mortgage assets means, with respect to an Enterprise, the
                dollar amount equal to the sum of:
                 (i) The unpaid principal balance of its single-family mortgage
                exposures, including any single-family loans that secure MBS guaranteed
                by the Enterprise;
                 (ii) The unpaid principal balance of its multifamily mortgage
                exposures, including any multifamily mortgage exposures that secure MBS
                guaranteed by the Enterprise;
                 (iii) The carrying value of its MBS guaranteed by an Enterprise or
                Ginnie Mae, PLS, and other securitization exposures (other than its
                retained CRT exposures); and
                 (iv) The exposure amount of any other mortgage assets.
                 (2) Residential mortgage debt outstanding means the dollar amount
                of mortgage debt outstanding secured by one- to four-family residences
                or multifamily residences that are located in the United States (and
                excluding any mortgage debt outstanding secured by non-farm, non-
                residential or farm properties).
                 (b) Amount. An Enterprise must calculate its stability capital
                buffer under this section on an annual basis by December 31 of each
                year. The stability capital buffer of an Enterprise is equal to:
                 (1) The ratio of:
                 (i) The mortgage assets of the Enterprise as of December 31 of the
                previous calendar year; to
                 (ii) The residential mortgage debt outstanding as of December 31 of
                the previous calendar year, as published by FHFA;
                 (2) Minus 0.05;
                 (3) Multiplied by 5;
                 (4) Divided by 100; and
                 (5) Multiplied by the adjusted total assets of the Enterprise.
                 (c) Effective date of an adjusted stability capital buffer--(1)
                Increase in stability capital buffer. An increase in the stability
                capital buffer of an Enterprise under this section will take effect
                (i.e., be incorporated into the maximum payout ratio under Table 1 to
                paragraph (b)(5) of Sec. 1240.11) on January 1 of the year that is one
                full calendar year after the increased stability capital buffer was
                calculated.
                 (2) Decrease in stability capital buffer. A decrease in the
                stability capital buffer of an Enterprise will take effect (i.e., be
                incorporated into the maximum payout ratio under Table 1 to paragraph
                (b)(5) of Sec. 1240.11) on January 1 of the year immediately following
                the calendar year in which the decreased stability capital buffer was
                calculated.
                [Alternative Approach]
                Sec. 1240.400 Stability capital buffer.
                 (a) Amount. An Enterprise must calculate its stability capital
                buffer under this section on an annual basis by December 31 of each
                year. The stability capital buffer of an Enterprise is equal to:
                 (1) Subject to paragraph (b) of this section, the GSIB surcharge as
                calculated under subpart H of 12 CFR 217 (expressed as a percent), as
                if the Enterprise were a globally systemic important BHC under 12 CFR
                217.402; multiplied by
                 (2) The weighted average of the risk weights of the mortgage
                exposures of the Enterprise (weighted by exposure amount) as of the
                effective date of the final rule; multiplied by
                 (3) The adjusted total assets of the Enterprise.
                 (b) Adjustment to systemic indicator score. In calculating the GSIB
                surcharge
                [[Page 39406]]
                under paragraph (a)(1) of this section, the Enterprise must:
                 (1) Exclude from the sum of its systemic indicator scores the
                systemic indicators for substitutability (payments activity, assets
                under custody, and underwritten transactions in debt and equity
                markets) and cross-jurisdictional activity (cross-jurisdictional claims
                and cross-jurisdictional liabilities); and
                 (2) Divide the sum of its systemic indicator scores, as adjusted
                under paragraph (b)(1) of this section, by the amount equal to 0.60.
                 (c) Effective date of an adjusted stability buffer--(1) Increase in
                stability capital buffer. An increase in the stability buffer of an
                Enterprise under this section will take effect (i.e., be incorporated
                into the maximum payout ratio under Table 1 to paragraph (b)(5) of
                Sec. 1240.11) on January 1 of the year that is one full calendar year
                after the increased stability capital buffer was calculated.
                 (2) Decrease in stability capital buffer. A decrease in the
                stability buffer of an Enterprise will take effect (i.e., be
                incorporated into the maximum payout ratio under Table 1 to paragraph
                (b)(5) of Sec. 1240.11) on January 1 of the year immediately following
                the calendar year in which the decreased stability capital buffer was
                calculated.
                CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
                SUBCHAPTER C--SAFETY AND SOUNDNESS
                PART 1750--[REMOVED]
                0
                6. Remove part 1750.
                Mark A. Calabria,
                Director, Federal Housing Finance Agency.
                [FR Doc. 2020-11279 Filed 6-29-20; 8:45 am]
                BILLING CODE 8070-01-P