Enterprise Regulatory Capital Framework-Prescribed Leverage Buffer Amount and Credit Risk Transfer

CourtFederal Housing Finance Agency
Published date16 March 2022
Record Number2022-04529
Federal Register, Volume 87 Issue 51 (Wednesday, March 16, 2022)
[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
                [Rules and Regulations]
                [Pages 14764-14772]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2022-04529]
                [[Page 14764]]
                -----------------------------------------------------------------------
                FEDERAL HOUSING FINANCE AGENCY
                12 CFR Part 1240
                RIN 2590-AB17
                Enterprise Regulatory Capital Framework--Prescribed Leverage
                Buffer Amount and Credit Risk Transfer
                AGENCY: Federal Housing Finance Agency.
                ACTION: Final rule.
                -----------------------------------------------------------------------
                SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
                adopting a final rule (final rule) that amends the Enterprise
                Regulatory Capital Framework (ERCF) by refining the prescribed leverage
                buffer amount (PLBA or leverage buffer) and credit risk transfer (CRT)
                securitization 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 final rule also
                makes technical corrections to various provisions of the ERCF that was
                published on December 17, 2020.
                DATES: This rule is effective May 16, 2022.
                FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
                Director, Office of Capital Policy, (202) 649-3141,
                [email protected]; Christopher Vincent, Senior Financial
                Analyst, Office of Capital Policy, (202) 649-3685,
                [email protected]; or Ming-Yuen Meyer-Fong, Associate
                General Counsel, Office of General Counsel, (202) 649-3078, [email protected]. These are not toll-free numbers. For TTY/TRS
                users with hearing and speech disabilities, dial 711 and ask to be
                connected to any of the contact numbers above.
                SUPPLEMENTARY INFORMATION:
                Table of Contents
                I. Introduction
                II. Overview of the Final Rule
                 A. Amendments to the ERCF
                 B. Effective Date
                III. General Comments on the Proposed Rule
                 A. 20 Percent Risk Weight Floor
                 B. Multifamily Countercyclical Adjustment
                IV. Leverage Buffer
                V. Credit Risk Transfer
                VI. ERCF Technical Corrections
                VII. Paperwork Reduction Act
                VIII. Regulatory Flexibility Act
                IX. Congressional Review Act
                I. Introduction
                 On September 27, 2021, FHFA published in the Federal Register a
                notice of proposed rulemaking (proposed rule) seeking comments on
                amendments to the ERCF that would refine the leverage buffer and the
                risk-based capital treatment for retained CRT exposures.\1\ FHFA
                proposed these amendments to ensure that the ERCF appropriately
                reflects the risks inherent to the Enterprises' business models and
                contains proper incentives for the Enterprises to distribute acquired
                credit risk to private investors rather than to buy and hold that risk.
                In meeting these objectives, the proposed amendments would help restore
                FHFA's intended paradigm of having the Enterprises' leverage capital
                requirements and buffer provide a credible backstop to their risk-based
                capital requirements and buffers, enhancing the safety and soundness of
                the Enterprises. FHFA is now adopting in this final rule the proposed
                amendments, substantially as proposed.
                ---------------------------------------------------------------------------
                 \1\ 86 FR 53230.
                ---------------------------------------------------------------------------
                 FHFA published the ERCF on December 17, 2020 \2\ with the purpose
                of implementing a going-concern regulatory capital standard to ensure
                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.\3\ The ERCF, which became effective on February 16, 2021, aimed
                to address issues that arose during the notice and comment period such
                as the pro-cyclicality of the single-family risk-based capital
                requirements, the quality of Enterprise capital used to meet the
                capital requirements, and the quantity of required capital at the
                Enterprises. Accordingly, the ERCF is significantly stronger than the
                statutory framework which governed the Enterprises' capital
                requirements prior to entering conservatorships.
                ---------------------------------------------------------------------------
                 \2\ 85 FR 82150.
                 \3\ In conservatorships, the Enterprises are supported by Senior
                Preferred Stock Purchase Agreements (PSPAs) between the U.S.
                Department of the Treasury (Treasury) and each Enterprise, through
                FHFA as its conservator (Fannie Mae's Amended and Restated Senior
                Preferred Stock Purchase Agreement with Treasury (September 26,
                2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Amend-and-Restated-SPSPA_09-26-2008.pdf; Freddie Mac's Amended and Restated Senior
                Preferred Stock Purchase Agreement with Treasury (September 26,
                2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/FRE-Amended-and-Restated-SPSPA_09-26-2008.pdf). The PSPAs, as amended by letter agreements
                executed by the parties on January 14, 2021 (2021 Fannie Mae Letter
                Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf; 2021 Freddie Mac Letter
                Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf), include a covenant at
                section 5.15 which states: ``[The Enterprise] shall comply with the
                Enterprise Regulatory Capital Framework [published in the Federal
                Register at 85 FR 82150 on December 17, 2020] disregarding any
                subsequent amendment or other modifications to that rule.''
                Modifying that covenant will require agreement between the Treasury
                and FHFA under section 6.3 of the PSPAs.
                ---------------------------------------------------------------------------
                 However, after finalizing the ERCF, FHFA identified specific
                aspects of the framework that might incentivize risk taking in certain
                economic environments and create disincentives to the Enterprises' CRT
                programs. Together, these features of the ERCF could result in an
                excessive buildup of risk accruing to taxpayers and the housing finance
                market, particularly because the Enterprises presently are severely
                undercapitalized and lack the resources on their own to safely absorb
                the credit risk associated with their normal operations.
                 FHFA views the transfer of risk, particularly credit risk, to a
                broad set of investors as an important tool to reduce taxpayer exposure
                to the risks posed by the Enterprises and to mitigate systemic risk
                caused by the size and monoline nature of the Enterprises' businesses.
                Since their development began in 2013, the CRT programs have been the
                Enterprises' primary mechanism to successfully effectuate reliable risk
                transfer to the private sector. Through these programs, the Enterprises
                have shed a significant amount of credit risk to help protect against
                potential losses while the PSPAs have significantly limited the
                Enterprises' ability to hold capital and withstand losses through
                normal operations. During this current period where the Enterprises are
                building capital, CRT remains an important risk mitigation tool to
                protect taxpayers against the heightened risk of potential PSPA draws
                in the event of a significant stress to the housing sector. It is
                therefore crucial that the Enterprises' capital requirements are
                appropriately sized, where the leverage capital framework is a credible
                backstop to the risk-based capital framework and where responsible and
                effective risk transfer is not unduly discouraged.
                II. Overview of the Final Rule
                A. Amendments to the ERCF
                 After carefully considering the comments on the proposed rule, and
                as described in this preamble, FHFA is adopting, substantially as
                proposed, amendments to the leverage buffer and risk-based capital
                treatment of CRT exposures. FHFA continues to believe that the
                amendments in this final rule will lessen the potential deterrents to
                Enterprise risk transfer by properly aligning incentives in the ERCF
                and will position the Enterprises to operate in a
                [[Page 14765]]
                safe and sound manner to fulfill their statutory mission throughout the
                economic cycle, both during and after conservatorships. Specifically,
                the final rule will:
                 Replace the fixed leverage buffer equal to 1.5 percent of
                an Enterprise's adjusted total assets with a dynamic leverage buffer
                equal to 50 percent of the Enterprise's stability capital buffer as
                calculated in accordance with 12 CFR 1240.400;
                 Replace the prudential floor of 10 percent on the risk
                weight assigned to any retained CRT exposure with a prudential floor of
                5 percent on the risk weight assigned to any retained CRT exposure; and
                 Remove the requirement that an Enterprise must apply an
                overall effectiveness adjustment to its retained CRT exposures in
                accordance with 12 CFR 1240.44(f) and (i).
                 In addition, the final rule will implement technical corrections to
                various provisions of the ERCF that was published on December 17, 2020,
                highlighted by a significant typographical error in the definition of
                the long-term HPI trend that constitutes the basis for calculating the
                single-family countercyclical adjustment.
                B. Effective Date
                 Under the rule published on December 17, 2020 establishing the
                ERCF, an Enterprise will not be subject to any requirement in the ERCF
                until the compliance date for the requirement as detailed in the ERCF.
                The effective date for the ERCF was February 16, 2021. The effective
                date for the ERCF amendments and technical corrections in this final
                rule will be 60 days after the day of publication of this final rule in
                the Federal Register.
                III. General Comments on the Proposed Rule
                 FHFA received 89 public comment letters on the proposed rule from a
                variety of interested parties, including private individuals, trade
                associations, consumer advocacy groups, think-tanks and institutes, and
                financial institutions.\4\ In general, and as discussed in greater
                detail below in the relevant sections of this preamble, commenters were
                supportive of FHFA's proposed amendments to both the leverage buffer
                and the risk-based capital treatment of retained CRT exposures.
                Overall, most commenters supported FHFA's efforts to restore the
                intended paradigm between leverage capital and risk-based capital at
                the Enterprises and to properly incentivize risk transfer within the
                ERCF. However, as discussed in the relevant sections of this preamble,
                FHFA also received a number of comments indicating concern over various
                aspects of the proposed amendments.
                ---------------------------------------------------------------------------
                 \4\ See comments on Amendments to the Enterprise Regulatory
                Capital Framework Rule--Prescribed Leverage Buffer Amount and Credit
                Risk Transfer, available at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=708. The
                comment period for the proposed rule closed on November 26, 2021.
                ---------------------------------------------------------------------------
                 Over half of the 89 comments FHFA received during this notice and
                comment period focused on issues not directly related to the proposed
                amendments or technical corrections. In these letters, commenters
                offered views on important topics such as loan-level pricing
                adjustments, incorporating guarantee fees into capital requirements,
                the ERCF grids and risk multipliers, the magnitude of single-family and
                multifamily risk weights, various other aspects of the CRT
                securitization framework, the costs of CRT transactions, and the
                overall complexity of the ERCF, among others. In addition, commenters
                offered views on housing finance reform and on matters relating to the
                Enterprises' conservatorships, including issues related to the
                Enterprises' consent to conservatorships in 2008, subsequent actions by
                FHFA or the U.S. Department of the Treasury (Treasury), the magnitude
                of funds remitted to Treasury by the Enterprises relative to cumulative
                draws, Treasury's financial interests in the Enterprises, and the
                PSPAs. FHFA acknowledges the importance of these topics and will
                thoroughly consider the public's feedback on these issues when relevant
                rulemakings and policy decisions are under consideration.
                 In addition to soliciting comments on the proposed amendments and
                technical corrections, FHFA also sought feedback on two additional
                topics related to the ERCF: The 20 percent risk weight floor on single-
                family and multifamily mortgage exposures and potential options for a
                countercyclical adjustment for multifamily mortgage exposures. FHFA
                received feedback on both topics.
                A. 20 Percent Risk Weight Floor
                 FHFA asked the public whether, in light of the proposed changes to
                the leverage buffer and the risk-based capital requirements for
                retained CRT exposures, the prudential risk weight floor of 20 percent
                on single-family and multifamily mortgage exposures was appropriately
                calibrated. FHFA did not propose a change to the risk weight floor on
                single-family and multifamily mortgage exposures. Nine commenters
                provided feedback on this question, and the opinions expressed by
                commenters were varied.
                 Some commenters recommended reducing or eliminating the 20 percent
                risk weight floor. Among these commenters, some suggested that lowering
                the floor is appropriate due to the Enterprises' improved balance
                sheets and mortgage lending standards relative to pre-crisis economics.
                Others suggested that the 20 percent risk weight floor in the ERCF is
                not appropriately calibrated. Another commenter suggested that the 20
                percent floor distorts market signals about risk and incentivizes risk
                taking by the Enterprises.
                 Conversely, some commenters recommended maintaining the 20 percent
                risk weight floor. Among these commenters, some suggested that such a
                floor is prudent to ensuring the safety and soundness of the
                Enterprises. One commenter suggested that the risk weight floor is
                useful as an incentive for the Enterprises to transfer credit risk on
                lower-risk exposures. Another commenter suggested that the risk weight
                floor is important to mitigate the model risks inherent in the risk-
                sensitive methodology FHFA used to calibrate risk weights for mortgage
                exposures. One commenter suggested that reducing this risk weight floor
                could significantly increase the gap between the credit risk capital
                requirements of the Enterprises and other market participants.
                 One of the key objectives FHFA cited for proposing amendments to
                the ERCF was to ensure the leverage capital framework was a credible
                backstop to the risk-based capital framework. Despite changes to the
                2020 ERCF proposed rule \5\ that increased risk-based capital under the
                2020 ERCF final rule, including raising the 15 percent risk weight
                floor on single-family and multifamily mortgage exposures to 20 percent
                and changing the dataset on which the single-family countercyclical
                adjustment is calculated, tier 1 leverage capital remains greater than
                tier 1 risk-based capital at each Enterprise in the absence of the
                leverage buffer and CRT amendments in the proposed rule. Should FHFA
                materially reduce the 20 percent floor on single-family and multifamily
                mortgage exposures without taking additional action, the likelihood
                that the leverage framework would once again be the binding capital
                constraint for the Enterprises would significantly increase. For this
                reason, and given the commenters' diverse feedback, FHFA has determined
                not to take action related to the 20 percent risk weight
                [[Page 14766]]
                floor on single-family and multifamily mortgage exposures at this time.
                ---------------------------------------------------------------------------
                 \5\ 85 FR 39274.
                ---------------------------------------------------------------------------
                B. Multifamily Countercyclical Adjustment
                 FHFA also asked the public to recommend an approach for mitigating
                the pro-cyclicality of the credit risk capital requirements for
                multifamily mortgage exposures that relies only on non-proprietary data
                or indices. Eight commenters provided feedback on this question,
                recommending three different types of approach. The first group of
                commenters suggested solutions following the same principles as FHFA's
                single-family countercyclical adjustment, where risk attributes such as
                the loan-to-value (LTV) ratio would be adjusted up or down depending on
                deviations from a long-term trend. For use in this approach, commenters
                recommended FHFA consider the property index published by the National
                Council of Real Estate Investment Fiduciaries (NCREIF), long-term
                vacancy rates, long-term property value and income growth rates, and
                adjusted cap rates. The second group of commenters recommended FHFA
                consider an approach where the countercyclical adjustment is based on
                ratios of index peaks to current values. Commenters suggested FHFA
                could use the NCREIF property index for property values and Enterprise
                investor reporting for net operating income (NOI). This approach would
                assume that the multifamily risk weights already account for a 35
                percent shock to property values and a 15 percent shock to NOI, so an
                adjustment would be made only to the extent that the property value
                and/or NOI index ratios suggest a further adjustment is necessary.
                Finally, one commenter suggested that FHFA should address pro-
                cyclicality for multifamily mortgage exposures by replacing mark-to-
                market LTV with original LTV and mark-to-market debt service coverage
                ratio (DSCR) with original DSCR.
                 FHFA appreciates the public's feedback on this topic and is
                committed to addressing the pro-cyclicality in the capital required for
                multifamily mortgage exposures. However, given the complexity of
                potential solutions and the diversity of suggestions provided by
                commenters, FHFA has determined that this topic requires further
                consideration, potentially in a future rulemaking. Therefore, FHFA has
                determined not to take action related to a multifamily countercyclical
                adjustment at this time.
                IV. Leverage Buffer
                 The proposed rule would amend the ERCF by replacing the fixed tier
                1 capital leverage buffer equal to 1.5 percent of an Enterprise's
                adjusted total assets with a dynamic tier 1 capital leverage buffer
                equal to 50 percent of the Enterprise's stability capital buffer.\6\ In
                the proposed rule, FHFA presented several benefits to this approach.
                ---------------------------------------------------------------------------
                 \6\ 12 CFR 1240.400.
                ---------------------------------------------------------------------------
                 First, a properly calibrated leverage ratio requirement and
                leverage buffer are critical aspects of a sound regulatory capital
                framework. The purpose of leverage capital is to promote financial
                stability by establishing a robust capital floor that persists
                throughout the economic cycle and by limiting risk taking when risk-
                based capital may otherwise fall to unduly low levels. Recalibrating
                the 1.5 percent leverage buffer will promote safety and soundness and
                financial stability at the Enterprises by lessening the likelihood that
                leverage capital will drive Enterprise decision-making in the majority
                of economic environments and reduce the frequency in which an
                Enterprise has an incentive to take on more risk in a capital
                optimization strategy. Furthermore, restoring leverage capital to a
                position of a credible backstop will allow other aspects of the ERCF,
                namely the risk-based capital requirements, including the single-family
                countercyclical adjustment, to work as intended. Second, the proposed
                leverage buffer amendment will encourage the Enterprises to transfer
                risk rather than to buy and hold risk. Third, a leverage framework with
                a dynamic buffer that grows and shrinks as an Enterprise grows and
                shrinks, respectively, will function as a better backstop to a risk-
                based capital framework that includes a stability capital buffer linked
                to an Enterprise's size. And fourth, a dynamic leverage buffer that is
                tied to the stability capital buffer will further align the ERCF with
                Basel III standards. Internationally, under the latest Basel framework
                adopted by the Bank for International Settlements, global systemically
                important banks (G-SIBs) are required to hold a leverage buffer equal
                to 50 percent of their higher loss-absorbency risk-based requirements--
                a measure akin to the G-SIB surcharge in the U.S. banking framework--to
                tailor an institution's leverage ratio to its business activities and
                risk profile.
                 The vast majority of comments FHFA received supported decreasing
                the tier 1 capital leverage buffer from a fixed 1.5 percent of adjusted
                total assets. Many commenters supported FHFA's proposed approach, while
                some supported decreasing the leverage buffer without tying it to the
                stability capital buffer and others favored eliminating the leverage
                buffer altogether.
                 Many commenters who recommended decreasing the leverage buffer
                suggested doing so because it is preferrable for risk-based capital
                metrics to be the binding capital constraint more frequently than non-
                risk-based capital floors such as leverage. Commenters suggested that
                this paradigm helps eliminate incentives for the Enterprises to
                increase risk taking and risk retention while providing flexibility to
                the Enterprises as they manage risk and rebuild robust levels of
                capital. In addition, commenters agreed with FHFA that a smaller
                leverage buffer would encourage the transfer of mortgage credit risk
                from the Enterprises to private investors. Another commenter stated
                that the 1.5 percent leverage buffer is unnecessary relative to the
                Enterprises' recent stress test results, and that such a high buffer
                would likely be excessive to the point of impairing the Enterprises'
                ability to support the market and meet their mission.
                 Many commenters expressed their general support for FHFA's proposed
                approach of tying the leverage buffer to the stability capital buffer.
                Commenters contended that a dynamic leverage buffer that expands and
                contracts with an Enterprise as its size and strategy evolve would more
                accurately reflect the Enterprise's risk and thereby help facilitate
                the Enterprises' ability to carry out their missions through all
                economic cycles. Thus, commenters reasoned that the proposed approach
                would help leverage serve as a credible backstop to the risk-based
                capital framework and allow the Enterprises to withstand losses in
                excess of those experienced during the great financial crisis. Other
                commenters supported FHFA's effort to move toward a dynamic leverage
                buffer to better reflect the spirit and intent of the leverage ratio,
                and also because dynamic buffers have proven to be an effective tool
                for managing capital at the global systemically important banks.
                Another commenter suggested that the proposed approach will help
                provide stability in the mortgage market and increase investor
                confidence in the Enterprises and overall economy throughout the
                economic cycle, helping stave off the need for emergency taxpayer
                intervention. Another commenter stated that basing the leverage buffer
                on a risk-based capital metric is preferrable because it better
                reflects the varying levels of risk within an Enterprise's particular
                pool of total assets.
                 Some commenters expressed more reserved support for setting the
                leverage buffer equal to 50 percent of the stability
                [[Page 14767]]
                capital buffer. Several commenters expressed concern that tying the
                leverage buffer to the stability capital buffer could have pro-cyclical
                implications in the sense that an Enterprise's market share tends to
                grow during a stress when other market participants are growing slowly
                or shrinking. Thus, requiring an Enterprise to increase its leverage
                buffer during the period when the Enterprise is fulfilling its
                countercyclical role could limit the Enterprise's ability to supply
                market liquidity when it is most needed. In contrast to these
                commenters' concern, FHFA anticipates that setting the leverage buffer
                equal to 50 percent of the stability capital buffer will actually
                reduce the pro-cyclicality of the leverage framework because increases
                to an Enterprise's adjusted total assets are reflected in the fixed 1.5
                percent leverage buffer immediately whereas increases to an
                Enterprise's share of the overall mortgage market are reflected in the
                stability capital buffer with up to a two-year delay.\7\ FHFA believes
                this delayed need to raise capital relative to the current ERCF will
                facilitate the Enterprises' abilities to provide liquidity to the
                mortgage market during a stress, even if an Enterprise grows its
                portfolio as a result of fulfilling its countercyclical mission.
                ---------------------------------------------------------------------------
                 \7\ Id.
                ---------------------------------------------------------------------------
                 A few other commenters supported FHFA's proposed amendments but
                recommended that FHFA: i. Continue to study the relationship between
                leverage, risk-based capital, and the stability capital buffer to
                determine definitively that the leverage buffer should be linked to the
                stability capital buffer; and ii. provide historical data affirming the
                proposed approach and demonstrating that under the proposed amendments
                leverage will rarely exceed risk-based capital.
                 Another commenter recommended that FHFA must ensure that its
                regulatory capital framework avoids discriminatory outcomes and
                promotes equitable treatment of borrowers and communities of color. One
                commenter supported FHFA's proposed amendments but expressed a desire
                for FHFA to be more anticipatory and expansive in the list of
                provisions it chooses to reconsider.
                 Some commenters recommended decreasing the leverage buffer but not
                tying it to the stability capital buffer. One commenter expressed
                concern that the stability capital buffer was itself arbitrarily
                determined, so by association a leverage buffer equal to 50 percent of
                the stability capital buffer is also arbitrarily determined. This
                commenter recommended that FHFA consider alternative methods of the
                setting the leverage buffer that are more closely tied to an
                Enterprise's risk. One commenter recommended that FHFA decrease an
                Enterprise's leverage buffer by some estimate of future guarantee fees.
                Similarly, another commenter recommended that FHFA decrease an
                Enterprise's leverage buffer to reflect risk transferred through CRT in
                the same way that the risk-based capital framework provides capital
                relief for CRT. Several commenters recommended FHFA simply reduce the
                leverage buffer from 1.5 percent of adjusted total assets to a lower
                percentage of adjusted total assets, such as 0.5 percent, because
                market share is not a reasonable representation of Enterprise risk.
                 Some commenters recommended FHFA eliminate the leverage buffer
                completely. These commenters generally viewed the leverage buffer as
                not necessary for the leverage framework to be a credible backstop to
                the risk-based capital framework. Two commenters suggested the 2.5
                percent leverage capital requirement is itself sufficient as a credible
                backstop to risk-based capital in the ERCF. Another commenter suggested
                the leverage buffer is unnecessary because: i. Stress losses on a new
                month of originations are lower than the capital required by the ERCF;
                and ii. future guarantee fees provide a significant source of claims-
                paying resources, which are not considered as a source of capital in
                the framework. One commenter suggested FHFA eliminate the leverage
                buffer rather than decrease it because a future FHFA director can just
                as easily increase it again.
                 Finally, some commenters recommended that FHFA maintain the fixed
                1.5 percent leverage buffer. One commenter claimed that FHFA does not
                provide evidence that the existing ERCF leverage-based requirements
                would be binding throughout the economic cycle, and that it is
                difficult to envision any realistic scenario in which the proposed
                amendments to the leverage buffer would result in a leverage-based
                requirement that could exceed the risk-based requirement, violating the
                concept of being a credible backstop. FHFA disagrees with the premise
                of this argument because the argument compares tier 1 leverage capital
                to adjusted total risk-based capital, which includes tier 2 capital.
                When looking only at tier 1 capital, one can readily construct
                realistic scenarios where tier 1 risk-based capital at an Enterprise
                decreases due to a period of sustained house price appreciation such
                that tier 1 leverage capital exceeds tier 1 risk-based capital and
                therefore leverage becomes the binding capital constraint.
                 The commenter also suggests that FHFA fails to explain how the
                calibration of the 1.5 percent leverage buffer is flawed and how the
                proposed leverage buffer is analogous to the risk-weighted-asset-based
                Basel leverage buffer for international G-SIBs. In the proposed rule,
                FHFA discussed how the leverage framework unduly disincentivizes risk
                transfer predominately due to the outsized leverage buffer, and how a
                fixed leverage buffer may not concurrently be appropriate for both a
                large and a small Enterprise. FHFA views these characteristics as flaws
                in the calibration of the leverage buffer because the design could
                result in taxpayers bearing excessive undue risk for as long as the
                Enterprises are in conservatorships and excessive risk to the housing
                finance market both during and after conservatorships. In addition,
                FHFA discussed how the proposed leverage buffer is similar to the Basel
                leverage buffer in that both are derived from measures that attempt to
                quantify the amount of systemic risk posed by the Enterprises and G-
                SIBs, respectively--the stability capital buffer in the ERCF and the G-
                SIB surcharge in the Basel framework. There are, of course, structural
                differences between the two buffers in both derivation and application,
                as is appropriate given that the Enterprises and the other financial
                institutions have different business models.
                 Furthermore, two commenters noted that the Financial Stability
                Oversight Council's (FSOC) review of the 2020 ERCF proposed rule found
                that capital requirements ``that are materially less than those
                contemplated by [the proposed rule] would likely not adequately
                mitigate the potential stability risk posed by the Enterprises,'' and
                that the proposed rule would result in a material two-thirds reduction
                to the leverage buffer, increasing risks to taxpayers and financial
                stability. FHFA generally agrees with the findings presented in FSOC's
                activities-based review of the secondary mortgage market.\8\ However,
                similar to approaches followed by other financial regulators, FHFA
                intends to periodically review the ERCF and adjust various elements as
                necessary to ensure the safety and soundness of the Enterprises so they
                can carry out their mission throughout the economic cycle. In addition,
                FHFA notes that Federal Reserve officials have publicly
                [[Page 14768]]
                identified binding leverage capital requirements under the
                Supplementary Leverage Ratio (SLR) framework as an important issue that
                must be addressed so that banks' incentives are not skewed to increase
                risk-taking. FHFA continues to agree with this guiding principle for
                the Enterprises under the ERCF.
                ---------------------------------------------------------------------------
                 \8\ https://home.treasury.gov/news/press-releases/sm1136.
                ---------------------------------------------------------------------------
                 The final rule adopts the dynamic tier 1 capital leverage buffer
                equal to 50 percent of the stability capital buffer as proposed. In
                consideration of the public comments on the proposed rule, FHFA
                continues to believe that such a leverage buffer determined in this
                manner will best position the Enterprises to fulfil their mission in a
                safe and sound manner throughout the economic cycle by ensuring that
                the leverage framework acts as a credible backstop to the risk-based
                capital framework and by encouraging the Enterprises to transfer credit
                risk rather than to buy and hold risk.
                 FHFA notes that the final rule will not change the tier 1 leverage
                capital requirement, which will remain at 2.5 percent of adjusted total
                assets. This requirement, plus other features of the ERCF such as the
                single-family countercyclical adjustment and the risk weight floor on
                single-family and multifamily mortgage exposures, will continue to
                mitigate the potential stability risk posed by the Enterprises and will
                ensure an Enterprise maintains robust capital even during the best
                economic conditions when risk-based capital requirements might fall due
                to significant house price appreciation.
                 In addition, FHFA continues to believe that the leverage buffer
                plays an important role in the ERCF, despite the recommendations of
                several commenters to eliminate the buffer. The leverage buffer
                represents a cushion above an Enterprise's 2.5 percent leverage ratio
                requirement that can be drawn down in a stress scenario without
                violating prompt corrective action, providing an Enterprise with
                flexibility to continue its normal operations without risk of breaching
                a requirement.
                V. Credit Risk Transfer
                 The proposed rule would replace the prudential floor of 10 percent
                on the risk weight assigned to any retained CRT exposure with a
                prudential floor of 5 percent on the risk weight assigned to any
                retained CRT exposure and would remove the requirement that an
                Enterprise must apply an overall effectiveness adjustment to its
                retained CRT exposures.\9\
                ---------------------------------------------------------------------------
                 \9\ 12 CFR 1240.44(f) and (i).
                ---------------------------------------------------------------------------
                 Many commenters expressed the view that CRT is an effective means
                by which to transfer risk to private markets, protect taxpayers, and
                stabilize the Enterprises and housing finance more generally.
                Consequently, the vast majority of comments FHFA received on the
                proposed amendments to the risk-based capital requirements for retained
                CRT exposures were generally supportive of the amendments. However, a
                minority of comments questioned the efficacy of CRT and noted that the
                amendments would weaken the Enterprises' financial resilience. Several
                other commenters offered broad critiques of and suggestions for the
                risk-based capital approach to CRT and the Enterprises' CRT programs
                more generally. While FHFA appreciates and considers all comments, the
                following discussion focuses on comments directly pertaining to the
                amendments put forward in the proposed rule.
                CRT Risk Weight Floor
                 In the proposed rule, FHFA contended that amending the CRT risk
                weight floor was necessary for two reasons. First, the 10 percent floor
                on the risk weight assigned to a retained CRT exposure unduly decreases
                the capital relief provided by CRT and reduces an Enterprise's
                incentives to engage in risk transfer. This occurs in part because the
                aggregate credit risk capital required for a retained CRT exposure is
                often greater than the aggregate credit risk capital required for the
                underlying exposures, especially when the credit risk capital
                requirements on the underlying whole loans and guarantees are low or
                the CRT is seasoned. Second, the 10 percent risk weight floor
                discourages CRT through its duplicative nature. The operational
                criteria for CRT, which state that FHFA must approve each transaction
                as being effective in transferring the credit risk, as well as the
                Enterprises' own ability to mitigate unknown risks through their
                underwriting standards and servicing and loss mitigation programs,
                lessen the need for a tranche-level risk weight floor as high as 10
                percent.
                 Commenters were generally very supportive of the proposed amendment
                to the CRT risk weight floor. Commenters suggested that reducing the
                risk weight floor on retained CRT exposures from 10 percent to 5
                percent raises the regulatory value of risk transfer closer to its
                economic value. Commenters stated that the change would restore the
                incentive for the Enterprises to engage in CRT to disperse credit risk
                among private investors and thereby lessen the systemic risk posed by
                the Enterprises. Commenters also suggested that transferring credit
                risk away from the Enterprises strengthens their safety and soundness
                and supports the overall mortgage market, including by promoting
                greater private market participation without an adverse impact on
                affordability. Several commenters supported the 5 percent floor because
                it represents a more market-sensitive treatment of CRT and better
                aligns capital to risk. In this regard, one commenter suggested that
                unduly high capital requirements will hamper an Enterprise's ability to
                fulfill its statutory mission of facilitating loans to low-income and
                very low-income borrowers and communities. In addition, commenters
                suggested that the 5 percent floor would provide reasonable protection
                from model risk while maintaining a conservative discount to equity
                capital, which has flexibility and fungibility advantages.
                 Furthermore, several commenters recommended lowering the CRT risk
                weight floor below 5 percent or eliminating it altogether. Commenters
                suggested that the floor is not analytically supported and provides
                excessive protection against CRT-related risks. One commenter's
                analysis suggested that CRT requirements are too stringent even if the
                floor is removed and recommended that FHFA calibrate the risk-based
                capital requirements for retained CRT exposures to be consistent with
                the economics of CRT transactions.
                 A few commenters recommended rejecting the proposed amendment in
                favor of the 10 percent risk weight floor. Several commenters claimed
                that the proposed amendment weakens the financial resilience of the
                Enterprises. These commenters suggested that the amendments will
                increase leverage at the Enterprises which will increase insolvency
                risk, and that FHFA should not balance incentivizing CRT with safety
                and soundness when considering capital standards.
                 Some commenters generally supported FHFA's proposal to lower the
                CRT risk weight floor but offered alternatives to the 5 percent floor
                in the proposed rule. A few commenters recommended that FHFA apply the
                CRT risk weight floor on a sliding scale such that the risk weight
                floor decreases as credit risk becomes more remote. A few commenters
                suggested that the floor should reflect an exposure-level analysis and
                perhaps be functionally related to economic variables such as seasoning
                or house price appreciation. One commenter recommended removing the
                floor and using an econometric approach that requires capital above the
                risk-based capital amount and provides a marginal benefit
                [[Page 14769]]
                to risk reduction activities beyond stress loss.
                 The final rule adopts the prudential floor of 5 percent on the risk
                weight assigned to any retained CRT exposure as proposed. In
                consideration of the public comments on the proposed rule, FHFA
                continues to believe that a prudential risk weight of 5 percent
                sufficiently ensures the viability of CRTs while mitigating their
                safety and soundness, mission, and housing stability risks. The final
                rule does not eliminate the CRT risk weight floor, as recommended by
                some commenters, because the prudential floor for a retained CRT
                exposure avoids treating that exposure as posing no credit risk, which
                continues to be an important policy objective for FHFA. In addition,
                FHFA has determined to finalize the 5 percent risk weight floor as
                proposed rather than adopting one of the alternatives suggested by
                commenters in order to maintain consistency with other aspects of the
                CRT securitization framework that were designed with a static risk
                weight floor in mind.
                Overall Effectiveness Adjustment
                 In the proposed rule, FHFA presented rationale for eliminating the
                overall effectiveness adjustment due to the duplicative nature of the
                adjustment within the risk-based capital requirements for retained CRT
                exposures. Unlike the counterparty and loss-timing effectiveness
                adjustments in the CRT securitization framework, the overall
                effectiveness adjustment does not target specific risks. Rather,
                similar to the risk weight floor on retained CRT exposures and the CRT
                operational criteria, the overall effectiveness adjustment was designed
                to address risks that are difficult to measure, such as model risk and
                the loss-absorbing benefits of equity capital relative to CRT. FHFA
                reasoned that, considering the additional elements of the CRT
                securitization framework that also target these difficult-to-measure
                risks, the overall effectiveness adjustment is duplicative and creates
                an unnecessary disincentive for the Enterprises to engage in CRT.
                 The vast majority of comments supported FHFA's proposed amendment
                to eliminate the overall effectiveness adjustment from the CRT
                securitization framework. Several commenters contended that the overall
                effectiveness adjustment was redundant and was not analytically
                supported. Commenters also reasoned that the proposed amendment
                produces a CRT treatment that better recognizes the risk reduction in
                CRT through improved CRT economics, provides appropriate incentives for
                the transfer of credit risk, and that even after removing the overall
                effectiveness adjustment, the capital relief provided by the framework
                is conservative. One commenter maintained that the overall
                effectiveness adjustment can be removed without sacrificing the
                Enterprises' safety and soundness. Multiple commenters suggested that
                the elimination of the overall effectiveness adjustment would encourage
                the Enterprises to disperse credit risk among investors rather than
                retaining that risk where taxpayers are ultimately liable, and that the
                proposed amendment would facilitate the Enterprises to carry out their
                mission throughout the economic cycle.
                 Several commenters supported keeping the overall effectiveness
                adjustment. These commenters contended that the proposal to eliminate
                the overall effectiveness adjustment further weakens the financial
                resilience of the Enterprises to withstand future credit losses that
                may occur during an economic stress and that FHFA should keep the
                adjustment because it accounts for differences in loss-absorbing
                capacity between CRT and equity capital. Several other commenters
                recommended FHFA keep the overall effectiveness adjustment in the CRT
                securitization framework, but their support for this aspect of the
                framework was conditional on either eliminating the CRT risk weight
                floor or making substantive reductions to the proposed risk weight
                floor.
                 The final rule adopts the removal of the overall effectiveness
                adjustment as proposed. In consideration of the public comments on the
                proposed rule, FHFA continues to believe that the overall effectiveness
                adjustment should be eliminated from the risk-based capital
                requirements for retained CRT exposures. FHFA believes that the risk
                weight floor, loss timing effectiveness adjustment, counterparty
                effectiveness adjustments, and CRT operational criteria, including
                FHFA's authority to review and approve CRT transactions as effective in
                transferring credit risk, sufficiently protect the Enterprises from the
                potential safety and soundness risks posed by CRT.
                VI. ERCF Technical Corrections
                 The proposed rule would make technical corrections to the ERCF
                related to definitions, variable names, the single-family
                countercyclical adjustment, and CRT formulas that were not accurately
                reflected in the final rule published on December 17, 2020. These
                technical corrections would revise the ERCF for the following items:
                 In Sec. 1240.2, the definition of ``Multifamily mortgage
                exposure'' would be moved from its current location to a location that
                follows alphabetical order relative to the other definitions within the
                section. The definition of a multifamily mortgage exposure would not
                change.
                 In Sec. 1240.33, the definition of ``Long-term HPI
                trend'' would be updated to correct a typographical error that resulted
                in only the coefficient of the trendline formula, 0.66112295, being
                published. The corrected trendline formula would be 0.66112295e
                (0.002619948*t). The Enterprises use the long-term HPI trend
                as the basis for calculating the single-family countercyclical
                adjustment. As published in the ERCF, the trendline would be a time-
                invariant horizontal line rather than a time-varying exponential
                function.
                 In Sec. 1240.33, the definition of OLTV for single-family
                mortgage exposures would be amended to include the parenthetical
                (original loan-to-value) after the acronym to provide additional
                clarity as to the meaning of OLTV. Single-family OLTV would continue to
                be based on the lesser of the appraised value and the sale price of the
                property securing the single-family mortgage.
                 In Sec. 1240.37, the second paragraph (d)(3)(iii) would
                be redesignated as (d)(3)(iv) to correct a typographical error.
                 In Sec. 1240.43(b)(1), the term ``KG'' would be replaced
                to correct a typographical error.
                 In Sec. 1240.44 we correct the following typographical
                errors:
                 [cir] In paragraph (b)(9)(i)(C), the term ``(LTFUPB%)'';
                 [cir] In paragraph (b)(9)(i)(D), the term ``LTF%'';
                 [cir] In paragraph (b)(9)(ii), the term ``LTF%'';
                 [cir] In paragraph (b)(9)(ii)(B), the term ``(CRTF15%)'';
                 [cir] In paragraph (b)(9)(ii)(C), the term ``(CRT80NotF15%)'';
                 [cir] In paragraph (b)(9)(ii)(E)(2)(i), the equation would be
                revised to correct typographical errors in the names of two variables
                within the equation;
                 [cir] In paragraph (b)(9)(ii)(E)(2)(iii), the term ``LTF%'';
                 [cir] In paragraph (c) introductory text, the term ``RW%'';
                 [cir] In paragraph (c)(1), the term ``AggEL%'';
                 [cir] In paragraph (g), the first three equations would be combined
                into one equation to correct a typographical error that erroneously
                split the equation into three distinct parts.
                 The final rule adopts the ERCF technical corrections as proposed.
                [[Page 14770]]
                VII. 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 final
                rule contains no such collection of information requiring OMB approval
                under the PRA. Therefore, no information has been submitted to OMB for
                review.
                VIII. 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 final
                rule under the Regulatory Flexibility Act. The General Counsel of FHFA
                certifies that the final rule will not have a significant economic
                impact on a substantial number of small entities because the final rule
                is applicable only to the Enterprises, which are not small entities for
                purposes of the Regulatory Flexibility Act.
                IX. Congressional Review Act
                 In accordance with the Congressional Review Act (5 U.S.C. 801 et
                seq.), FHFA has determined that this final rule is a major rule and has
                verified this determination with the Office of Information and
                Regulatory Affairs of OMB.
                List of Subjects for 12 CFR Part 1240
                 Capital, Credit, Enterprise, Investments, Reporting and
                recordkeeping requirements.
                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
                amends part 1240 of Title 12 of the Code of Federal Regulation as
                follows:
                CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
                SUBCHAPTER C--ENTERPRISES
                PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
                0
                1. The authority citation for part 1240 is revised to read as follows:
                 Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
                4611-4612, 4631-36.
                0
                2. Amend Sec. 1240.2 by removing the definition of ``Multifamily
                mortgage exposure'' and adding a new definition of ``Multifamily
                mortgage exposure'' in alphabetical order to read as follows:
                Sec. 1240.2 Definitions.
                * * * * *
                 Multifamily mortgage exposure means an exposure that is secured by
                a first or subsequent lien on a property with five or more residential
                units.
                * * * * *
                0
                3. Revise Sec. 1240.11(a)(6) as follows:
                Sec. 1240.11 Capital conservation buffer and leverage buffer.
                 (a) * * *
                 (6) Prescribed leverage buffer amount. An Enterprise's prescribed
                leverage buffer amount is 50 percent of the Enterprise's stability
                capital buffer calculated in accordance with subpart G of this part.
                * * * * *
                0
                4. Amend Sec. 1240.33(a) by:
                0
                a. In the definition of ``Long-term HPI trend'', removing
                ``0.66112295'' and adding ``0.66112295e (0.002619948*t)'' in
                its place; and
                0
                b. Revising the definition of ``OLTV''.
                 The revision reads as follows:
                Sec. 1240.33 Single-family mortgage exposures.
                 (a) * * *
                 OLTV (original loan-to-value) 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.
                * * * * *
                Sec. 1240.37 [Amended]
                0
                5. Amend Sec. 1240.37 by redesignating the second paragraph
                (d)(3)(iii) as (d)(3)(iv).
                Sec. 1240.43 [Amended]
                0
                6. Amend Sec. 1240.43(b)(1) by removing the term ``KG'' and adding the
                term ``KG'' in its place.
                0
                7. Amend Sec. 1240.44 by:
                0
                a. In paragraph (b)(9)(i)(C), removing the term ``(LTFUPB%)'' and
                adding the term ``(LTFUPB)'' in its place;
                0
                b. In paragraph (b)(9)(i)(D), removing the term ``LTF%'' and adding the
                term ``LTF'' in its place;
                0
                c. In paragraph (b)(9)(ii) introductory text removing the term ``LTF%''
                and adding the term ``LTF'' in its place;
                0
                d. In paragraph (b)(9)(ii)(B), removing the term ``(CRTF15%)'' and
                adding the term ``(CRTF15)'' in its place;
                0
                e. In paragraph (b)(9)(ii)(C), removing the term ``(CRT80NotF15%)'' and
                adding the term ``(CRT80NotF15)'' in its place;
                0
                f. Revising the equation in paragraph (b)(9)(ii)(E)(2)(i);
                0
                g. In paragraph (b)(9)(ii)(E)(2)(iii), removing the term ``LTF%'' and
                adding the term ``LTF,'' in its place;
                0
                h. In paragraph (c) introductory text:
                0
                i. Removing the term ``RW%'' and adding the term ``RW'' in its
                place; and
                0
                ii. Removing the term ``10 percent'' and adding the term ``5 percent''
                in its place;
                0
                i. In paragraph (c)(1), removing the term ``AggEL%'' and adding the
                term ``AggEL'' in its place;
                0
                j. In paragraphs (c)(2) and (c)(3)(ii), removing the term ``10
                percent'' and adding the term ``5 percent'' in its place;
                0
                k. Revising the first equation in paragraph (d);
                0
                l. In paragraph (e), removing the term ``10 percent'' and adding the
                term ``5 percent'' in its place;
                0
                m. Revising paragraph (f)(2)(i);
                0
                n. In paragraph (g), revising the first three equations;
                0
                o. Revising the first equation in paragraph (h); and
                0
                p. Removing and reserving paragraph (i).
                 The revisions read as follows:
                Sec. 1240.44 Credit risk transfer approach (CRTA).
                * * * * *
                 (b) * * *
                 (9) * * *
                 (ii) * * *
                 (E) * * *
                 (2) * * *
                 (i) * * *
                [[Page 14771]]
                [GRAPHIC] [TIFF OMITTED] TR16MR22.001
                * * * * *
                 (d) * * *
                 [GRAPHIC] [TIFF OMITTED] TR16MR22.002
                
                * * * * *
                 (f) * * *
                 (2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure
                (EAE) of an Enterprise with respect to a retained CRT exposure is as
                follows:
                [GRAPHIC] [TIFF OMITTED] TR16MR22.003
                 Where the loss timing effectiveness adjustments (LTEA) for a
                retained CRT exposure are determined under paragraph (g) of this
                section, and the loss sharing effectiveness adjustment (LSEA) for a
                retained CRT exposure is determined under paragraph (h) of this
                section.
                * * * * *
                 (g) * * *
                 [GRAPHIC] [TIFF OMITTED] TR16MR22.004
                
                * * * * *
                 (h) * * *
                [[Page 14772]]
                [GRAPHIC] [TIFF OMITTED] TR16MR22.005
                * * * * *
                Sandra L. Thompson,
                Acting Director, Federal Housing Finance Agency.
                [FR Doc. 2022-04529 Filed 3-15-22; 8:45 am]
                BILLING CODE 8070-01-P
                

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT