FHFA proposes annual capital planning for Fannie Mae, Freddie Mac

The regulator for two large government-related mortgage investors is floating a proposal under which they would submit annual reports for capital planning purposes.

The Federal Housing Finance Agency’s proposed rule, which has a 60-day comment period, would incorporate the determination of a stress capital buffer into the planning process for government-sponsored enterprises Fannie Mae and Freddie Mac.

Under the Federal Housing Finance Agency proposal, Fannie and Freddie would need to show their proposed capital actions in their annual plans. They would also need to lay out how their capital levels will change under a variety of stress tests, including required ratios separately proposed for amendment.

“The proposed rule will help ensure that the enterprises have robust systems and processes in place to monitor and maintain proper levels of capital,” said Sandra Thompson, acting director of the FHFA, in a press release. “Adhering to a framework similar to other regulatory capital planning frameworks will better position the enterprises, and the mortgage market, to withstand stressful economic environments.”

The transparency annual capital plans could provide into the GSEs’ financials could be welcome, so long as it does not result in increases to their required capital ratios that are unnecessarily high and constrain low-to-moderate income lending, said Rob Zimmer, principal at TVDC and registered lobbyist for the Community Mortgage Lenders of America.

“More stringent reporting on capital is certainly part of the utility model they look like they’re heading toward,” he said in an interview.

While the Biden administration ultimately did not choose to nominate a widely-rumored candidate for FHFA director who’s been a clear advocate of the utility model — instead choosing Thompson for the role — some experts still expect Fannie and Freddie to head down that road.

Under a utility model, Fannie and Freddie would be expected to deliver regular dividends but wouldn’t be subject to capital levels as restrictive as those used by the banking industry, Zimmer said.

While the FHFA’s proposed capital planning rule is consistent with the framework for large bank holding companies, the rule does make adjustments to account for differences that exist between the GSEs and depositories, such as in the case where the Fannie and Freddie would need to estimate and project revenues, expenses, losses, reserves and pro forma capital levels under scenarios set both internally and by their regulator. While the banking framework has a nine-quarter horizon for regulatory and internal scenarios, the FHFA proposes a period of five years for the latter to give the enterprises more time to build adequate levels in capital as they adjust to new standards.

The proposed annual capital planning is well-suited to the GSE model, according to Henry Coffey, managing director of equity research at Wedbush Securities.

Such reporting is “normal” and “what anyone would expect…of a financial institution of Fannie and Freddie’s size,” he said in an email.

Earlier this year, the FHFA also proposed requiring Fannie and Freddie to issue quarterly disclosures in line with international capital standards.