The Office of Federal Housing Enterprise Oversight has granted an extension of the public comment period for the proposed risk-based capital rule for Fannie Mae and Freddie Mac.

This extension, which expires March 10, is the second extension that has been granted to the institutions. Both Fannie Mae and Freddie Mac, along with the Mortgage Bankers Association of America and the Mortgage Insurance Companies of America have applied for the extension, stating that they needed more time to duplicate the computer model that OFHEO used to conduct a risk-based capital stress test in 1996 and 1997.

OFHEO is an independent agency within the office of the U.S. Department of Housing and Urban Development that regulates government-sponsored enterprises. Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, OFHEO was required to propose a risk-based capital rule for Fannie and Freddie to be sure they are adequately capitalized in the event of an economic emergency.

"It is all an outgrowth of our statutory responsibility," said Jill Weide, acting director for public affairs at OFHEO. "We think we're at the cutting edge of risk-based capital regulation and the other regulators that would be doing this are in recognition of how much it makes sense," referring to the Federal Home Loan Banks' decision to also switch to a risk-based capital structure (MBSL 10/25/99).

The public comment period, in which the agencies involved had time to analyze the OFHEO model and provide feedback on the rather complex rule, was originally scheduled to expire last April, and Weide has said that only Freddie Mac has made a submission regarding a specific piece of the test. Fannie Mae has not finished replicating the model as part of its testing.

"We can't analyze the proposed regulation until we replicate it," said David Jeffers, vice president for corporate relations for Fannie Mae. "Much of the time that we have between now and the new deadline, much of that will be used for analysis, but we have not begun that yet." He added that Fannie is about 80% through the duplication process, and that should be completed in "a matter of weeks."

Both organizations are currently operating under a minimum-based capital regulation, which is a ratio-based structure of determining capital. Under the current structure, both Fannie Mae and Freddie Mac are adequately capitalized, but when the risk-based stress test was run in 1996 and 1997, Fannie Mae came up more than $3.5 billion undercapitalized both times. Jeffers is still waiting for the model duplication to be completed to determine the cause for OFHEO's results.

However, both agencies feel that that the move to a risk-based capital structure is positive. "We just think that the risk-based approach is a reasonable way of looking at our business," said Doug Robinson, a spokesman from Freddie Mac. "We're happy to work with OFHEO to come up with a model that looks at our business carefully and allows us to serve our mission."

Jeffers agreed. "We think from a policy point of view, risk-based capital standards are the right way to go," he said. "We were early proponents of it when they were first put into the statute back in 1992, because a stress-test based standard is the most appropriate way to go."

After the comment period expires, OFHEO will review the proposed rule and make any revisions, if necessary. The rule will then become final, and the GSEs will have one year before it will cover them. However, Weide did not say if another run of the test will be conducted before the rule becomes final, but the test will be run every quarter to generate new numbers for Fannie and Freddie.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.