Mel Watt and the FHFA (the regulatory body, not a funk band) have issued a proposed rule on how much capital Fannie Mae and Freddie Mac should have to protect taxpayers from losses.

“The Federal Housing Finance Agency (FHFA or the Agency) is proposing a new regulatory capital framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises), which includes a new framework for risk-based capital requirements and two alternatives for an updated minimum leverage capital requirement.

The risk-based framework would provide a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going concern buffer components. The proposed rule would maintain the statutory definitions of core capital and total capital.”

The proposed rule is 368 pages long and it is recommending a base 2.5% capital rule.

§ 1240.50 Minimum leverage capital requirement: 2.5 percent alternative.
Each Enterprise shall maintain at all times core capital in an amount at least equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities, or such higher amount as the Director may require pursuant to part 1225 of this chapter.

§ 1240.51 Minimum leverage capital requirement: Bifurcated alternative.
Each Enterprise shall maintain at all times core capital in an amount at least equal to 4% of non-trust assets and 1.5% of trust assets, or such higher amount as the Director may require pursuant to part 1225 of this chapter.

Given that unemployment rates are near decade lows and home prices are above where they were at the peak of the housing bubble, now is a good time to have this discussion.

staatistta

Is 2.5% capital big enough?

fhfa90

Clearly, Mel Watt wants Fannie Mae and Freddie Mac to stay alive.

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