Comments to FHFA re: GSE Capital

Alfred M. Pollard
General Counsel
Federal Housing Finance Agency
400 Seventh Street, SW
Eighth Floor
Washington, DC 20219

The American Bankers Association appreciates this opportunity to offer comments on the Federal Housing Finance Agency’s (FHFA) proposed rule on Enterprise Capital Requirements,which includes a new framework for risk-based capital requirements and two alternatives for an updated minimum leverage capital requirement.

Introduction

Although the Enterprises (Fannie Mae and Freddie Mac) have been operating essentially without capital under terms of their conservatorship, we share FHFA’s view that the proposal of a capital rule to govern the Enterprises is a valuable undertaking. Managing the GSEs to an appropriate capital standard provides discipline over what activities are undertaken by the Enterprises, and the degree to which they engage in certain transactions, such as credit risk transfers. Indeed, ABA has long advocated that appropriate capital standards are an essential element not only to ensure the financial viability of the Enterprises but also as a management tool to ensure that their activities are appropriately limited to the defined and directed role assigned to them in the secondary mortgage market. Additionally, the proposal of new capital standards provides an official forum for public input and discussion of the proper roles played by the Enterprises going forward, and the level of capitalization that should be required for the various risks involved in those roles. Such a public discussion with input from impacted parties and market participants should prove useful to policy makers generally, and specifically to legislators as they undertake reform legislation. While the legislative process does provide for public discussion and input on these issues, it has thus far not resulted in a satisfactory consensus approach for reform of the Enterprises. This forum provided by FHFA’s official notice and comment on detailed capital proposals from the regulator of the Enterprises is an opportunity to focus attention on specific activities undertaken by the Enterprises and the risks associated with those activities. We appreciate the opportunity to provide comments and hope that they will prove useful both in the ongoing management of the Enterprises, and in guiding the future direction of the Enterprises and the government’s role in the secondary mortgage market.

We must also note, however, that the specific capital proposal, while useful in focusing public and industry participant attention on Enterprise capital regulation, is of limited use until we know the future structure and mission of the GSEs. This is not to understate the usefulness of the proposal in guiding that direction, but an acknowledgement that future structures and missions assigned to the Enterprises,if indeed the Enterprises even continue in their current form,is an open question. As we have seen from legislative proposals in recent years, Congress has considered significantly different structures for carrying out the government’s role in the secondary market. The Johnson/Crapo and Corker/Warner bills considered by the Senate Banking Committee would have divided the functions of the Enterprises among several separate entities, each of which would require a different capital structure appropriate to the specific risks undertaken by each of those entities. Similarly, proposals introduced or discussed in the House would entail significantly different roles and structures for the government in the secondary mortgage market. The most recent discussion draft proposed by Representatives Hensarling, Delaney and Himes would shift the provision of the federal guarantee to Ginnie Mae, while providing significant credit enhancement from private market participants. Such a structure would require different capital requirements for each of these entities attendant to the activities they undertake and the risks associated with those activities. Nevertheless, regardless of the structures or duties and limits ultimately chosen by Congress (which we maintain must be the ultimate arbiter of the future direction of the government’s role in the secondary mortgage market), it seems likely that certain broad functions and attendant risks assigned to the Enterprises or their successors will not change dramatically. They will remain focused on housing finance and the provision of a federal guarantee, while offsetting risk through credit risk transfers and other mechanisms. With that in mind, as well as the acknowledgement of the limits of the applicability of the specific proposal on the table, we offer the following comments and constructive criticisms.

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