SFA Responds To FHFA: Suspend Implementation of Proposed GSE Capital Rule
On Monday August 31st, SFA submitted a response to the FHFA on their Proposed Enterprise Capital Framework. SFA’s response highlights broad industry concerns about not only particular aspects of the rule itself, but the practical effect of the FHFA taking steps that could allow the GSEs to resume their former position of relying on an implicit government guaranty.
Given the breadth of concerns raised and potential negative severity of enacting the proposed rule under the current conditions, SFA recommended that FHFA suspend implementation of the rule until broader questions about the role of the GSEs are adequately resolved, and specific questions about the impact of the rule on the operations of the GSEs are answered.
SFA raised two overarching issues with the re-proposed ECF.
- The capital rule assumes resolution and clarity on a number of outstanding policy issues. Unfortunately, such resolution does not exist. The primary example of such an issue is whether there will be a full-faith and credit guaranty on legacy and new-issue agency mortgage-backed securities (MBS) in place before the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac exit conservatorship.
- The capital rule unnecessarily penalizes Credit Risk Transfer (CRT) programs at the enterprises, likely eliminating valid benefits of this diversified, cost-effective risk management tool. As a result, the GSEs would be incented to hold more risk, their cost of capital will increase, and the economic benefits passed along to mortgage borrowers via lower g-fees will be reduced or eliminated.
SFA members also commented on the need for interagency coordination, shortcomings of “bank-like” capital standards, issues with the countercyclicality capital approach, shifting the volume within government agencies, and the moral hazard and many challenges of relying on an “implied” guarantee.