FHFA Issues Final Rule Regarding the Enterprise Regulatory Capital Framework

FHFA recently issued a final rule that amends the Enterprise Regulatory Capital Framework by updating the prescribed leverage buffer amount and credit risk transfer (CRT) securitization framework for Fannie Mae and Freddie Mac (the Enterprises).  The changes made by the final rule will go into effect on May 16, 2022.

The final rule largely tracks the proposed rule that was published in September 2021, which WBK covered here.  Among other changes, the final rule replaces the current fixed tier 1 capital leverage buffer equal to 1.5% of the Enterprise’s adjusted total assets with a dynamic tier 1 capital leverage buffer equal to 50% of the Enterprise’s stability capital buffer.  Additionally, the final rule adopts the prudential floor of 5% on the risk weight assigned to any retained CRT exposure as proposed.  Previously, the prudential floor was 10%.  The final rule also adopts the removal of the overall effectiveness adjustment as proposed.  FHFA noted that “the risk weight floor, loss timing effectiveness adjustment, counterparty effectiveness adjustments, and CRT operational criteria, including FHFA’s authority to review and approve CRT transactions as effective in transferring credit risk, sufficiently protect the Enterprises from the potential safety and soundness risks posed by CRT.” Finally, the final rule makes various technical corrections (e.g., it changes certain definitions, variable names, the single family countercyclical adjustment, and CRT formulas).