MBA Offers Recommendations to FHFA on New GSE Capital Framework

The Mortgage Bankers Association asked the Federal Housing Finance Agency to restructure the capital framework for Fannie Mae and Freddie Mac, moving from past business models to a market utility approach that enables them to meet all of their obligations.

“A robust capital framework is critical to ensuring the Enterprises can operate in a safe and sound manner that supports and strengthens the housing finance system following their exits from conservatorship,” wrote MBA President & CEO Robert Broeksmit, CMB. “MBA believes FHFA should take all necessary steps to ensure that the post-conservatorship Enterprises cannot and do not revert to their business models and activities of the past. The development of a framework that encourages the Enterprises to operate as market utilities will allow them to meet their obligations both to shareholders and to the public.”

The letter to FHFA Director Mark Calabria comes in response to a March FHFA proposed rule ( to implement a new regulatory capital framework for Fannie Mae and Freddie Mac.

MBA offered the following observations:

•           It is appropriate and necessary for FHFA to strengthen the Enterprises’ capital framework prior to their eventual exits from conservatorship. MBA noted The Great Financial Crisis  revealed both the quantity and quality of capital that the Enterprises held at the time were inadequate to absorb the impacts of rapidly falling home prices, rising mortgage delinquencies, and dislocations in fixed income markets. The capital framework in place during this period also failed to encourage safe and sound operations (for example, by failing to prevent excessive growth in the Enterprises’ retained portfolios and outsized exposure to risk from investments in non-agency mortgage-backed securities.

“It is clear that a capital framework that better aligns the capital held by the Enterprises and the risks they assume is needed,” MBA said. “In order for the Enterprises to carry out the objectives specified in their charters, they must be available to operate at all times, in all market environments, through all portions of the credit cycle – including their countercyclical functions that support the market when the availability of private credit wanes. The required capital levels for the Enterprises therefore must be sufficient to ensure the companies can withstand severe market downturns, such as those associated with the Great Financial Crisis or the COVID-19 pandemic.

MBA also noted the proposed framework, while carefully considered, remains too complex and lacks transparency in key areas. It is also critical that a capital framework be finalized and well-understood by market participants prior to the Enterprises exiting conservatorship.

•           The capital framework should provide incentives for the Enterprises to maintain and expand upon positive changes to their business models over the past decade in furtherance of their vital housing missions, rather than simply operate under their pre-2008 business models (albeit with more capital). MBA noted in the period leading to their eventual conservatorships, the Enterprises engaged in business practices that caused them to fall short of fully satisfying the objectives in their charters. Significant increases in the size of their retained portfolios exposed them to excessive levels of mortgage credit risk. MBA said while many of these problematic business practices have been addressed in whole or in part through reforms instituted by FHFA over the past decade.

“Most of these reforms, however, are reliant on directives issued by FHFA through its conservatorship authorities,” MBA said. “We believe these reforms should be codified wherever possible, and FHFA should use the fullest extent of its ongoing charter, safety-and-soundness and affordable housing authorities to ensure that those reforms are firmly in place prior to the Enterprises exiting conservatorship.

In addition, MBA said to the extent appropriate, FHFA should align the capital framework with these reforms. “While the capital framework is not the primary tool by which these reforms should be achieved or retained, there is some level of interdependence, as the framework will impact these reforms and influence the business practices of the Enterprises and their roles in the market,” MBA said.

•           The proposed capital framework should be modified to encourage the Enterprises to operate as market utilities, with effective incentives to distribute rather than hold mortgage credit risk. MBA reiterated its long-held belief that FHFA should tailor the capital framework – as well as other regulatory and supervisory tools – to encourage the Enterprises to operate as utility-like, through-the-cycle managers and distributors of mortgage credit risk. “This approach would best achieve the FHFA mandate that “the operations and activities of each [Enterprise] foster liquid, efficient, competitive and resilient national housing finance markets,” MBA said.

Under such an approach, the Enterprises would function more as market utilities than as “growth” companies. FHFA would set target rates of return for the companies, as well as strict requirements related to permissible activities, appropriate market conduct, and acceptable corporate governance standards. The Enterprises would be structured to provide steady earnings – representing an attractive risk-adjusted return for patient-capital investors.  The “through-the-cycle” presence of the Enterprises references the need for sufficient capital for the companies to withstand periods of severe market stress and provide countercyclical liquidity in the mortgage market. Finally, the enhanced focus on management and distribution of credit risk (including various approaches to CRT) would reduce the Enterprises’ exposure to borrower delinquencies – for example, in favor of transferring that risk to external investors willing to absorb it at reasonable prices.

“This approach would facilitate a greater role in the mortgage market for diverse sources of private capital, more efficiently price mortgage credit risk, limit the systemic risk posed by the Enterprises and promote broad access to affordable mortgage credit through enhanced secondary market liquidity,” MBA said.

MBA also recommended the following adjustments to the Framework:

•           The level of required capital implied by the framework is too high and may be determined too frequently by a leverage ratio rather than risk-based standards. MBA has sought greater clarity regarding the frequency with which the leverage ratio would have served as the binding capital constraint had this framework been in place in prior periods. “Absent this information, any public comments will be incomplete, and finalization of the proposed rule would be inappropriate,” MBA said.

•           The treatment of credit risk transfer mechanisms is far too punitive and would discourage broad and diversified use of these mechanisms.

•           While the framework includes important features to mitigate procyclicality in the single-family market, further steps are needed to address procyclicality in the multifamily market.

•           The stress scenarios used to develop the risk grids and multipliers should be based on empirical loan performance data over the same periods for both the single-family and multifamily markets. MBA requested further information regarding the time period used for the multifamily stress analysis.

MBA also recommended the following additional reforms that Congress should legislate or FHFA should implement or make more durable prior to the release of the Enterprises from conservatorship, regardless of the form this release takes:

•           Pricing discounts, favorable underwriting requirements, and credit variances based on the volume, size, or business model of single-family lenders should be prohibited.

•           FHFA should facilitate the continuation of the Enterprises’ important roles in the multifamily market.

•           FHFA should support and facilitate the expansion (both in volume and type) of the Enterprises’ credit risk transfer (CRT) programs in a manner that ensures similar levels of protection across differing structures.

•           Acquisition of a controlling interest in an Enterprise by a mortgage lender or servicer should be prohibited in order to prevent “vertical integration.”

•           The standards for the development of new products, activities, and technologies at the Enterprises should be clarified.

•           FHFA should promote enhanced public access to Enterprise data beyond the data published in support of the CRT programs.

•           A more explicit guarantee on the Enterprises’ single-family and multifamily MBS would promote secondary market liquidity and the broad availability of affordable mortgage credit.