Fitch: FHFA Final Capital Rules Supportive of Credit for Fannie, Freddie

Fitch Ratings, New York, said the Federal Housing Finance Agency recent adoption of final regulations requiring the submission of annual capital plans and new public risk disclosures for Fannie Mae and Freddie Mac are creditor positive.

“The new regulations provide a transparent capital framework for stakeholders as seen at larger, more complex U.S. banks under Basel III quarterly disclosure requirements,” Fitch said.

On May 26, FHFA finalized tenets for quarterly and annually quantitative and qualitative disclosures related to the GSEs’ risk management and corporate governance. The final ruling establishes capital structure requirements and buffers under the standardized approach for the GSEs. Separately, on June 1, the regulator published a final rule that amended the Enterprise Regulatory Capital Framework by requiring the GSEs to submit annual capital plans to the FHFA and provide prior notice for certain capital actions. The final rule also incorporates the stress capital buffer determination from the ERCF into the capital planning process. Implementation of both rules takes effect 2023, with GSEs to submit their first capital plans by May 20, 2023. 

The combined required capital for Fannie and Freddie is between $250 billion and $300 billion, well above current capital levels. The combined GSEs’ net worth was $84 billion as of 1Q22. In a reasonably supportive economic environment, the two can generate net income of $15 to $20 billion per year through organic generation, although income could be pressured by prolonged challenging economic conditions. “This ignores the fact that the GSEs still technically owe the U.S. Treasury over $200 billion collectively under the liquidation preference of the Treasury’s senior preferred stock,” Fitch said.

Capital plans are to include an assessment of the expected sources and uses of capital over the planning horizon, including projected revenues, expenses, losses, reserves, and pro-forma capital internal and FHFA scenarios. Also required are discussion of how each GSE will maintain sufficient capital commensurate with business risks and under expected and stressful conditions and how any expected changes to business plans would likely materially affect GSE capital adequacy or liquidity.

Fitch said the required static stress capital buffer floor of 0.75% of adjusted total assets included in the final capital planning rule is consistent with the ERCF proposal in December 2020. The calculated stress capital buffer in any given year would include four quarters of planned common stock dividends, “which is somewhat irrelevant given the enterprises are currently not contemplating paying a dividend,” it said.

“Fitch believes Fannie and Freddie have continued to execute on their mission to provide liquidity, stability and affordability to the housing finance industry,” the analysis said.