UPDATED: Regulators react to proposed capital plan for Fannie Mae, Freddie Mac, with tone of ‘not enough’

A proposed capital requirements plan for secondary mortgage market giants Fannie Mae and Freddie Mac, presented to federal regulators Friday, has won the plaudits of the chairman of the federal insurer of bank deposits.

However, but both she and the regulator of national banks suggested the plan did not go far enough in imposing capital requirements on the firms.

In a statement issued Friday, Federal Deposit Insurance Corp. (FDIC) Chairman Jelena McWilliams said she applauded the work of Federal Housing Financial Administration (FHFA) Director Mark Calabria, and the work of the interagency Financial Stability Oversight Council (FSOC), for work on the proposal. FHFA is the federal regulator of the two government-sponsored entities (GSEs).

The FSOC met Friday to discuss “secondary mortgage market activities,” and the FSOC 2021 budget. However, the Treasury Department also said the preliminary agenda for the executive session of the meeting “includes secondary mortgage market activities, the Council’s 2020 annual report, and short-term wholesale funding markets” (which was a secret session).

“While the Federal Housing Finance Agency’s (FHFA’s) proposed capital requirements would still be substantially lower than bank capital requirements, the proposal represents a dramatic improvement compared to the pre-crisis model,” McWilliams said in a statement distributed to the press. “Of course, raising capital comes with a cost, and thus calibrating capital standards always involves balancing competing goals,” she added.

Also in her statement, McWilliams asserted that, since being placed into conservatorship in September of 2008, Fannie Mae’s and Freddie Mac’s roles in the mortgage market “has only grown.” “If and when the companies are released from conservatorship, robust capital standards will be critical to help protect the mortgage markets and taxpayers during future housing market downturns,” she said.

The plan, according to press reports, would require the GSEs to hold more than five times their current capital levels and align their capital standards more closely with those of banks.

Press reports Friday indicated that the FSOC viewed the capital plan advanced by Calabria as short of the capital cushion that the secondary mortgage market companies may need. In a statement, the FSOC said capital requirements that are “materially less than those contemplated by the proposed rule” would likely not address the risk that Fannie and Freddie pose to financial stability.

In a separate statement, Office of the Comptroller of the Currency (OCC) Acting Comptroller Brian Brooks also voiced support for the review and proposed capital plan. However, Brooks suggested that the capital proposal was too little. “Consistent with the FSOC’s statement issued today, we look to avoid market distortions and different approaches to regulation of similar risks across the system and seek thereby to ensure that banks can continue playing a meaningful role in the provision of housing finance. I note that competition is itself an excellent form of risk management.” Brooks added that of particular interest in the proposal to his agency is the provision of capital relief for credit risk transfer transactions.

Statement by FDIC Chairman Jelena McWilliams on FSOC Activities-Based Review of Secondary Mortgage Market Activities

Statement by the Acting Comptroller of the Currency Regarding FSOC’s Consideration of Secondary Mortgage Market Activities

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