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Rule2022-04529

Enterprise Regulatory Capital Framework-Prescribed Leverage Buffer Amount and Credit Risk Transfer

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Published

March 16, 2022

Effective

May 16, 2022

Issuing agencies

Federal Housing Finance Agency

Abstract

The Federal Housing Finance Agency (FHFA or the Agency) is adopting a final rule (final rule) that amends the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (PLBA or leverage buffer) and credit risk transfer (CRT) securitization framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an Enterprise). The final rule also makes technical corrections to various provisions of the ERCF that was published on December 17, 2020.

Full Text

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<title>Federal Register, Volume 87 Issue 51 (Wednesday, March 16, 2022)</title>
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[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Rules and Regulations]
[Pages 14764-14772]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-04529]

[[Page 14764]]

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1240

RIN 2590-AB17

Enterprise Regulatory Capital Framework--Prescribed Leverage
Buffer Amount and Credit Risk Transfer

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
adopting a final rule (final rule) that amends the Enterprise
Regulatory Capital Framework (ERCF) by refining the prescribed leverage
buffer amount (PLBA or leverage buffer) and credit risk transfer (CRT)
securitization framework for the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac, and with Fannie Mae, each an Enterprise). The final rule also
makes technical corrections to various provisions of the ERCF that was
published on December 17, 2020.

DATES: This rule is effective May 16, 2022.

FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
<a href="/cdn-cgi/l/email-protection#42032c263027356c142330302b27373002242a24236c252d34">[email&#160;protected]</a>; Christopher Vincent, Senior Financial
Analyst, Office of Capital Policy, (202) 649-3685,
<a href="/cdn-cgi/l/email-protection#77341f051e040318071f120559211e191412190337111f111659101801">[email&#160;protected]</a>; or Ming-Yuen Meyer-Fong, Associate
General Counsel, Office of General Counsel, (202) 649-3078, <a href="/cdn-cgi/l/email-protection#125f7b7c753f4b67777c3c5f776b77603f547d7c7552747a74733c757d64">[email&#160;protected]</a>. These are not toll-free numbers. For TTY/TRS
users with hearing and speech disabilities, dial 711 and ask to be
connected to any of the contact numbers above.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Overview of the Final Rule
A. Amendments to the ERCF
B. Effective Date
III. General Comments on the Proposed Rule
A. 20 Percent Risk Weight Floor
B. Multifamily Countercyclical Adjustment
IV. Leverage Buffer
V. Credit Risk Transfer
VI. ERCF Technical Corrections
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act

I. Introduction

On September 27, 2021, FHFA published in the Federal Register a
notice of proposed rulemaking (proposed rule) seeking comments on
amendments to the ERCF that would refine the leverage buffer and the
risk-based capital treatment for retained CRT exposures.\1\ FHFA
proposed these amendments to ensure that the ERCF appropriately
reflects the risks inherent to the Enterprises' business models and
contains proper incentives for the Enterprises to distribute acquired
credit risk to private investors rather than to buy and hold that risk.
In meeting these objectives, the proposed amendments would help restore
FHFA's intended paradigm of having the Enterprises' leverage capital
requirements and buffer provide a credible backstop to their risk-based
capital requirements and buffers, enhancing the safety and soundness of
the Enterprises. FHFA is now adopting in this final rule the proposed
amendments, substantially as proposed.
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\1\ 86 FR 53230.
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FHFA published the ERCF on December 17, 2020 \2\ with the purpose
of implementing a going-concern regulatory capital standard to ensure
that each Enterprise operates in a safe and sound manner and is
positioned to fulfill its statutory mission to provide stability and
ongoing assistance to the secondary mortgage market across the economic
cycle.\3\ The ERCF, which became effective on February 16, 2021, aimed
to address issues that arose during the notice and comment period such
as the pro-cyclicality of the single-family risk-based capital
requirements, the quality of Enterprise capital used to meet the
capital requirements, and the quantity of required capital at the
Enterprises. Accordingly, the ERCF is significantly stronger than the
statutory framework which governed the Enterprises' capital
requirements prior to entering conservatorships.
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\2\ 85 FR 82150.
\3\ In conservatorships, the Enterprises are supported by Senior
Preferred Stock Purchase Agreements (PSPAs) between the U.S.
Department of the Treasury (Treasury) and each Enterprise, through
FHFA as its conservator (Fannie Mae's Amended and Restated Senior
Preferred Stock Purchase Agreement with Treasury (September 26,
2008), <a href="https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Amend-and-Restated-SPSPA_09-26-2008.pdf">https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Amend-and-Restated-SPSPA_09-26-2008.pdf</a>; Freddie Mac's Amended and Restated Senior
Preferred Stock Purchase Agreement with Treasury (September 26,
2008), <a href="https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/FRE-Amended-and-Restated-SPSPA_09-26-2008.pdf">https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/FRE-Amended-and-Restated-SPSPA_09-26-2008.pdf</a>). The PSPAs, as amended by letter agreements
executed by the parties on January 14, 2021 (2021 Fannie Mae Letter
Agreement, <a href="https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf">https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf</a>; 2021 Freddie Mac Letter
Agreement, <a href="https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf">https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf</a>), include a covenant at
section 5.15 which states: ``[The Enterprise] shall comply with the
Enterprise Regulatory Capital Framework [published in the Federal
Register at 85 FR 82150 on December 17, 2020] disregarding any
subsequent amendment or other modifications to that rule.''
Modifying that covenant will require agreement between the Treasury
and FHFA under section 6.3 of the PSPAs.
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However, after finalizing the ERCF, FHFA identified specific
aspects of the framework that might incentivize risk taking in certain
economic environments and create disincentives to the Enterprises' CRT
programs. Together, these features of the ERCF could result in an
excessive buildup of risk accruing to taxpayers and the housing finance
market, particularly because the Enterprises presently are severely
undercapitalized and lack the resources on their own to safely absorb
the credit risk associated with their normal operations.
FHFA views the transfer of risk, particularly credit risk, to a
broad set of investors as an important tool to reduce taxpayer exposure
to the risks posed by the Enterprises and to mitigate systemic risk
caused by the size and monoline nature of the Enterprises' businesses.
Since their development began in 2013, the CRT programs have been the
Enterprises' primary mechanism to successfully effectuate reliable risk
transfer to the private sector. Through these programs, the Enterprises
have shed a significant amount of credit risk to help protect against
potential losses while the PSPAs have significantly limited the
Enterprises' ability to hold capital and withstand losses through
normal operations. During this current period where the Enterprises are
building capital, CRT remains an important risk mitigation tool to
protect taxpayers against the heightened risk of potential PSPA draws
in the event of a significant stress to the housing sector. It is
therefore crucial that the Enterprises' capital requirements are
appropriately sized, where the leverage capital framework is a credible
backstop to the risk-based capital framework and where responsible and
effective risk transfer is not unduly discouraged.

II. Overview of the Final Rule

A. Amendments to the ERCF

After carefully considering the comments on the proposed rule, and
as described in this preamble, FHFA is adopting, substantially as
proposed, amendments to the leverage buffer and risk-based capital
treatment of CRT exposures. FHFA continues to believe that the
amendments in this final rule will lessen the potential deterrents to
Enterprise risk transfer by properly aligning incentives in the ERCF
and will position the Enterprises to operate in a

[[Page 14765]]

safe and sound manner to fulfill their statutory mission throughout the
economic cycle, both during and after conservatorships. Specifically,
the final rule will:
<bullet> Replace the fixed leverage buffer equal to 1.5 percent of
an Enterprise's adjusted total assets with a dynamic leverage buffer
equal to 50 percent of the Enterprise's stability capital buffer as
calculated in accordance with 12 CFR 1240.400;
<bullet> Replace the prudential floor of 10 percent on the risk
weight assigned to any retained CRT exposure with a prudential floor of
5 percent on the risk weight assigned to any retained CRT exposure; and
<bullet> Remove the requirement that an Enterprise must apply an
overall effectiveness adjustment to its retained CRT exposures in
accordance with 12 CFR 1240.44(f) and (i).
In addition, the final rule will implement technical corrections to
various provisions of the ERCF that was published on December 17, 2020,
highlighted by a significant typographical error in the definition of
the long-term HPI trend that constitutes the basis for calculating the
single-family countercyclical adjustment.

B. Effective Date

Under the rule published on December 17, 2020 establishing the
ERCF, an Enterprise will not be subject to any requirement in the ERCF
until the compliance date for the requirement as detailed in the ERCF.
The effective date for the ERCF was February 16, 2021. The effective
date for the ERCF amendments and technical corrections in this final
rule will be 60 days after the day of publication of this final rule in
the Federal Register.

III. General Comments on the Proposed Rule

FHFA received 89 public comment letters on the proposed rule from a
variety of interested parties, including private individuals, trade
associations, consumer advocacy groups, think-tanks and institutes, and
financial institutions.\4\ In general, and as discussed in greater
detail below in the relevant sections of this preamble, commenters were
supportive of FHFA's proposed amendments to both the leverage buffer
and the risk-based capital treatment of retained CRT exposures.
Overall, most commenters supported FHFA's efforts to restore the
intended paradigm between leverage capital and risk-based capital at
the Enterprises and to properly incentivize risk transfer within the
ERCF. However, as discussed in the relevant sections of this preamble,
FHFA also received a number of comments indicating concern over various
aspects of the proposed amendments.
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\4\ See comments on Amendments to the Enterprise Regulatory
Capital Framework Rule--Prescribed Leverage Buffer Amount and Credit
Risk Transfer, available at <a href="https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=708">https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=708</a>. The
comment period for the proposed rule closed on November 26, 2021.
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Over half of the 89 comments FHFA received during this notice and
comment period focused on issues not directly related to the proposed
amendments or technical corrections. In these letters, commenters
offered views on important topics such as loan-level pricing
adjustments, incorporating guarantee fees into capital requirements,
the ERCF grids and risk multipliers, the magnitude of single-family and
multifamily risk weights, various other aspects of the CRT
securitization framework, the costs of CRT transactions, and the
overall complexity of the ERCF, among others. In addition, commenters
offered views on housing finance reform and on matters relating to the
Enterprises' conservatorships, including issues related to the
Enterprises' consent to conservatorships in 2008, subsequent actions by
FHFA or the U.S. Department of the Treasury (Treasury), the magnitude
of funds remitted to Treasury by the Enterprises relative to cumulative
draws, Treasury's financial interests in the Enterprises, and the
PSPAs. FHFA acknowledges the importance of these topics and will
thoroughly consider the public's feedback on these issues when relevant
rulemakings and policy decisions are under consideration.
In addition to soliciting comments on the proposed amendments and
technical corrections, FHFA also sought feedback on two additional
topics related to the ERCF: The 20 percent risk weight floor on single-
family and multifamily mortgage exposures and potential options for a
countercyclical adjustment for multifamily mortgage exposures. FHFA
received feedback on both topics.

A. 20 Percent Risk Weight Floor

FHFA asked the public whether, in light of the proposed changes to
the leverage buffer and the risk-based capital requirements for
retained CRT exposures, the prudential risk weight floor of 20 percent
on single-family and multifamily mortgage exposures was appropriately
calibrated. FHFA did not propose a change to the risk weight floor on
single-family and multifamily mortgage exposures. Nine commenters
provided feedback on this question, and the opinions expressed by
commenters were varied.
Some commenters recommended reducing or eliminating the 20 percent
risk weight floor. Among these commenters, some suggested that lowering
the floor is appropriate due to the Enterprises' improved balance
sheets and mortgage lending standards relative to pre-crisis economics.
Others suggested that the 20 percent risk weight floor in the ERCF is
not appropriately calibrated. Another commenter suggested that the 20
percent floor distorts market signals about risk and incentivizes risk
taking by the Enterprises.
Conversely, some commenters recommended maintaining the 20 percent
risk weight floor. Among these commenters, some suggested that such a
floor is prudent to ensuring the safety and soundness of the
Enterprises. One commenter suggested that the risk weight floor is
useful as an incentive for the Enterprises to transfer credit risk on
lower-risk exposures. Another commenter suggested that the risk weight
floor is important to mitigate the model risks inherent in the risk-
sensitive methodology FHFA used to calibrate risk weights for mortgage
exposures. One commenter suggested that reducing this risk weight floor
could significantly increase the gap between the credit risk capital
requirements of the Enterprises and other market participants.
One of the key objectives FHFA cited for proposing amendments to
the ERCF was to ensure the leverage capital framework was a credible
backstop to the risk-based capital framework. Despite changes to the
2020 ERCF proposed rule \5\ that increased risk-based capital under the
2020 ERCF final rule, including raising the 15 percent risk weight
floor on single-family and multifamily mortgage exposures to 20 percent
and changing the dataset on which the single-family countercyclical
adjustment is calculated, tier 1 leverage capital remains greater than
tier 1 risk-based capital at each Enterprise in the absence of the
leverage buffer and CRT amendments in the proposed rule. Should FHFA
materially reduce the 20 percent floor on single-family and multifamily
mortgage exposures without taking additional action, the likelihood
that the leverage framework would once again be the binding capital
constraint for the Enterprises would significantly increase. For this
reason, and given the commenters' diverse feedback, FHFA has determined
not to take action related to the 20 percent risk weight

[[Page 14766]]

floor on single-family and multifamily mortgage exposures at this time.
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\5\ 85 FR 39274.
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B. Multifamily Countercyclical Adjustment

FHFA also asked the public to recommend an approach for mitigating
the pro-cyclicality of the credit risk capital requirements for
multifamily mortgage exposures that relies only on non-proprietary data
or indices. Eight commenters provided feedback on this question,
recommending three different types of approach. The first group of
commenters suggested solutions following the same principles as FHFA's
single-family countercyclical adjustment, where risk attributes such as
the loan-to-value (LTV) ratio would be adjusted up or down depending on
deviations from a long-term trend. For use in this approach, commenters
recommended FHFA consider the property index published by the National
Council of Real Estate Investment Fiduciaries (NCREIF), long-term
vacancy rates, long-term property value and income growth rates, and
adjusted cap rates. The second group of commenters recommended FHFA
consider an approach where the countercyclical adjustment is based on
ratios of index peaks to current values. Commenters suggested FHFA
could use the NCREIF property index for property values and Enterprise
investor reporting for net operating income (NOI). This approach would
assume that the multifamily risk weights already account for a 35
percent shock to property values and a 15 percent shock to NOI, so an
adjustment would be made only to the extent that the property value
and/or NOI index ratios suggest a further adjustment is necessary.
Finally, one commenter suggested that FHFA should address pro-
cyclicality for multifamily mortgage exposures by replacing mark-to-
market LTV with original LTV and mark-to-market debt service coverage
ratio (DSCR) with original DSCR.
FHFA appreciates the public's feedback on this topic and is
committed to addressing the pro-cyclicality in the capital required for
multifamily mortgage exposures. However, given the complexity of
potential solutions and the diversity of suggestions provided by
commenters, FHFA has determined that this topic requires further
consideration, potentially in a future rulemaking. Therefore, FHFA has
determined not to take action related to a multifamily countercyclical
adjustment at this time.

IV. Leverage Buffer

The proposed rule would amend the ERCF by replacing the fixed tier
1 capital leverage buffer equal to 1.5 percent of an Enterprise's
adjusted total assets with a dynamic tier 1 capital leverage buffer
equal to 50 percent of the Enterprise's stability capital buffer.\6\ In
the proposed rule, FHFA presented several benefits to this approach.
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\6\ 12 CFR 1240.400.
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First, a properly calibrated leverage ratio requirement and
leverage buffer are critical aspects of a sound regulatory capital
framework. The purpose of leverage capital is to promote financial
stability by establishing a robust capital floor that persists
throughout the economic cycle and by limiting risk taking when risk-
based capital may otherwise fall to unduly low levels. Recalibrating
the 1.5 percent leverage buffer will promote safety and soundness and
financial stability at the Enterprises by lessening the likelihood that
leverage capital will drive Enterprise decision-making in the majority
of economic environments and reduce the frequency in which an
Enterprise has an incentive to take on more risk in a capital
optimization strategy. Furthermore, restoring leverage capital to a
position of a credible backstop will allow other aspects of the ERCF,
namely the risk-based capital requirements, including the single-family
countercyclical adjustment, to work as intended. Second, the proposed
leverage buffer amendment will encourage the Enterprises to transfer
risk rather than to buy and hold risk. Third, a leverage framework with
a dynamic buffer that grows and shrinks as an Enterprise grows and
shrinks, respectively, will function as a better backstop to a risk-
based capital framework that includes a stability capital buffer linked
to an Enterprise's size. And fourth, a dynamic leverage buffer that is
tied to the stability capital buffer will further align the ERCF with
Basel III standards. Internationally, under the latest Basel framework
adopted by the Bank for International Settlements, global systemically
important banks (G-SIBs) are required to hold a leverage buffer equal
to 50 percent of their higher loss-absorbency risk-based requirements--
a measure akin to the G-SIB surcharge in the U.S. banking framework--to
tailor an institution's leverage ratio to its business activities and
risk profile.
The vast majority of comments FHFA received supported decreasing
the tier 1 capital leverage buffer from a fixed 1.5 percent of adjusted
total assets. Many commenters supported FHFA's proposed approach, while
some supported decreasing the leverage buffer without tying it to the
stability capital buffer and others favored eliminating the leverage
buffer altogether.
Many commenters who recommended decreasing the leverage buffer
suggested doing so because it is preferrable for risk-based capital
metrics to be the binding capital constraint more frequently than non-
risk-based capital floors such as leverage. Commenters suggested that
this paradigm helps eliminate incentives for the Enterprises to
increase risk taking and risk retention while providing flexibility to
the Enterprises as they manage risk and rebuild robust levels of
capital. In addition, commenters agreed with FHFA that a smaller
leverage buffer would encourage the transfer of mortgage credit risk
from the Enterprises to private investors. Another commenter stated
that the 1.5 percent leverage buffer is unnecessary relative to the
Enterprises' recent stress test results, and that such a high buffer
would likely be excessive to the point of impairing the Enterprises'
ability to support the market and meet their mission.
Many commenters expressed their general support for FHFA's proposed
approach of tying the leverage buffer to the stability capital buffer.
Commenters contended that a dynamic leverage buffer that expands and
contracts with an Enterprise as its size and strategy evolve would more
accurately reflect the Enterprise's risk and thereby help facilitate
the Enterprises' ability to carry out their missions through all
economic cycles. Thus, commenters reasoned that the proposed approach
would help leverage serve as a credible backstop to the risk-based
capital framework and allow the Enterprises to withstand losses in
excess of those experienced during the great financial crisis. Other
commenters supported FHFA's effort to move toward a dynamic leverage
buffer to better reflect the spirit and intent of the leverage ratio,
and also because dynamic buffers have proven to be an effective tool
for managing capital at the global systemically important banks.
Another commenter suggested that the proposed approach will help
provide stability in the mortgage market and increase investor
confidence in the Enterprises and overall economy throughout the
economic cycle, helping stave off the need for emergency taxpayer
intervention. Another commenter stated that basing the leverage buffer
on a risk-based capital metric is preferrable because it better
reflects the varying levels of risk within an Enterprise's particular
pool of total assets.
Some commenters expressed more reserved support for setting the
leverage buffer equal to 50 percent of the stability

[[Page 14767]]

capital buffer. Several commenters expressed concern that tying the
leverage buffer to the stability capital buffer could have pro-cyclical
implications in the sense that an Enterprise's market share tends to
grow during a stress when other market participants are growing slowly
or shrinking. Thus, requiring an Enterprise to increase its leverage
buffer during the period when the Enterprise is fulfilling its
countercyclical role could limit the Enterprise's ability to supply
market liquidity when it is most needed. In contrast to these
commenters' concern, FHFA anticipates that setting the leverage buffer
equal to 50 percent of the stability capital buffer will actually
reduce the pro-cyclicality of the leverage framework because increases
to an Enterprise's adjusted total assets are reflected in the fixed 1.5
percent leverage buffer immediately whereas increases to an
Enterprise's share of the overall mortgage market are reflected in the
stability capital buffer with up to a two-year delay.\7\ FHFA believes
this delayed need to raise capital relative to the current ERCF will
facilitate the Enterprises' abilities to provide liquidity to the
mortgage market during a stress, even if an Enterprise grows its
portfolio as a result of fulfilling its countercyclical mission.
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\7\ Id.
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A few other commenters supported FHFA's proposed amendments but
recommended that FHFA: i. Continue to study the relationship between
leverage, risk-based capital, and the stability capital buffer to
determine definitively that the leverage buffer should be linked to the
stability capital buffer; and ii. provide historical data affirming the
proposed approach and demonstrating that under the proposed amendments
leverage will rarely exceed risk-based capital.
Another commenter recommended that FHFA must ensure that its
regulatory capital framework avoids discriminatory outcomes and
promotes equitable treatment of borrowers and communities of color. One
commenter supported FHFA's proposed amendments but expressed a desire
for FHFA to be more anticipatory and expansive in the list of
provisions it chooses to reconsider.
Some commenters recommended decreasing the leverage buffer but not
tying it to the stability capital buffer. One commenter expressed
concern that the stability capital buffer was itself arbitrarily
determined, so by association a leverage buffer equal to 50 percent of
the stability capital buffer is also arbitrarily determined. This
commenter recommended that FHFA consider alternative methods of the
setting the leverage buffer that are more closely tied to an
Enterprise's risk. One commenter recommended that FHFA decrease an
Enterprise's leverage buffer by some estimate of future guarantee fees.
Similarly, another commenter recommended that FHFA decrease an
Enterprise's leverage buffer to reflect risk transferred through CRT in
the same way that the risk-based capital framework provides capital
relief for CRT. Several commenters recommended FHFA simply reduce the
leverage buffer from 1.5 percent of adjusted total assets to a lower
percentage of adjusted total assets, such as 0.5 percent, because
market share is not a reasonable representation of Enterprise risk.
Some commenters recommended FHFA eliminate the leverage buffer
completely. These commenters generally viewed the leverage buffer as
not necessary for the leverage framework to be a credible backstop to
the risk-based capital framework. Two commenters suggested the 2.5
percent leverage capital requirement is itself sufficient as a credible
backstop to risk-based capital in the ERCF. Another commenter suggested
the leverage buffer is unnecessary because: i. Stress losses on a new
month of originations are lower than the capital required by the ERCF;
and ii. future guarantee fees provide a significant source of claims-
paying resources, which are not considered as a source of capital in
the framework. One commenter suggested FHFA eliminate the leverage
buffer rather than decrease it because a future FHFA director can just
as easily increase it again.
Finally, some commenters recommended that FHFA maintain the fixed
1.5 percent leverage buffer. One commenter claimed that FHFA does not
provide evidence that the existing ERCF leverage-based requirements
would be binding throughout the economic cycle, and that it is
difficult to envision any realistic scenario in which the proposed
amendments to the leverage buffer would result in a leverage-based
requirement that could exceed the risk-based requirement, violating the
concept of being a credible backstop. FHFA disagrees with the premise
of this argument because the argument compares tier 1 leverage capital
to adjusted total risk-based capital, which includes tier 2 capital.
When looking only at tier 1 capital, one can readily construct
realistic scenarios where tier 1 risk-based capital at an Enterprise
decreases due to a period of sustained house price appreciation such
that tier 1 leverage capital exceeds tier 1 risk-based capital and
therefore leverage becomes the binding capital constraint.
The commenter also suggests that FHFA fails to explain how the
calibration of the 1.5 percent leverage buffer is flawed and how the
proposed leverage buffer is analogous to the risk-weighted-asset-based
Basel leverage buffer for international G-SIBs. In the proposed rule,
FHFA discussed how the leverage framework unduly disincentivizes risk
transfer predominately due to the outsized leverage buffer, and how a
fixed leverage buffer may not concurrently be appropriate for both a
large and a small Enterprise. FHFA views these characteristics as flaws
in the calibration of the leverage buffer because the design could
result in taxpayers bearing excessive undue risk for as long as the
Enterprises are in conservatorships and excessive risk to the housing
finance market both during and after conservatorships. In addition,
FHFA discussed how the proposed leverage buffer is similar to the Basel
leverage buffer in that both are derived from measures that attempt to
quantify the amount of systemic risk posed by the Enterprises and G-
SIBs, respectively--the stability capital buffer in the ERCF and the G-
SIB surcharge in the Basel framework. There are, of course, structural
differences between the two buffers in both derivation and application,
as is appropriate given that the Enterprises and the other financial
institutions have different business models.
Furthermore, two commenters noted that the Financial Stability
Oversight Council's (FSOC) review of the 2020 ERCF proposed rule found
that capital requirements ``that are materially less than those
contemplated by [the proposed rule] would likely not adequately
mitigate the potential stability risk posed by the Enterprises,'' and
that the proposed rule would result in a material two-thirds reduction
to the leverage buffer, increasing risks to taxpayers and financial
stability. FHFA generally agrees with the findings presented in FSOC's
activities-based review of the secondary mortgage market.\8\ However,
similar to approaches followed by other financial regulators, FHFA
intends to periodically review the ERCF and adjust various elements as
necessary to ensure the safety and soundness of the Enterprises so they
can carry out their mission throughout the economic cycle. In addition,
FHFA notes that Federal Reserve officials have publicly

[[Page 14768]]

identified binding leverage capital requirements under the
Supplementary Leverage Ratio (SLR) framework as an important issue that
must be addressed so that banks' incentives are not skewed to increase
risk-taking. FHFA continues to agree with this guiding principle for
the Enterprises under the ERCF.
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\8\ <a href="https://home.treasury.gov/news/press-releases/sm1136">https://home.treasury.gov/news/press-releases/sm1136</a>.
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The final rule adopts the dynamic tier 1 capital leverage buffer
equal to 50 percent of the stability capital buffer as proposed. In
consideration of the public comments on the proposed rule, FHFA
continues to believe that such a leverage buffer determined in this
manner will best position the Enterprises to fulfil their mission in a
safe and sound manner throughout the economic cycle by ensuring that
the leverage framework acts as a credible backstop to the risk-based
capital framework and by encouraging the Enterprises to transfer credit
risk rather than to buy and hold risk.
FHFA notes that the final rule will not change the tier 1 leverage
capital requirement, which will remain at 2.5 percent of adjusted total
assets. This requirement, plus other features of the ERCF such as the
single-family countercyclical adjustment and the risk weight floor on
single-family and multifamily mortgage exposures, will continue to
mitigate the potential stability risk posed by the Enterprises and will
ensure an Enterprise maintains robust capital even during the best
economic conditions when risk-based capital requirements might fall due
to significant house price appreciation.
In addition, FHFA continues to believe that the leverage buffer
plays an important role in the ERCF, despite the recommendations of
several commenters to eliminate the buffer. The leverage buffer
represents a cushion above an Enterprise's 2.5 percent leverage ratio
requirement that can be drawn down in a stress scenario without
violating prompt corrective action, providing an Enterprise with
flexibility to continue its normal operations without risk of breaching
a requirement.

V. Credit Risk Transfer

The proposed rule would replace the prudential floor of 10 percent
on the risk weight assigned to any retained CRT exposure with a
prudential floor of 5 percent on the risk weight assigned to any
retained CRT exposure and would remove the requirement that an
Enterprise must apply an overall effectiveness adjustment to its
retained CRT exposures.\9\
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\9\ 12 CFR 1240.44(f) and (i).
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Many commenters expressed the view that CRT is an effective means
by which to transfer risk to private markets, protect taxpayers, and
stabilize the Enterprises and housing finance more generally.
Consequently, the vast majority of comments FHFA received on the
proposed amendments to the risk-based capital requirements for retained
CRT exposures were generally supportive of the amendments. However, a
minority of comments questioned the efficacy of CRT and noted that the
amendments would weaken the Enterprises' financial resilience. Several
other commenters offered broad critiques of and suggestions for the
risk-based capital approach to CRT and the Enterprises' CRT programs
more generally. While FHFA appreciates and considers all comments, the
following discussion focuses on comments directly pertaining to the
amendments put forward in the proposed rule.

CRT Risk Weight Floor

In the proposed rule, FHFA contended that amending the CRT risk
weight floor was necessary for two reasons. First, the 10 percent floor
on the risk weight assigned to a retained CRT exposure unduly decreases
the capital relief provided by CRT and reduces an Enterprise's
incentives to engage in risk transfer. This occurs in part because the
aggregate credit risk capital required for a retained CRT exposure is
often greater than the aggregate credit risk capital required for the
underlying exposures, especially when the credit risk capital
requirements on the underlying whole loans and guarantees are low or
the CRT is seasoned. Second, the 10 percent risk weight floor
discourages CRT through its duplicative nature. The operational
criteria for CRT, which state that FHFA must approve each transaction
as being effective in transferring the credit risk, as well as the
Enterprises' own ability to mitigate unknown risks through their
underwriting standards and servicing and loss mitigation programs,
lessen the need for a tranche-level risk weight floor as high as 10
percent.
Commenters were generally very supportive of the proposed amendment
to the CRT risk weight floor. Commenters suggested that reducing the
risk weight floor on retained CRT exposures from 10 percent to 5
percent raises the regulatory value of risk transfer closer to its
economic value. Commenters stated that the change would restore the
incentive for the Enterprises to engage in CRT to disperse credit risk
among private investors and thereby lessen the systemic risk posed by
the Enterprises. Commenters also suggested that transferring credit
risk away from the Enterprises strengthens their safety and soundness
and supports the overall mortgage market, including by promoting
greater private market participation without an adverse impact on
affordability. Several commenters supported the 5 percent floor because
it represents a more market-sensitive treatment of CRT and better
aligns capital to risk. In this regard, one commenter suggested that
unduly high capital requirements will hamper an Enterprise's ability to
fulfill its statutory mission of facilitating loans to low-income and
very low-income borrowers and communities. In addition, commenters
suggested that the 5 percent floor would provide reasonable protection
from model risk while maintaining a conservative discount to equity
capital, which has flexibility and fungibility advantages.
Furthermore, several commenters recommended lowering the CRT risk
weight floor below 5 percent or eliminating it altogether. Commenters
suggested that the floor is not analytically supported and provides
excessive protection against CRT-related risks. One commenter's
analysis suggested that CRT requirements are too stringent even if the
floor is removed and recommended that FHFA calibrate the risk-based
capital requirements for retained CRT exposures to be consistent with
the economics of CRT transactions.
A few commenters recommended rejecting the proposed amendment in
favor of the 10 percent risk weight floor. Several commenters claimed
that the proposed amendment weakens the financial resilience of the
Enterprises. These commenters suggested that the amendments will
increase leverage at the Enterprises which will increase insolvency
risk, and that FHFA should not balance incentivizing CRT with safety
and soundness when considering capital standards.
Some commenters generally supported FHFA's proposal to lower the
CRT risk weight floor but offered alternatives to the 5 percent floor
in the proposed rule. A few commenters recommended that FHFA apply the
CRT risk weight floor on a sliding scale such that the risk weight
floor decreases as credit risk becomes more remote. A few commenters
suggested that the floor should reflect an exposure-level analysis and
perhaps be functionally related to economic variables such as seasoning
or house price appreciation. One commenter recommended removing the
floor and using an econometric approach that requires capital above the
risk-based capital amount and provides a marginal benefit

[[Page 14769]]

to risk reduction activities beyond stress loss.
The final rule adopts the prudential floor of 5 percent on the risk
weight assigned to any retained CRT exposure as proposed. In
consideration of the public comments on the proposed rule, FHFA
continues to believe that a prudential risk weight of 5 percent
sufficiently ensures the viability of CRTs while mitigating their
safety and soundness, mission, and housing stability risks. The final
rule does not eliminate the CRT risk weight floor, as recommended by
some commenters, because the prudential floor for a retained CRT
exposure avoids treating that exposure as posing no credit risk, which
continues to be an important policy objective for FHFA. In addition,
FHFA has determined to finalize the 5 percent risk weight floor as
proposed rather than adopting one of the alternatives suggested by
commenters in order to maintain consistency with other aspects of the
CRT securitization framework that were designed with a static risk
weight floor in mind.

Overall Effectiveness Adjustment

In the proposed rule, FHFA presented rationale for eliminating the
overall effectiveness adjustment due to the duplicative nature of the
adjustment within the risk-based capital requirements for retained CRT
exposures. Unlike the counterparty and loss-timing effectiveness
adjustments in the CRT securitization framework, the overall
effectiveness adjustment does not target specific risks. Rather,
similar to the risk weight floor on retained CRT exposures and the CRT
operational criteria, the overall effectiveness adjustment was designed
to address risks that are difficult to measure, such as model risk and
the loss-absorbing benefits of equity capital relative to CRT. FHFA
reasoned that, considering the additional elements of the CRT
securitization framework that also target these difficult-to-measure
risks, the overall effectiveness adjustment is duplicative and creates
an unnecessary disincentive for the Enterprises to engage in CRT.
The vast majority of comments supported FHFA's proposed amendment
to eliminate the overall effectiveness adjustment from the CRT
securitization framework. Several commenters contended that the overall
effectiveness adjustment was redundant and was not analytically
supported. Commenters also reasoned that the proposed amendment
produces a CRT treatment that better recognizes the risk reduction in
CRT through improved CRT economics, provides appropriate incentives for
the transfer of credit risk, and that even after removing the overall
effectiveness adjustment, the capital relief provided by the framework
is conservative. One commenter maintained that the overall
effectiveness adjustment can be removed without sacrificing the
Enterprises' safety and soundness. Multiple commenters suggested that
the elimination of the overall effectiveness adjustment would encourage
the Enterprises to disperse credit risk among investors rather than
retaining that risk where taxpayers are ultimately liable, and that the
proposed amendment would facilitate the Enterprises to carry out their
mission throughout the economic cycle.
Several commenters supported keeping the overall effectiveness
adjustment. These commenters contended that the proposal to eliminate
the overall effectiveness adjustment further weakens the financial
resilience of the Enterprises to withstand future credit losses that
may occur during an economic stress and that FHFA should keep the
adjustment because it accounts for differences in loss-absorbing
capacity between CRT and equity capital. Several other commenters
recommended FHFA keep the overall effectiveness adjustment in the CRT
securitization framework, but their support for this aspect of the
framework was conditional on either eliminating the CRT risk weight
floor or making substantive reductions to the proposed risk weight
floor.
The final rule adopts the removal of the overall effectiveness
adjustment as proposed. In consideration of the public comments on the
proposed rule, FHFA continues to believe that the overall effectiveness
adjustment should be eliminated from the risk-based capital
requirements for retained CRT exposures. FHFA believes 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.

VI. ERCF Technical Corrections

The proposed rule would make technical corrections to the ERCF
related to definitions, variable names, the single-family
countercyclical adjustment, and CRT formulas that were not accurately
reflected in the final rule published on December 17, 2020. These
technical corrections would revise the ERCF for the following items:
<bullet> In Sec. 1240.2, the definition of ``Multifamily mortgage
exposure'' would be moved from its current location to a location that
follows alphabetical order relative to the other definitions within the
section. The definition of a multifamily mortgage exposure would not
change.
<bullet> In Sec. 1240.33, the definition of ``Long-term HPI
trend'' would be updated to correct a typographical error that resulted
in only the coefficient of the trendline formula, 0.66112295, being
published. The corrected trendline formula would be 0.66112295e
(0.002619948*t). The Enterprises use the long-term HPI trend
as the basis for calculating the single-family countercyclical
adjustment. As published in the ERCF, the trendline would be a time-
invariant horizontal line rather than a time-varying exponential
function.
<bullet> In Sec. 1240.33, the definition of OLTV for single-family
mortgage exposures would be amended to include the parenthetical
(original loan-to-value) after the acronym to provide additional
clarity as to the meaning of OLTV. Single-family OLTV would continue to
be based on the lesser of the appraised value and the sale price of the
property securing the single-family mortgage.
<bullet> In Sec. 1240.37, the second paragraph (d)(3)(iii) would
be redesignated as (d)(3)(iv) to correct a typographical error.
<bullet> In Sec. 1240.43(b)(1), the term ``KG'' would be replaced
to correct a typographical error.
<bullet> In Sec. 1240.44 we correct the following typographical
errors:
[cir] In paragraph (b)(9)(i)(C), the term ``(LTFUPB%)'';
[cir] In paragraph (b)(9)(i)(D), the term ``LTF%'';
[cir] In paragraph (b)(9)(ii), the term ``LTF%'';
[cir] In paragraph (b)(9)(ii)(B), the term ``(CRTF15%)'';
[cir] In paragraph (b)(9)(ii)(C), the term ``(CRT80NotF15%)'';
[cir] In paragraph (b)(9)(ii)(E)(2)(i), the equation would be
revised to correct typographical errors in the names of two variables
within the equation;
[cir] In paragraph (b)(9)(ii)(E)(2)(iii), the term ``LTF%'';
[cir] In paragraph (c) introductory text, the term ``RW%'';
[cir] In paragraph (c)(1), the term ``AggEL%'';
[cir] In paragraph (g), the first three equations would be combined
into one equation to correct a typographical error that erroneously
split the equation into three distinct parts.
The final rule adopts the ERCF technical corrections as proposed.

[[Page 14770]]

VII. Paperwork Reduction Act

The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The final
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.

VIII. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified that the regulation will not have
a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final
rule under the Regulatory Flexibility Act. The General Counsel of FHFA
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities because the final rule
is applicable only to the Enterprises, which are not small entities for
purposes of the Regulatory Flexibility Act.

IX. Congressional Review Act

In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is a major rule and has
verified this determination with the Office of Information and
Regulatory Affairs of OMB.

List of Subjects for 12 CFR Part 1240

Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.

Authority and Issuance

For the reasons stated in the Preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-4612, 4631-36, FHFA
amends part 1240 of Title 12 of the Code of Federal Regulation as
follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER C--ENTERPRISES

PART 1240--CAPITAL ADEQUACY OF ENTERPRISES

0
1. The authority citation for part 1240 is revised to read as follows:

Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-4612, 4631-36.

0
2. Amend Sec. 1240.2 by removing the definition of ``Multifamily
mortgage exposure'' and adding a new definition of ``Multifamily
mortgage exposure'' in alphabetical order to read as follows:

Sec. 1240.2 Definitions.

* * * * *
Multifamily mortgage exposure means an exposure that is secured by
a first or subsequent lien on a property with five or more residential
units.
* * * * *

0
3. Revise Sec. 1240.11(a)(6) as follows:

Sec. 1240.11 Capital conservation buffer and leverage buffer.

(a) * * *
(6) Prescribed leverage buffer amount. An Enterprise's prescribed
leverage buffer amount is 50 percent of the Enterprise's stability
capital buffer calculated in accordance with subpart G of this part.
* * * * *

0
4. Amend Sec. 1240.33(a) by:
0
a. In the definition of ``Long-term HPI trend'', removing
``0.66112295'' and adding ``0.66112295e (0.002619948*t)'' in
its place; and
0
b. Revising the definition of ``OLTV''.
The revision reads as follows:

Sec. 1240.33 Single-family mortgage exposures.

(a) * * *
OLTV (original loan-to-value) means, with respect to a single-
family mortgage exposure, the amount equal to:
(i) The unpaid principal balance of the single-family mortgage
exposure at origination; divided by
(ii) The lesser of:
(A) The appraised value of the property securing the single-family
mortgage exposure; and
(B) The sale price of the property securing the single-family
mortgage exposure.
* * * * *

Sec. 1240.37 [Amended]

0
5. Amend Sec. 1240.37 by redesignating the second paragraph
(d)(3)(iii) as (d)(3)(iv).

Sec. 1240.43 [Amended]

0
6. Amend Sec. 1240.43(b)(1) by removing the term ``KG'' and adding the
term ``K<INF>G</INF>'' in its place.
0
7. Amend Sec. 1240.44 by:
0
a. In paragraph (b)(9)(i)(C), removing the term ``(LTFUPB%)'' and
adding the term ``(LTFUPB<not-eq>)'' in its place;
0
b. In paragraph (b)(9)(i)(D), removing the term ``LTF%'' and adding the
term ``LTF<not-eq>'' in its place;
0
c. In paragraph (b)(9)(ii) introductory text removing the term ``LTF%''
and adding the term ``LTF<not-eq>'' in its place;
0
d. In paragraph (b)(9)(ii)(B), removing the term ``(CRTF15%)'' and
adding the term ``(CRTF15<not-eq>)'' in its place;
0
e. In paragraph (b)(9)(ii)(C), removing the term ``(CRT80NotF15%)'' and
adding the term ``(CRT80NotF15<not-eq>)'' in its place;
0
f. Revising the equation in paragraph (b)(9)(ii)(E)(2)(i);
0
g. In paragraph (b)(9)(ii)(E)(2)(iii), removing the term ``LTF%'' and
adding the term ``LTF<not-eq>,'' in its place;
0
h. In paragraph (c) introductory text:
0
i. Removing the term ``RW%'' and adding the term ``RW<not-eq>'' in its
place; and
0
ii. Removing the term ``10 percent'' and adding the term ``5 percent''
in its place;
0
i. In paragraph (c)(1), removing the term ``AggEL%'' and adding the
term ``AggEL<not-eq>'' in its place;
0
j. In paragraphs (c)(2) and (c)(3)(ii), removing the term ``10
percent'' and adding the term ``5 percent'' in its place;
0
k. Revising the first equation in paragraph (d);
0
l. In paragraph (e), removing the term ``10 percent'' and adding the
term ``5 percent'' in its place;
0
m. Revising paragraph (f)(2)(i);
0
n. In paragraph (g), revising the first three equations;
0
o. Revising the first equation in paragraph (h); and
0
p. Removing and reserving paragraph (i).
The revisions read as follows:

Sec. 1240.44 Credit risk transfer approach (CRTA).

* * * * *
(b) * * *
(9) * * *
(ii) * * *
(E) * * *
(2) * * *
(i) * * *

[[Page 14771]]

[GRAPHIC] [TIFF OMITTED] TR16MR22.001

* * * * *
(d) * * *
[GRAPHIC] [TIFF OMITTED] TR16MR22.002

* * * * *
(f) * * *
(2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure
(EAE) of an Enterprise with respect to a retained CRT exposure is as
follows:
[GRAPHIC] [TIFF OMITTED] TR16MR22.003

Where the loss timing effectiveness adjustments (LTEA) for a
retained CRT exposure are determined under paragraph (g) of this
section, and the loss sharing effectiveness adjustment (LSEA) for a
retained CRT exposure is determined under paragraph (h) of this
section.
* * * * *
(g) * * *
[GRAPHIC] [TIFF OMITTED] TR16MR22.004

* * * * *
(h) * * *

[[Page 14772]]

[GRAPHIC] [TIFF OMITTED] TR16MR22.005

* * * * *

Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2022-04529 Filed 3-15-22; 8:45 am]
BILLING CODE 8070-01-P

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