The National Association of Realtors (NAR) is asking the Federal Housing Finance Agency (FHFA) to reconsider its proposed rule regarding capital standards at Fannie Mae and Freddie Mac.
FHFA said its re-proposed capital rule for the government-sponsored enterprises (GSEs), published in the Federal Register on June 30, would strengthen Fannie and Freddie so they can continue to serve the mortgage market and help low- and moderate- income households access credit throughout the economic cycle.
NAR President Vince Malta recently wrote a letter to FHFA Director Mark Calabria stating the pros and cons of the 2020 proposed rule from the trade organization’s standpoint.
For instance, Malta noted it would require the enterprises to hold a capital level that is the greater of a risk-based rule – where the level is roughly the 2018 proposal plus several, significant buffers and additional bank-like rules on the types of capital used, or a leverage ratio equal to 4 percent.
“Laudably, the FHFA would limit the GSEs’ ability to distribute dividends if their prescribed stress, stability and countercyclical buffers fell below minimum thresholds,” Malta said in the letter. “The current proposal also makes strides in limiting the countercyclicality of the proposal from 2018 through the use of collars on price growth. This effectively limits the impact of mark-to-market practices that would reduce the capital the GSEs hold just as risk increases.”
In addition, the rule reduces the burden on single borrowers and those using small-dollar loans.
However, Malta said four changes are problematic and would drive an adverse impact to the market and finance system:
- A minimum 4 percent leverage capital level and risk-based buffers are imposed that are invariant to risk.
- The regulatory capital value of CRT is eliminated.
- Revenue is excessively discounted.
- Capital is determined in the context of a run-off portfolio instead of an ongoing enterprise.
“The proposed rule has the effect of raising the level of capital well beyond an economic level plus a buffer and simultaneously forcing the GSEs to use a higher cost of capital,” Malta added.
NAR noted that excess capital raises costs for the consumer. In addition, the proposal forces the GSEs to hold risk on portfolio, rather than selling it into the market, which reduces competition.
NAR instead recommended converting the GSEs into market utilities.
“Had the GSEs been private entities when COVID-19 forced business closures and mass layoffs earlier this year, it is likely our nation’s housing market would have been devastated as the purely private GSEs pulled back, pushing our economy deeper into recession,” Malta wrote.